UNITED
STATES


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
      1934For
      the fiscal year ended October 31, 2008ORo
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period
      from              to


Commission
file number: 0-20820





LOGO


SHUFFLE
MASTER, INC.


(Exact
name of registrant as specified in its charter)


Minnesota
            
            41-1448495(State
      or Other Jurisdiction of Incorporation or Organization)
            
            (IRS
      Employer Identification No.)1106
      Palms Airport Drive, Las Vegas
            NV
            89119(Address
      of Principal Executive Offices)
            (State)
            (Zip
      Code)


Registrant’s
Telephone Number, Including Area Code: (702) 897-7150





Securities
registered pursuant to Section 12(b) of the Act:


Title
      of each class
            Name
      of each exchange on which registeredCommon
      Stock, $0.01 par value per share
            NASDAQ
      National Market





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes o  No x


Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


Yes x  No o


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 o


Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulations S-K (§229.405 of this chapter) 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 the Form 10-K or
any amendments to this Form 10-K. o


Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act:


Large
      accelerated filer o
            Accelerated
      filer x
            Non-accelerated
      filer o
              (Do
      not check if a smaller reporting company)
            Smaller
      reporting company o


Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).  Yes o No x


The
aggregate market value of voting Common Stock held by non-affiliates of the
Registrant on April 30, 2008 was approximately $173,106,960.




As of
January 8, 2009, 53,645,515 shares of Common Stock of the Registrant were
outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE




Parts II
and III of this Annual Report on Form 10-K incorporate by reference
information from the Registrant’s Proxy Statement for its Annual Meeting of
Shareholders to be held on March 18, 2009 (“Fiscal 2008 Proxy Statement”)
to be filed with the SEC within 120 days of the end of the fiscal year
covered by this report.


1


SHUFFLE
MASTER, INC.


ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED OCTOBER 31, 2008




TABLE
OF CONTENTS




PagePart
      IItem
      1.
            Business
            3Item
      1A.
            Forward
      Looking Statements and Risk
      Factors
            19Item
      1B.
            Unresolved
      Staff
      Comments
            31Item
      2.
            Properties
            31Item
      3.
            Legal
      Proceedings
            31Item
      4.
            Submission
      of Matters to a Vote of Security
      Holders
            33Part
      IIItem
      5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
            32Item
      6.
            Selected
      Financial
      Data
            35Item
      7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            36Item
      7A.
            Quantitative
      and Qualitative Disclosures about Market
      Risk
            77Item
      8.
            Financial
      Statements and Supplementary
      Data
            78Item
      9.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            124Item
      9A.
            Controls
      and
      Procedures
            124Item
      9B.
            Other
      Information
            128Part
      IIIItem
      10.
            Directors,
      Executive Officers and Corporate
      Governance
            129Item
      11.
            Executive
      Compensation
            129Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            129Item
      13.
            Certain
      Relationships and Related Transactions, and Director
      Independence
            129Item
      14.
            Principal
      Accounting Fees and
      Service
            129Part
      IVItem
      15.
            Exhibits
      and Financial Statement
      Schedules
            130





2


PART
I


(In
thousands, except units, per unit/seat amounts and square footage)








ITEM
1. BUSINESS





BUSINESS





Unless the context indicates otherwise,
references to “Shuffle Master, Inc.”, “we”, “us”, “our”, or the “Company”,
include Shuffle Master, Inc. and its consolidated
subsidiaries.




We are a Minnesota corporation formed
in 1983. We conducted our initial public offering and became a NASDAQ-listed
public company in 1992. Our corporate offices are located at 1106 Palms
Airport Drive, Las Vegas, Nevada 89119 and our telephone number is
702-897-7150.




We maintain an Internet website at
www.shufflemaster.com, and we make available on the website, free of charge, our
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and
Current Reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934, as amended, as soon as reasonably practicable after filing such
material electronically with the Securities and Exchange Commission. We also
provide a variety of other information on our website including all of our press
releases. We have included our website address in this filing only as a textual
reference. The information contained on our website is not incorporated by
reference into this Annual Report on Form 10-K.




We specialize in providing casino and
other gaming customers with products and services that improve their table game
speed, profitability, productivity and security. We operate through four
business segments: Utility, Proprietary Table Games (“PTG”), Electronic Table
Systems ("e-Table") or (“ETS”) and Electronic Gaming Machines (“EGM”).
Utility products include automatic card shufflers, Intelligent Table Systems
components, such as our i-Shoe AutoTM card reading shoe, our i-ScoreTM baccarat
viewer and our roulette chip sorters. PTG includes live proprietary table games,
progressive table games with bonus options, side bets for both our proprietary
table games as well as public domain table games and proprietary table game
licensing for other gaming media. ETS includes electronic table gaming
platforms. EGM includes traditional video slot machines.





We believe that installed units and
installed seats are important gauges of segment performance because they measure
historic market placements of leased and sold products and provide insight into
potential markets for expansion of existing product placements, next generation
products and service. As of October 31, 2008, we had an installed base of
approximately 28,000 shuffler and other Utility products, approximately
6,000 PTG units, approximately 7,000 ETS seats and approximately
21,000 EGM seats.  Installed units are the sum of the product
units currently under lease or license agreements plus the aggregate amount of
product units we have sold since our inception. Similarly, installed seat base
is the sum of the seats (with each chair at an electronic gaming table
considered a seat) currently under lease plus the aggregate amount of seats we
have sold since our inception. Some sold units and seats may no longer be in use
by our casino customers or may have been replaced by other models. Accordingly,
we are unable to determine the precise number of units or seats currently in
use.





Our four business segments are
summarized as follows:





Utility.Our Utility segment
develops products for our casino customers that enhance table game speed,
productivity, profitability and security. We introduced the first successful
automatic card shuffling equipment to the gaming industry and we continue to
develop and market a full complement of automatic card shufflers for use with
the vast majority of card-based table games placed in casinos and other gaming
locations, including our own proprietary table games. We are working on the
development of next generation shufflers and technological advancements in the
areas of card recognition and remote diagnostics, among other developments.
Currently, our Utility segment revenue is derived substantially from the lease
and sale of our automatic card shufflers and associated service revenue. We also
offer chip sorting products that simplify the handling of gaming chips on high
volume roulette tables. Additionally, we have acquired or are developing
products to gather data and to enable casinos to track table game play such as
our i-Shoe AutoTM card reading shoe and our i-ScoreTM baccarat viewer that
displays current game results and trends.  These products are intended
to cost-effectively provide casinos and our other customers with data on table
game play for security and marketing purposes, which in turn allows them to
increase their profitability.


3





Proprietary Table
Games.Our
PTG segment develops and delivers proprietary table games that enhance our
casino customers' and other licensed operators' table game operations. Products
in this segment include our proprietary table games as well as proprietary
features added to public domain games such as poker, baccarat, pai gow poker,
and blackjack table games. We believe we currently have the most popular
proprietary table game titles in the world, as our current proprietary table
games titles include all of the top six and eleven of the top fifteen most
popular titles in the world as of October 31, 2008.




We intend to broaden our PTG content
through development and acquisition. By enhancing the value of our existing
installed base with add-on features and capabilities and increasing our presence
with new titles, we hope to increase our domestic market penetration and expand
further into international markets. We have also begun to install proprietary
progressives and side bets on public domain table games as well as on our
proprietary table games. Additionally, to maximize the reach of our broad
intellectual property portfolio, we have licensed several of our popular
proprietary table game titles to a variety of other companies including Delta
Rangers, Inc. Delta Rangers' Malta-based subsidiary, Guardian Gaming, operates
Shuffle Master Live!, a play for fun and, where legal, play for real internet
gaming site that offers several Shuffle Master proprietary titles as well as a
wide range of public domain content in jurisdictions where internet gaming is
legal. Internet gaming is not legal in the United States. Guardian Gaming
launched Shuffle Master Live! in November 2007.




Electronic Table
Systems.Our ETS segment
develops and delivers various products involving popular table game content
using e-Table game platforms. Our primary ETS products are the Table MasterTM,
Vegas Star®, Rapid Table GamesTM and i-TableTM platforms.  Our Table
Master and Vegas Star feature a virtual dealer which enables us to offer table
game content in markets where live table games are not permitted, such as
racinos, video lottery and arcade markets. Our Rapid Table Games product enables
the automation of certain components of traditional table games such as data
collection, placement of bets, collection of losing bets and payment of winning
bets combined with live dealer and game outcomes. This automation provides
benefits to both casino operators and players, including greater security and
faster speed of play.  Our i-Table platform combines an electronic
betting interface with a live dealer who deals the cards from a Shuffle Master
card reading shoe or shuffler to dramatically improve game speed and security
while reducing many operating expenses associated with live tables.





Electronic Gaming
Machines.  Our EGM segment develops and delivers our PC-based
video slot machines into select markets, primarily in Australia and, to a lesser
extent, Asia.  Through our Australian subsidiary Stargames Limited
(“Stargames”), we offer an extensive selection of video slot titles which
include a range of bonus round options that can be configured as a network of
machines or as stand-alone units. In addition to selling the full EGM
complement, we sell software conversion kits that allow existing EGM terminals
to be converted to other games on the PC3 and PC4 platform. Popular titles for
our EGMs include Drifting Sands 3TM, Ninja 3TM, The Pink Panther® series of linked
games (iChing, Kelly CountryTM, Deep Sea Dollars, CubaTM, Galapagos WildTM, Sunset
on the Serengeti and Lonesome George), and the new Grand CentralTM progressive
link.





For additional information about our
segments, including segment revenue, operating income and assets, see “Item 6.
Selected Financial Data,” “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and “Item 8. Financial Statements
and Supplementary Data” included in this Annual Report on Form 10-K (“Form
10-K”).




The
table below presents our product lines and the percentage of total revenue from
continuing operations contributed by each product line in the fiscal years ended
October 31:




Percentage
      of Total RevenueProduct
      Line
            
            2008
            
            2007
            
            2006Utility
            42.5%
            
            43.9%
            
            53.2%Proprietary
      Table Games
            20.3%
            
            18.5%
            
            23.5%Electronic
      Table Systems
            14.5%
            
            15.5%
            
            10.2%Electronic
      Gaming Machines
            22.6%
            
            22.0%
            
            13.0%Other
      revenue
            0.1%
            
            0.1%
            
            0.1%100.0%
            
            100.0%
            
            100.0%





4





OUR
STRATEGY





We are proud of the products that we
develop and market and believe we can have continued growth and expansion. To
that end, we have devised and are implementing the following six-point
strategy:





·
            A
      continuing emphasis on leasing versus
selling





·
            Continued
      development of relevant technology to drive new products across all
      product lines





·
            An
      effort to increase the return from existing assets already in the field by
      upgrading or adding new value
elements





·
            A
      value engineering program to reduce manufacturing costs across all product
      lines





·
            The
      monetization of non-core assets and the utilization of the proceeds to
      reduce debt





·
            A
      cost reduction initiative to reduce manufacturing costs and examine our
      existing infrastructure.





This six-point strategic initiative
assists us in defining and implementing our specific product strategies for the
future, which in no particular order are:





·
            To
      focus on developing, manufacturing and marketing products that increase
      the speed, profitability, productivity and security of our casino and
      other customers in their table game
operations.





·
            To
      develop and market shufflers with advanced features and capabilities, such
      as optical card recognition, deck validation, and remote diagnostics, to
      replace older generation shufflers and to further penetrate domestic and
      foreign markets.





·
            To
      market our next generation chip sorting device, the Easy Chipper C®, to
      simplify the process of handling gaming chips for our casino and other
      customers in their table game
operations.





·
            To
      broaden our PTG segment by developing or acquiring additional table game
      content to increase our penetration of casino customers' table game
      operations. In addition, our analysis has shown that there exists a strong
      correlation between proprietary table game growth and demand for automatic
      shufflers.





·
            To
      develop a variety of felt-based and e-Table solutions to increase revenue
      from existing assets in the field by adding new value elements such as
      progressives and side bets.





·
            To
      market our e-Table platforms to provide a cost-effective brand extension
      of our PTG content to existing casino and new casino customers and to
      explore other venues in which the platforms could be reasonably modified
      to fulfill market demands.





·
            To
      increase our international sales through specific product development,
      acquisitions and/or strategic alliances and penetrate new
      markets.





·
            To
      continue our strong commitment to research and development of new product
      technologies, such as our recently introduced PC4 platform, an operating
      system that enhances the audiovisual gaming experience of our interactive
      games.





·
            To
      continue to provide ongoing and timely maintenance and service on our
      installed base of products.





·
            To
      reduce manufacturing costs across all product lines through cost savings
      initiatives and value engineering.





·
            To
      examine our existing infrastructure with an eye toward reducing overhead
      costs and improving our operating
margins.





·
            To
      develop or acquire patents, licenses and other intellectual property both
      to broaden our product offerings and to vigorously protect our patents and
      products from potential
infringement.


5




OUR
UTILITY SEGMENT
 Since our founding, we have developed
and marketed products that enhance the speed, productivity, security, and
profitability of the table game operations of our casino and other customers.
Our automatic card shufflers were the first such products.  We believe that
our casino and other customers are seeking to increase the operating returns of
their table game operations. By introducing a combination of technologies, our
Utility products increase the speed, profitability, productivity and security
for casino and other customers in their table game
operations.





Our Shuffler
Products. We currently market a complete range of shufflers,
including single deck, batch, and continuous shufflers. Single deck shufflers
are generally used on proprietary table games such as our own Let It Ride® and
Three Card PokerTM
games. Additionally, we offer a single deck/double deck shuffler, the Deck
Mate®, for use on live stakes poker tables and single or double deck table
games.





Multi-deck shufflers, which include
continuous and batch versions, are most commonly used in multi-deck blackjack
and mini-baccarat table games.





Our shufflers significantly reduce the
opportunity for card manipulation by dealers, resulting in increased security.
By allowing cards to be shuffled continuously or in frequent batches, our
shufflers reduce or eliminate card counting and shuffle tracking. Because our
shufflers shuffle one or more decks while a game is being played, down-time
related to dealershuffling is also
significantly reduced, with the potential for a corresponding increase in
playing time and win for the casino.





Our existing shuffler products, in
alphabetical order, are the following:





ACE®
            
            A
      second generation single deck shuffler which features random number
      algorithms and movements to shuffle cards and form hands or groups of
      cards. The ACE was introduced in January
1999.





Deck
      Mate®
            
            A
      single deck/double deck batch shuffler where cards are randomly shuffled
      and placed onto a platform according to computer-generated instructions.
      The unit may be flush-mounted in either a poker table or on an extension
      to a blackjack table. The Deck Mate was introduced in October
      2002.





i-DealTM
            
            A
      third generation single deck shuffler that features several key
      enhancements including card recognition technology that reads the rank and
      suit of each card being dealt and a state of the art touch screen display.
       The i-Deal was introduced in our fourth quarter of fiscal
      2007.





King®
            
            A
      multi-deck continuous shuffler using technology similar to the ACE, with
      up to five decks of shuffled cards that are dealt continuously and
      directly from the machine and that are reloaded immediately after a hand
      is played. The King was introduced in January
  2000.





MD1®
            
            A
      multi-deck batch shuffler that shuffles two to eight decks, used primarily
      for multiple deck blackjack or mini-baccarat games. The MD1 was introduced
      in late fiscal 1994.





MD2®
            
            A
      next generation multi-deck batch shuffler that shuffles two to eight decks
      and features optional optical card recognition that verifies that the deck
      or group of decks are intact.  The MD2 was introduced in
      September 2003.





one2six®
            
            A
      multi-deck continuous shuffler that accommodates up to six decks of cards
      and is primarily used on multi-deck games like blackjack to prevent card
      counting and shuffle tracking. The one2six shuffler was first introduced
      internationally in 2002.





Our Chip Sorting
Machines. Our chip sorting machines simplify the handling of gaming
chips, which increases the productivity and security on roulette
tables.


6





Easy Chipper C®
            
            This
      chip sorting device simplifies the process of handling gaming chips on
      roulette tables by directly ejecting the chips from the hopper wheel into
      the tubes with its state-of-the-art ejection system. It also has a color
      reading system that quickly and accurately sorts up to ten different
      colored chips while separating non-programmed ones.ChipmasterTM
            
            The
      Chipmaster’s superior system of delivering chip stacks right to the table
      surface provides roulette tables with an incomparable level of work
      ergonomics and service quality.  This dramatically increases the
      level of service provided to players because the dealer is always face to
      face with clients and increases table security because it prevents the
      dealer from needing to take his eyes off the table except when he spins
      the ball.





Intelligent Table
Systems ("ITS") and other Utility Products. We have acquired and are
developing technology to enable casinos and other customers to track and analyze
play on their table games.





ITS and other Utility products, in
alphabetical order, are the following:





i-ScoreTM
            
            Featuring
      multi-format display options, the i-Score enables casinos to display a
      variety of baccarat game trends on an LCD display mounted at the table.
      Game outcome data can be entered either manually using the i-Score’s
      easy-to-use touch key pad or automatically when connected to an i-Shoe or
      an i-Shoe Auto.i-ShoeTM
            
            A
      smart alternative to a traditional dealing shoe, the i-Shoe holds up to
      eight decks of cards and can be trained to read any card type. It features
      an easy-to-read display for ongoing dealer instruction as well as lights
      that indicate the outcome of each round. Additionally, it interfaces with
      an LCD monitor that displays game history and trends, and the game results
      can be transmitted to a remote location via the casino network for
      review.i-Shoe
      AutoTM
            
            The
      i-Shoe Auto delivers cards to the front of the shoe automatically,
      reducing repetitive stress injuries while making the dealing process
      easier and more accurate than ever before. Its optical card recognition
      technology automatically reads the rank and suit of each card as it is
      dealt and uses this data to determine appropriate game outcome and reduce
      game manipulation and collusion on multi-deck games like baccarat.
      Featuring an easy-to-read LCD touch screen that displays the accurate hand
      values once each round is complete, the i-Shoe Auto can also transmit game
      results to a remote location via the casino network for further review and
      analysis.





MD2®
      Workstation
            
            The
      MD2 Workstation combines the MD2 batch shuffler with proprietary software
      to count, read, and verify each card as it is being shuffled to produce
      detailed reports that reveal the accuracy and composition of each deck for
      off-table and back-of-house
verification.





7





OUR
PROPRIETARY TABLE GAMES (“PTG”) SEGMENT





Our Proprietary
Table Games and Other Value Elements. Our PTG segment includes our
live proprietary table games, progressive table games with bonusing options, and
side bets. We are continuously developing new table games to complement our
existing offerings and to extend our penetration of proprietary table games on
the casino floor. Additionally, tomaximize
the reach of our broad intellectual property portfolio, we have licensed several
of our popular table game titles, in certain jurisdictions, to a variety of
other companies including Delta Rangers, Inc., a company whose Malta-based
subsidiary, Guardian Gaming, operates Shuffle Master Live!, a play for fun and,
where legal, play for real internet gaming site that offers several Shuffle
Master proprietary titles as well as a wide range of public domain content in
jurisdictions where internet gaming is legal.  Internet gaming is not
legal in the United States.  Shuffle Master Live! was launched in November
2007.





Our existing PTG, progressive table
games with bonusing options, and side bets, in alphabetical order, are the
following:





Bet
      the Set "21"®
            
            Bet
      the Set "21" is an optional side bet for blackjack that considers the
      first two cards the player receives. If the player's first two cards are a
      pair or a suited pair, the player
wins.





Blackjack Press®
            
            Players
      make equal wagers on two blackjack positions and the Press bet which
      enables them to play two separate blackjack hands and "press" the one that
      they think can beat the dealer.





Caribbean
      Stud®
            
            Caribbean
      Stud is a five card stud poker game with a progressive jackpot. Each
      player receives five cards dealt face down, and the dealer receives five
      cards with the last card dealt face up. After examining their cards,
      players must either bet or fold and once all betting decisions have been
      made, the dealer compares his cards to each player. The dealer's hand must
      contain an Ace-King or better to qualify and challenge the players' hands;
      otherwise the dealer folds and only the ante wagers are paid. For the
      progressive wager, the top hands pay a percentage of the progressive
      jackpot, while other hands pay a fixed dollar amount. In the event that
      more than one progressive hand hits during the same round, the dealer will
      first pay the player furthest to his right and then move counter-clockwise
      to pay other players.





Casino
      War®
            
            Players
      make a wager and if their card is higher than the dealer's card, they win
      even money. If a player's card matches the dealer's card, they are at war
      and the player can either quit play by surrendering half of his wager or
      can continue to play by going to war. If the player chooses to go to war,
      both the player and the dealer match the original wager and receive
      another card. The highest card wins the
hand.








Crazy
      4 Poker®
            
            Players
      receive five cards to make their best four-card poker hand. The game
      features head-to-head play versus the dealer, a Queens Up Bonus bet that
      pays when a player's final hand contains a pair of Queens or better, and a
      Super Bonus that pays when a player has a straight or better. Players may
      "triple down" against the dealer when their hand contains a pair of Aces
      or higher, and receive a premium payout when they receive four
      Aces.





Dragon
      Bonus®
            
            Dragon
      Bonus is an optional side bet for baccarat where players win when their
      selected hand is a natural winner or wins by at least four
      points.





Fortune
      Blackjack®
            
            Fortune
      Blackjack is an optional side bet for blackjack that considers the first
      two cards the player receives. If the player's first two cards total 20 or
      21, the player wins.





8





Fortune
      Pai Gow Poker®
            
            Fortune
      Pai Gow Poker is an optional side bet for Pai Gow Poker that considers the
      best hand possible among the player's seven cards. Players may bet any
      amount within table limits; however, a Fortune bet of at least five
      dollars qualifies them for Envy Bonus payouts. Players win the Envy Bonus
      when someone else at the table receives a four-of-a-kind or higher.
      Fortune Pai Gow Poker is also available with a progressive jackpot that is
      triggered when a player receives five Aces or a seven card Straight
      Flush.





Four
      Card Poker®
            
            Players
      receive five cards to make their best four-card poker hand. The game
      features head-to-head play versus the dealer and an optional bonus bet
      that pays when their final hand contains a pair of Aces or higher. Players
      may "triple down" against the dealer, providing high game
      volatility.





Jackpot
      BaccaratTM
            
            Jackpot
      Baccarat is an optional side bet for baccarat that pays when three or more
      of the Player and Banker cards are the same rank. The more cards that are
      the same rank, the more the player wins.  Jackpot Baccarat is also
      available as a local area
progressive.





Let
      It Ride®
            
            Players
      place three separate but 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 then 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.





Let
      It Ride Bonus®
            
            The
      Let It Ride Bonus game adds a bonus bet and paytable bonuses to the basic
      Let It Ride table game. It is played in the same manner as the basic game
      except that the player has an option to make an additional side wager,
      known as the Let It Ride Bonus bet. The Let It Ride 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.
      Additionally, the game offers a 3 Card BonusTM side bet which rewards
      players if their first three cards are a pair or better. This wager is
      made at the beginning of the game when the standard and Let It Ride Bonus
      wagers are placed.





Mississippi
      StudTM
            
            Players
      receive two cards that will be combined with three community cards to make
      a five-card poker hand. The players compete against a paytable rather than
      the dealer and win if their hand is a pair of 6s or
  better.





Roll
      Your Own BlackjackTM
            
            A
      single-deck blackjack game, Roll Your Own BlackjackTM features a three-card
      bonus bet that pays odds when players receive a Flush or higher. Players
      receive three cards to make two blackjack hands: the best two cards are
      used to form their starting hand and the third card will be used for their
      second hand.





Royal
      Match 21®
            
            Royal
      Match 21 is an optional side bet for blackjack that considers the first
      two cards the player receives. If the cards are the same suit or a Royal
      Match (a King and Queen in suit), the player wins. An optional Crown
      Treasure Bonus wager may be received if the player and the dealer each
      receive a Royal Match.





9





Sharp
      ShooterTM
            
            Sharp
      Shooter is an optional side bet for Craps where players win if the shooter
      makes at least three points before a seven-out. The more points the
      shooter makes, the higher the payouts, and if the shooter makes 10 points,
      the Streak Shooter bet pays the top award and the sequence
      ends.





Texas Hold'em Bonus®
            
            Texas
      Hold'em Bonus is based on live-stakes hold'em. Players are dealt two
      "hole" cards, and five community cards are dealt in the middle of the
      table. Players can make their five-card hand from both, one or none of
      their hole cards in combination with the community cards. Texas Hold'em
      Bonus also offers an optional progressive bonus bet that pays odds if the
      player's initial two "hole" cards are a pair of 2s or
    better.





Three
      Card Draw PokerTM
            
            Three
      Card Draw Poker features head-to-head play against the dealer and a bonus
      bet. Players place wagers on three-card hands plus an optional draw card,
      with options to bet against the dealer or against the paytable. If the
      player's hand contains a Three-of-a-Kind or better, his bonus bet wins
      according to the paytable. Additionally, if his hand contains a
      Three-of-a-Kind or better, he wins Ante Bonus
  payouts.





Three
      Card Poker®
            
            Players
      place wagers on three-card stud hands, with options to bet against the
      dealer’s hand, bet on the value of their own hand or both. Winning hands
      are paid according to a predetermined payout schedule and bonus payouts
      may be earned on certain high ranking hands. Three Card Poker is also
      available with a progressive jackpot that is triggered when players
      receive a three-of-a-kind or higher.  We do not have any rights
      to Three Card Poker in the United
Kingdom.





Ultimate
      Texas Hold'em®
            
            Players
      receive two hole cards that will be combined with five community cards to
      make their best five-card poker hand. The game features head-to-head play
      versus the dealer and an optional bonus bet that pays odds if the player's
      final five-card hand is a three-of-a-kind or higher. Ultimate Texas
      Hold'em is also available with a progressive option and a bad beat
      progressive.





OUR
ELECTRONIC TABLE SYSTEMS (“ETS”) SEGMENT





Our Electronic
Table Systems. Our ETS products are e-Table platforms developed for
multi-player use. We have developed or acquired other technology or platforms to
deliver our or others’ proprietary table game content or public domain games on
multi-player terminals. Some of our e-Table products enable us to offer table
game content in markets where live table games are not permitted, such as
racino, video lottery, and arcade markets. We are developing these e-Table
platforms to enable the marketing and deployment of our table game content into
previously unpenetrated international and domestic casino, racino, and other
gaming markets. We intend to incorporate all our e-Table products to a universal
platform.





Our ETS products, in alphabetical
order, are described below:





i-TableTM
            
            Our
      newest ETS product, the i-Table combines a variety of our products to
      create an exciting new table game experience. Utilizing six touch-screen
      player stations embedded in a standard size blackjack table, the i-Table
      combines an intuitive electronic betting interface with a live dealer who
      deals the selected game from either an i-Shoe Auto card reading shoe or
      one2six Plus continuous shuffler for public domain games like blackjack
      and baccarat, or the i-Deal specialty shuffler for our proprietary games
      such as Three Card Poker. By automating the betting process, the i-Table
      dramatically increases game security, accuracy and speed, resulting in a
      significant increase in rounds per hour while eliminating errors. Further,
      its integrated card and bet recognition functionality instantaneously
      record a variety of crucial table game data points and its real-time
      access to all card data gives i-Table the ability to offer players true
      odds wagers.  Finally, the i-TableTM platform provides casinos
      with an unprecedented level of game versatility, as its integrated
      software and hardware configuration makes it easy to switch between
      popular shoe-dealt games like blackjack and baccarat and between specialty
      shuffler dealt games such as Three Card Poker and Ultimate Texas Hold’em
      as player demand dictates.





Rapid
      Table GamesTM
            
            Rapid
      Table Games combine a dealer and a live game with electronic touch screen
      betting stations to dramatically increase game frequency and security by
      automating all aspects of the wagering process on high volume games like
      roulette, baccarat, and craps. Rapid Table Games offer a variety of
      installation configurations that can accommodate additional player
      positions as traffic increases including Rapid SatelliteTM terminals that
      enable remote play from other areas of the casino. Important features
      of this platform include its ability to offer increased game speed and a
      higher average bet per player.  The Mojo cabinet is a new
      cabinet style offered with the Rapid Table Games.  The Mojo
      cabinet is more versatile and flexible than the legacy Classic cabinet and
      uses up to 30% less floor space. It includes a number of new features and
      dealer display options and features front and top of unit access that
      makes servicing and cash box collection
easier.








Table
      MasterTM
            
            The
      Table Master is a state-of-the-art e-Table featuring a video screen that
      displays a virtual video dealer who interacts with players on each of five
      included betting stations. Table Master also possesses a video tabletop
      that digitally shows player cards, game play and bets and uses a
      player-activated button panel that simulates the player options of a live
      table game. Additionally, because it is a fully electronic platform, Table
      Master can be utilized in markets like racinos where live table games are
      not permitted. Important features of this product include its ability
      to offer our proprietary table game content without a live dealer and the
      ease of cost-efficient conversion to different content.  Table
      Master differentiates itself as a configuration best suited for communal
      game play, whereby outcomes are dependent on other player betting and
      outcomes (such as
blackjack).





Vegas Star®
            
            Vegas
      Star is a state-of-the-art e-Table that combines a virtual dealer with up
      to 32 individual touch screen betting terminals per server on the PC3
      platform and up to 64 betting terminals on the PC4 platform. During game
      play, players sit at individual stations that are linked together giving
      them the feel of a live table game, and an animated representation of
      table activity is shown on a video widescreen. The Vegas Star platform is
      also available in some markets in a three-station Nova configuration and
      in the single-station satellite configuration. Additionally, because it is
      a full electronic platform, Vegas Star can be utilized in markets
      like racinos where live table games are not permitted. Important
      features of this product include its ability to offer our proprietary
      table game content without a live dealer and the ease of cost-efficient
      conversion to different content.  Vegas Star differentiates
      itself as a configuration best suited for individual game play, whereby
      outcomes are independent of the individual player bets (such as
      craps).  The Mojo cabinet is a new cabinet style offered with
      the Vegas Star.  The Mojo cabinet is more versatile and flexible
      than the legacy Classic cabinet and uses up to 30% less floor space. It
      includes a number of new features and dealer display
      options  and features front and top of unit access that makes
      servicing and cash box collection
easier.





OUR
ELECTRONIC GAMING MACHINES (“EGM”) SEGMENT





Our Electronic
Gaming Machines.  We offer an extensive selection of video slot
titles developed for select markets primarily in Australasia.
 Featuring a wide variety of denominations and configurations,
EGMs can be configured as a network of machines or as stand-alone units.
EGM titles are offered in the ergonomic eStar cabinet and are available on both
the dependable Stargames PC3 operating platform and more recently the new PC4
operating platform. The PC4 operating platform features enhanced audiovisual
capabilities as well as greater capacity to integrate with technical
advancements expected in the coming years.





At
Stargames' headquarters, the slot cabinets are designed and assembled and the
gaming content is developed for the various Australian and international
jurisdictions where these machines are sold. These games are developed to
function on a multitude of operating protocols including SAS, X Series, QCOM,
VLC and ASP. Some popular game titles which have been marketed across these
jurisdictions include: Drifting Sands 3TM, Ninja 3TM, The Pink Panther® series of linked games
(iChing, Kelly CountryTM, Deep Sea Dollars, CubaTM, Galapagos WildTM, Sunset
on the Serengeti and Lonesome George), and the new Grand CentralTM progressive
link.


10


Stargames also licensed content from
and paid royalties to WMS Industries Inc. ("WMS"), a U.S. slot
manufacturer. This agreement was limited to the Australian and New Zealand
markets and terminated effective January 31, 2008.  Except for
several titles, the rights expire in mid 2009, and we have no minimum royalty
obligations with respect to these continuing rights.





OTHER
SEGMENT INFORMATION





Customers andmarketing. We
market our products to casinos and other legal gaming establishments around the
world with our direct domestic and international sales force and several
domestic and international distributors and/or representatives. We also market
several of our e-Table products to a variety of gaming venues not permitted to
offer live table games, such as racinos and other legal gaming establishments
around the world. We currently maintain sales and marketing offices in six
countries and have relationships with various distributors
worldwide.





We believe the quality and breadth of
our customer base is a strong testament to the effectiveness and quality of our
product offerings, technological innovation and customer service. Our customer
base includes the leading casino operators on all six continents that allow
casino style gaming, including operators in leading established gaming markets
such as the United States, Canada, Latin America, Macau, Europe, Australia,
Malaysia and Africa. Moreover, our customer base includes all of the top 20
global gaming companies measured by annual revenues. Our customers include,
among others, Harrah's Entertainment, MGM Mirage, Mohegan Tribal Gaming
Authority, Las Vegas Sands Corp., Crown Ltd., Wynn Resorts, Limited,
Sociedade de Jogos de Macau S.A., Genting, Galaxy Entertainment, The Rank Group,
and Sun International Resorts.





Our products and the locations in which
we may sell them are subject to the licensing and product approval requirements
of various national, state, provincial and tribal jurisdictional agencies that
regulate gaming around the world.  See "Business—Gaming Regulation"
section below.  We both lease and sell our products, although we
implemented a strategy to continue our emphasis on leasing versus selling
predominantly in the United States.  When we lease our products, we
generally negotiate a month-to-month operating lease or license for our products
for a fixed fee, both domestically and internationally. When we sell certain of
our products, we sometimes offer our customers a choice between a sale or a
longer-term sales-type lease or other financing arrangements, depending on the
needs of each customer. We service the products we sell and lease. A lease
includes a service contract. We also offer service packages to customers who
purchase products from us.





Globalopportunity. As
part of our long-term strategic planning, we regularly analyze the global market
opportunity for our products and services. Our most recent analysis leads us to
believe that the global market for traditional table game products, including
public domain products, proprietary table games and poker, is expected to grow
by 31% over the next five years to approximately 82,000 installed units. We
expect that the Americas will continue to represent the largest market for table
games, although the Australasian region is expected to represent the largest
growth opportunity. Our research indicates that there is a strong correlation
between the growth in global table game demand and the demand for our PTG and
Utility products. In addition, our analysis leads us to believe that over the
corresponding period, the global market for e-Table games will increase to
approximately 46,000 installed seats. North America is expected to be the
largest growth opportunity for e-Table games, followed closely by Australasia.
We believe this provides a compelling opportunity for us to provide our
proprietary content in electronic formats.





Given our global footprint and our
leading market position, we believe that we are well-positioned to capitalize on
the anticipated growth in the global table games market. In addition, given the
benefits and revenue opportunities that e-Table games present for casino and
racino operators, we believe we are well positioned to benefit from the
anticipated growth in the e-Table games market.





Competition. We
compete with other gaming products and supply companies for space on the casino
customer's floor, as well as for our customer's capital spending. With respect
to our Utility products, namely shufflers and other gaming equipment, we have
competed with Elixir Gaming Technologies, Inc. (formerly "VendingData"), a
company with a U.S. presence that markets batch and continuous versions of its
multi-deck shuffler, the Random Ejection ShufflerTM, their single deck shufflers,
the Shuffler ProTM and thePoker OneTM, and
their Deck CheckerTM card verification device on a domestic and international
basis. Historically, Elixir Gaming Technologies, Inc. has attempted to
compete with our shuffler products on the basis of price.  In late
2008, Elixir announced its intention to exit the shuffler
business.  We compete on this basis as well as on the basis of
offering a complete line of shufflers, product reliability, a superior service
network, the strength of our intellectual property, and the breadth of our
sales, regulatory, and distribution channels. Additionally, other companies may
develop and market shufflers and seek to develop and obtain regulatory approvals
of additional shuffler products. We also compete against hand shuffling, which
remains the most common shuffling option on casino card games around the
world.


11


We cannot
provide assurances that a competitive product will not gain substantial
placements or that a competitive product or hand shuffling will cause price
erosion of our shufflers in the future.  As it relates to our Easy Chipper
C and Chipmaster roulette chip sorting products, several companies also
manufacture and sell competitive chipper products. We believe the most
successful of these products is the Chipper Champ PlusTM and the most current is
the Chipper Champ 2TM, both sold by TCS John Huxley. Competition with our i-Shoe
card reading shoe is predominantly limited to Angel Co. Ltd.'s Angel
Eye® card reading shoe.





With respect to our PTG segment, in
addition to companies such as IGT, Bally Technologies, Inc. (“Bally”),
Aristocrat Gaming (“Aristocrat”) and WMS that primarily market slot machines, we
also compete with both non-proprietary table games such as blackjack, and
several companies which primarily develop and license proprietary table games.
Some of those competitors' widely known proprietary table game titles include
Galaxy Gaming's Lucky LadiesTM, Emperor's ChallengeTM and Masque Publishing's
Spanish 21®. Competition in this segment is particularly based on price, brand
recognition, player appeal, and the strength of underlying intellectual
property. Smaller developers and vendors are more able to participate in
developing and marketing table games, compared to other gaming products, because
of the lower cost and complexity associated with the development of these
products, and a generally less stringent regulatory environment. We compete on
these bases, as well as on the strength of our extensive sales, service and
distribution channels. We have been able to increase our placements of table
games not only because of the general growth of table games, but also by
displacing other table game products. In the future, table game competitors as
well as slot machine companies could market table games that might displace our
products. Also, if United States patent laws continue to be interpreted
less favorably to patent owners, which has been the import of several recent
cases, then third parties may be more willing to challenge our patents by
placing in the market identical or almost identical games to those in our PTG
segment.





There are numerous other companies that
manufacture and/or sell e-Tables that are similar to the games in our ETS
segment. These companies include, but are not limited to, Aristocrat,
Elektroncek (also known as Interblock), Aruze Corporation ("Aruze"), Novomatic
Industries ("Novomatic"), IGT, PacificNet Inc. (“PacificNet”),
PokerTek, Inc. (“PokerTek”) and TableMAX Holdings
(“TableMAX”).





Our EGM segment is part of a highly
competitive international slot market. The Australasian market reflects other
worldwide markets insofar as most of the major international manufacturers have
a presence there. The major competitors to Stargames in these markets are
Aristocrat, IGT, Bally, Konami Co. Ltd. ("Konami"), Aruze and
Ainsworth Game Technology (“Ainsworth”).  In Asia, these competitors are
also active along with further competition from myriad European slot
manufacturers.





Finally, some of our product segments
may compete against each other for space on the casino floor.





Productsupply. We
obtain most of the parts for our products from outside suppliers, including both
off-the-shelf items as well as components manufactured to our specifications. We
also manufacture a small number of parts in-house that are used both for product
assembly and for servicing existing products. We generally perform warehousing,
quality control, final assembly and shipping ourselves from our facilities in
both Las Vegas and Sydney, Australia, although small inventories are maintained
and repairs are performed by our field service employees.





Additionally,
some of our products are manufactured by subcontract manufacturers, located in
both Desplaines, Illinois and Salzburg, Austria, both of which also inventory
and ship these products. We believe that our sources of supply for components
and raw materials are adequate and that alternative sources of materials are
available.





Research anddevelopment(“R&D”).  We
employ a staff of electrical, mechanical and software engineers, graphic artists
and game developers to support, improve and upgrade our existing shufflers, to
develop new shufflers, to develop technology and game content for our PTG,
e-Table platforms and EGM products and to develop and explore other potential
table-related Utility products.  We perform the majority of our
domestic research and development ourselves. We also use a foreign, third party
developer for certain of our international product offerings.





For
our Utility products, the main focus of our R&D efforts during fiscal
2008 has been finalizing the mechanical, hardware and software development
of the i-Deal shuffler, developing the i-Shoe Auto featuring optical card
recognition and an auto-card feeding mechanism, designing hardware and software
for the one2six Plus continuous shuffler featuring optical card recognition,
developing a universal fixture for testing all electronic boards, and developing
and improving other Utility products, including developing generic card
recognition technology to replace card libraries.  Additional R&D
efforts were focused on developing the i-Score Baccarat display system,
including new computer hardware.


12


PTG expenses related to development
have historically focused on implementing progressives onto existing proprietary
games as well as developing or licensing a large variety of new games including
Ultimate Draw Poker, 6 Card Poker, Three Card Poker Mini Royal Edition, Royal
Match 21 Progressive, Bet the Set “21” Progressive, King’s Bounty, King’s Bounty
Progressive, Hit and Run Blackjack and Hit and Run Blackjack
Progressive.  Additional R&D efforts were spent on developing the
Video Progressive Display System (“ViPS”) to support our PTG progressive
products.





For our e-Table product lines, a
majority of our R&D efforts have involved creating and implementing new game
content and implementing the new PC4 gaming platform in our Vegas Star, Rapid
Table Game and EGM products. With respect to our Table Master product, we
implemented several new games including Ultimate Draw Poker and Royal Match 21
with Odds and focused our efforts on new features such as adding progressive
jackpots to Let It Ride and Royal Match 21. Development in the Vegas Star line
included a new, lower cost cabinet design as well as continued focus on
commercializing new cabinet technologies and value engineering. In
addition, new titles were implemented including Ultimate Baccarat, Slingshot
Roulette, and Star Craps. The Rapid Table Game product line R&D expenses
were also attributable to value engineering in its cabinet design, SAS protocol
support and implementation of improved titles, including Rapid Baccarat and
Rapid Craps.





Significant R&D efforts during
fiscal 2008 were also focused on the new i-Table, our first product that
benefited from an emphasis on “globalizing” our research and development by
combining resources from our Utility, PTG and ETS segments and utilizing product
knowledge from both our United States based entity as well as
Stargames.  The i-Table utilizes a unique combination of a live
dealer, an automatic card shuffler or card reading device with optical card
recognition, PTG content and electronic wagering interfaces.





Development efforts in the EGM line
included a variety of new game titles and themes, including “Galapagos Wild” and
“Sunset on the Serengeti” for the Pink Panther linked jackpot product that took
advantage of the improved graphics and sound capabilities of the PC4 gaming
platform. The next generation linked jackpot product, “Grand Central” was also
developed with new game titles including “Gold Country”, “Sycee”, and
“Oceanus”.  The cabinets and platform technology for Table Master,
Vegas Star, Rapid Table Games and Electronic Gaming Machines have undergone a
program of continuous improvement to reduce cost and increase the capabilities
of the technology.





We believe that one of our strengths is
identifying new product opportunities and developing new products, therefore we
expect to continue to spend a significant portion of our annual revenues on
research and development, including the acquisition of intellectual property
from third parties.Total R&D expense was $18,474, $17,337 and
$12,910 for fiscal 2008, 2007 and 2006, respectively.





INTELLECTUAL
PROPERTY





We believe that our patents,
trademarks, licenses, copyrights and trade secrets are significant assets that
provide us with a competitive advantage and are critical to our future
profitability and growth. We protect our investment in research and development
by seekingpatent and trademark protection
for our technologies. We also acquire and license patents and other intellectual
property from third parties. Infringement claims, patent invalidity or
expiration, license non-renewal, failure to stop infringers, inadequacy of
patent and other intellectual property coverage, delays in using our
intellectual property to develop products or the costs of protecting our
intellectual property could adversely affect our future results of operations
and our financial position.





Patents. We
own numerous United States and international patents and applications related to
our existing products and methods, future products that have not yet been
introduced, potential product modifications and improvements and to products we
do not currently sell.  Some of the patents (primarily our game play
method patents) we own are issued only in the United States.  A
majority of the technology is internally developed.  Some of our
technology has been purchased and is licensed.





Most of the patents that we own have a
life of 20 years from the filing date of the first non-provisional patent
application in a family of patents.  While some of our older, owned
patents expire in 2011, the majority of our patents, including those with our
newest technology, expire thereafter.  Under the laws of the United States,
when a patent expires, a competitor would be legally able to make, use, offer to
sell or sell the invention claimed in the patent.  We believe that the
expiration of any of our patents prior to 2011 will not have a material adverse
effect on our business. A few of our licensed patents expire in 2009, but they
are no longer important to our business. We also have numerous patent
applications pending for our existing, planned and potential products. No
assurance can be given that any such patents will be issued, or that the patents
we currently hold or have licensed or any new patents that we acquire are, will
be, or will remain valid, will provide any competitive protection for our
products, or will adequately cover our competitors' products. We sometimes sell
in the


13


ordinary
course of business patents that we no longer continue to believe are strategic
to our business. We may continue to do so in the future, as part of our six
point strategic plan, to dispose of non-core assets.





Trademarks. We
own numerous United States and international trademark registrations and common
law trademarks. Some of the more important marks include: Shuffle Master,
Incorporated®, the Shuffle Master 4-square logoTM, ACE®, Deck
Mate®, i-DealTM, King®, MD1®, MD2®, one2six®, Easy Chipper C®, i-ShoeTM,
Bet the Set “21”®, Blackjack Press®, Caribbean Stud®, Casino War®, Crazy 4
Poker®, Dragon Bonus®, Fortune Blackjack®, Fortune Pai Gow Poker®, Four Card
Poker and design®, Jackpot BaccaratTM, Let It Ride®, Let It Ride Bonus®, Let
It Ride The TournamentTM, Mississippi StudTM, Roll Your Own BlackjackTM, Royal
Match 21®, Sharp ShooterTM, Texas Hold'em Bonus®, Three Card Poker and design®,
Ultimate Texas Hold' Em®, i-TableTM, Table MasterTM, Rapid Table GamesTM and Vegas
Star®.  We believe that our trademarks and trade dress are an
important component of the brand identity of our products. We also license
trademarks from others.





Intellectualpropertylicenses. We
obtain licenses to intellectual property from third parties. These licenses are
subject to various conditions and restrictions and typically involve us paying
royalties on a fixed or unit basis. We acquired a paid-up license in the PGIC
Progressive Side Bet patents in 2006 with the grant of certain expanded rights
in September 2007. While we do not believe that any of these current license
agreements are in jeopardy ofbeing
terminated, we can make no assurance that all of these license agreements will
remain in effect or that such licenses can be extended under terms favorable to
us.  See subsequent events in Note 16 in regards to the amended and
restated last license agreement included in “Item 8. Financial Statements and
Supplementary Data” included in this Annual Report on
Form 10-K.





In addition, when we license our
products to our customers, we also license the right to use our intellectual
property to casino customers. We typically earn license royalties on a periodic
basis or on a paid-up lifetime basis. We do not license our intellectual
property to other gaming equipment suppliers, except occasionally as part of a
cross-license arrangement.





We granted a multiple game license to
Delta Rangers, Inc. for the play of a number of our proprietary table games
on legalized internet gaming sites outside of the United States.





Otherintellectualproperty. In
addition to patents, we also own intellectual property in the form of copyrights
(registered and unregistered), trademarks (registered and unregistered), trade
dress, and as trade secrets. No assurance can be given that we will be
successful in maintaining the confidentiality of our trade secrets and other
proprietary information. Costs associated with defending and pursuing
infringement claims can be substantial. In the absence of valid and enforceable
patent, copyright, trademark or trade secret protection, we would be vulnerable
to competitors who could lawfully copy our products and technology.





Product-relatedagreements. We
are a party to certain cross-licensing agreements. Under these agreements, we
have certain rights to third party intellectual property. There are no royalty
obligations with respect to any of these agreements that are material to our
results of operations. Further, none of the royalties that we receive from these
agreements are material to our results of operations.





Infringement andlitigation. We
do not believe that any of our products, methods or technologies infringes the
valid and enforceable patents and other intellectual property rights of others.
However, we have been and are subject to litigation claiming that we have
infringed the rights of others and that certain of our patents and other
intellectual property are invalid or unenforceable. We have also brought actions
against others to protect our rights. For a discussion of these cases see “Item
3. Legal Proceedings”, included in this Form 10-K.





GAMING
REGULATION





Overview. We
are subject to a wide range of complex gaming laws and regulations in over 200
jurisdictions, both foreign and domestic, in which we are licensed or have
applications pending. Jurisdictions require us to be licensed, our key personnel
to be found suitable, qualified or licensed, and our products to be reviewed and
approved before placement. Additionally, gaming laws and regulations of most
jurisdictions provide that beneficial owners of 5% or more of our common stock
are subject to reporting procedures and may be subject to licensure that
includes suitability investigations and submission of personal and financial
information as required, unless the owner is eligible for and obtains an
exemption. Under certain circumstances, an "Institutional Investor," as such
term is defined by certain gaming jurisdictions' statutes or regulations, who
acquires more than 5% may apply for a waiver of the suitability requirement.
Generally, gaming jurisdictions may permit an Institutional Investor to hold up
to 15% upon a showing that they meet the jurisdiction's definition of an
"Institutional Investor" and certification as to their passive investment
intent. Furthermore, most jurisdictions have ongoing reporting requirements for
certain transactions and are concerned with our accounting practices,
internal


14


controls,
business relationships, and the fair operation of our products. Gaming
regulatory requirements vary from jurisdiction to jurisdiction and licensing,
approval, and processes related to findings of suitability, qualifications or
licenses, our products, key personnel, and certain shareholders can be lengthy
and expensive.





Generalregulatorylicensing andapprovals. We
intend to maintain our existing licenses and to seek the necessary licenses,
approvals, qualifications and findings of suitability for us, our products and
our management personnel in new jurisdictions where we anticipate sales
opportunities. We have never been denied a license, permit or approval necessary
to do business in any jurisdiction, nor had a license suspended or revoked.
However, there can be no assurance that new licenses, approvals, qualifications
or findings of suitability will be obtained or that our existing licenses will
not be revoked, suspended or conditioned. If a license, approval, qualification
or finding of suitability is required by a regulatory authority and we fail to
seek or do not receive the necessary license, qualification or finding of
suitability, then we may be prohibited from distributing our products for use in
the respective jurisdiction or may be required to provide our products through
other licensed entities at a reduced profit to us. There can also be no
assurance that we will be able to obtain the necessary approvals for our
products as they are developed. In addition, changes in legislation or in
judicial or regulatory interpretations could occur which could adversely affect
us.





We are licensed as a manufacturer and
distributor of gaming devices, an operator of inter-casino linked systems and a
slot route operator in Nevada. We are a gaming-related casino service industry
licensee in New Jersey and hold supplier, manufacturer and distributor licenses
in numerous other jurisdictions throughout North America and elsewhere. Due to
variations in jurisdictional regulatory transaction reporting, as well as
manufacturer, distributor, and product licensing requirements, only the
specifics of Nevada gaming law requirements are provided below as being
representative of gaming regulation to which we are subject in other
jurisdictions.





Nevadaregulatorymatters. We
are 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 controls 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.





We are registered with the Nevada
Commission as a publicly traded corporation and are licensed as a manufacturer
and distributor of gaming devices, an operator of inter-casino linked systems
and a slot route operator. 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 we violated gaming laws, then the approvals and licenses we hold could be
limited, conditioned, suspended or revoked, and we, and the individuals
involved, could be subject to substantial fines for each separate violation of
the gaming laws at the discretion of the Nevada Commission. Each type of gaming
device, slot game, slot game operating system, table game or associated
equipment manufactured, distributed, leased, licensed or sold in Nevada must
first be approved by the Nevada Board and, in some cases, the Nevada Commission.
We must regularly submit detailed financial and operating reports to the Nevada
Board. Certain loans, leases, sales of securities and similar financing
transactions must also be reported to or approved by the Nevada
Commission.





Certain officers, directors and key
employees 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 Nevada Commission. Changes
in specified key positions must be reported to the Nevada Commission. In
addition to its authority to deny an application for a license, the Nevada
Commission has jurisdiction to disapprove a change in position by an officer,
director or key employee. The Nevada Commission has the power to require
licensed gaming companies to suspend or dismiss officers, directors or other key
employees and to sever relationships with other persons who refuse to file
appropriate applications or whom the authorities find unsuitable to act in such
capacities.





The Nevada Commission may also require
anyone having a material relationship or involvement with us 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


15


with the
investigation. We customarily reimburse such costs and fees. Any person who
acquires more than 5% of our voting securities must report the acquisition to
the Nevada Commission. Any person who becomes a beneficial owner of more than
10% of our voting securities is 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 our 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. (It should be noted that in many other states the requirement of a
suitability finding or of a licensure applies to any holder of 5% or more of our
stock, unless the owner is eligible for and obtains an exemption.) The Nevada
Commission has amended its regulations pertaining to Institutional Investors to
temporarily allow an Institutional Investor to beneficially own more than 15%,
but not more than 19%, if the ownership percentage results from a stock
repurchase program. These Institutional Investors may not acquire any additional
shares and must reduce their holdings within one year from constructive notice
of exceeding 15%, or must file a suitability application. An Institutional
Investor will be deemed to hold voting securities for investment purposes only
if 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 our board of directors,
any change in our corporate charter, bylaws, management, policies or operations,
or any of our gaming affiliates, or any other action which the Nevada Commission
finds to be inconsistent with holding our 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 based solely
on such failure or refusal. The same restrictions apply to a record owner if the
record owner, when requested, 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. We are
subject to disciplinary action if, after we receive noticethat a person is unsuitable to be a security
holder or to have any other relationship with us, we: (i) pay that person
any dividend or interest upon our voting securities; (ii) allow that person
to exercise, directly or indirectly, any voting right conferred through
securities held by that person; or (iii) give remuneration in any form to
that person. If a security holder is found unsuitable, then we may be found
unsuitable if we fail to pursue all lawful efforts to require such unsuitable
person to relinquish his or her voting securities for cash at fair market
value.





The Nevada Commission may also, in its
discretion, require any other holders of our equity securities or any holders of
our debt securities to file applications, be investigated and be found suitable
to own our debt or equity securities. 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, we may be sanctioned, including the loss of our
approvals, if, without the prior approval of the Nevada Commission, we:
(i) pay to the unsuitable person any dividends, interest or any
distribution whatsoever; (ii) recognize any voting right by such unsuitable
person in connection with such securities; (iii) pay the unsuitable person
remuneration in any form; or (iv) make any payment to the unsuitable person
by way of principal, redemption, conversion, exchange, liquidation or similar
transaction.





We are 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 our
shareholders. The Nevada Commission has the power to require our 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 us.





We may not make certain public
offerings of our securities, without the prior approval of the Nevada
Commission. Such approval, if given, does not constitute a finding,
recommendation or approval by the Nevada Commission or the Nevada Board as to
the accuracy or adequacy of the prospectus or the investment merits of the
securities offered. Any representation to the contrary is unlawful.





On December 20, 2007, the Nevada
Commission granted us prior approval to make public offerings for a period of
two years, subject to certain conditions (the "Shelf Approval"). The Shelf
Approval is in effect at this time. However, the Shelf Approval may be rescinded
for good cause without prior notice upon the issuance of an interlocutory stop
order by the Chairman of the Nevada Board. The Shelf Approval does not
constitute a finding, recommendation or approval by the Nevada Commission or the
Nevada Board as to the accuracy or adequacy of the prospectus or the investment
merits of the securities offered. Any representation to the contrary is
unlawful.





Changes in control of us 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 by the Nevada Commission. Entities seeking to
acquire control of us must satisfy the Nevada Board and the Nevada Commission
concerning a variety of stringent standards prior to assuming control of us. The
Nevada Commission may also require


16


controlling
shareholders, officers, directors and other persons having a material
relationship or involvement with the entity proposing to acquire control, to be
investigated and licensed as part of the approval process of the
transaction.





Approvals are required from the Nevada
Commission before we can make exceptional repurchases of voting securities above
the current market price and before a corporate acquisition opposed by
management can be consummated. Nevada's gaming regulations alsorequire prior approval by the Nevada
Commission if we adopt a plan of recapitalization proposed by our board of
directors in opposition to a tender offer made directly to our shareholders for
the purpose of acquiring control of us.





We have formally adopted a compliance
plan and appointed a compliance committee in accordance with Nevada Commission
requirements. Our compliance committee meets quarterly and is responsible for
implementing and monitoring our compliance with regulatory matters. This
committee also reviews information and reports regarding the suitability of
potential key employees or other parties who may be involved in material
transactions or relationships with us.





Federalregistration. As
a manufacturer and distributor of gaming devices, we are registered pursuant to
and have complied with the Federal Gambling Devices Act of 1962 (the "Federal
Act"). In order to manufacture, sell, deliver, or operate our gaming devices, we
must renew our federal registration annually and comply with its various
record-keeping and equipment identification requirements. The Federal Act makes
it unlawful for a person or business entity to manufacture, deliver, receive,
operate, lease or sell gaming devices in interstate or foreign commerce unless
that person or entity has first registered with the Attorney General of the
United States. Violation of the Federal Act may result in seizure and forfeiture
of the equipment, as well as other penalties.





Native Americangamingregulation. Gaming
on Native American lands is governed by the Federal Indian Gaming Regulatory Act
of 1988 ("IGRA") and specific tribal ordinances and regulations. Class III
gaming, as defined under IGRA, also requires a Tribal-State Compact, which is a
written agreement between a specific tribe and the respective state. This
compact authorizes the type of Class III gaming activity and the standards,
procedures and controls under which the Class III gaming activity must be
conducted. The National Indian Gaming Commission ("NIGC") has oversight
authority over gaming on Native American lands and generally monitors tribal
gaming including the establishment and enforcement of required minimum internal
control standards. Each Tribe is sovereign and must have a tribal gaming
commission or office established to regulate tribal gaming activity to ensure
compliance with IGRA, NIGC, and its Tribal-State Compact. We have complied with
each of the numerous vendors licensing and specific product approval and
shipping notification requirements imposed by Tribal-State Compacts and enforced
by tribal and/or state gaming agencies under IGRA in the Native American lands
in which we do business.





Otherjurisdictions. We
have obtained or are in the process of obtaining all licenses/permits required
by jurisdictions having legalized gaming. In general, such requirements are
similar to Nevada in that there are company approvals as well as individual
licensing and product approvals.





Productapprovals. Each
of our products is subject to extensive testing and reviews by multiple state,
jurisdictional or third party laboratories. The detail and extent of the review
generally 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. Associated equipment is equipment that is not
classified as a gaming device or gaming equipment but, which 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 concurrently with the use of such equipment
in the respective jurisdiction. The time required for product testing can be
extensive and is subject to a wide range of formal and informal standards that
can lead to great uncertainty as to the length of the regulatory approval
process. Additionally, product testing is subject to changing standards, as a
result of which, we may be required to upgrade or revise our products. We
believe the laboratories responsible for testing are handling a great number of
product submissions and are under the pressure of limited funding and resources.
Such limitations could cause our product approvals to be delayed for unknown
periods of time.





A description of regulatory status and
updates related to each of our product segments is discussed below.





For our Utility products, we have
obtained approvals for our shufflers, excluding developmental models, in all
gaming markets in North America where casino and poker gaming is legalized. We
have also received or filed (directly or through our international distributors)
for approval of our shuffler products in additional international jurisdictions
where required. In addition to our shufflers, Utility product approvals also
include our chip sorting machines, such as our Easy Chipper C, which has been
approved in all major casino gaming jurisdictions in North America and various
international


17


jurisdictions.  Last,
Utility product approvals include our ITS products, namely the i-Shoe, which has
been approved in Nevada, Indiana and Connecticut, as well as California and
Iowa Tribal jurisdictions.





For fiscal 2008, we received Utility
product approvals for our i-Deal shuffler, our newest shuffler, in Canadian
jurisdictions as well as numerous gaming jurisdictions in the United
States.  Additionally in fiscal 2008, we received product approvals
for our MD2 shuffler with card recognition in most major casino gaming markets
in North America.  We anticipate additional approvals of our Utility
products throughout fiscal 2009.





For our PTG products, our Let It Ride
and Three Card Poker table games are approved in all major casino gaming markets
in North America and numerous other international gaming jurisdictions. Four
Card Poker, Caribbean Stud, Ultimate Texas Hold'em, Texas Hold'em Bonus, Fortune
Pai Gow Poker, and Royal Match 21 are approved in most jurisdictions in North
America.  Additional product approvals include Blackjack Press, Sharp
Shooter, and progressive versions of Three Card Poker and Fortune Pai Gow Poker
from the Nevada Gaming Control Board and Gaming Laboratories
International.





For fiscal 2008, we received numerous
PTG product approvals for our progressive table games throughout casino gaming
jurisdictions in North America.  Progressive product approvals
included Texas Hold’em Bonus, Ultimate Texas Hold’em, Three Card Poker, Four
Card Poker, Royal Match 21, Let It Ride, Fortune Pai Gow and Casino
War.  We anticipate additional approvals of our PTG products
throughout fiscal 2009.





For our ETS products, our Table
Master with blackjack was first submitted for regulatory testing in fiscal
2004 and has been approved in multiple jurisdictions. Additional approved Table
Master games include Three Card Poker, Let It Ride Bonus, Dragon Bonus Baccarat
and Ultimate Texas Hold’em.  In addition, our Vegas Star with
Roulette was first submitted for regulatory testing in fiscal 2003 and has been
approved in key Australian jurisdictions, tribal North American jurisdictions
and Macau. Additional approved Vegas Star games include Sic Bo,
Baccarat and Blackjack.  Last, our Rapid Roulette was first
submitted for regulatory testing approval in fiscal 2002 and has been
approved in multiple jurisdictions in North America as well as key Australasia
jurisdictions.  The only additionally approved Rapid e-Table game is
Baccarat.





For fiscal 2008, we received ETS
product approvals for Table Master - Four Card Poker in Nevada, New Mexico,
Iowa, Indiana and numerous tribal jurisdictions within the United
States.  In addition, we received product approvals for Star Craps in
tribal jurisdictions, including Arizona, California and
Michigan.  Last, we received product approvals for Rapid Roulette in
both New Jersey and Ontario, Canada as well as Rapid Baccarat in
Nevada.  We anticipate additional approvals of our ETS products
throughout fiscal 2009.





OTHER BUSINESS INFORMATION





Customerservice. As
part of our strategy to maintain and expand our market position, we have made a
commitment to maintain a high level of service to our customers. We have
numerous field service centers in the United States and internationally,
including our operations in Macau. Within our service areas, we provide regular
preventative maintenance service and on-demand repair service for our leased
equipment, provide service training to our customers and provide back-up units
to our lessees. For casinos that purchase our products, we offer service
contracts providing service benefits similar to those of leased units or
parts-only warranty contracts.





Significantcustomersales,foreignsales andforeignassets. For
fiscal 2008, 2007 and 2006 sales to customers outside the United States
accounted for approximately 53%, 55% and 44% of consolidated revenue; and no
individual customer accounted for more than 10% of consolidated revenue in each
of those years. As of October 31, 2008, approximately 58% of our long-lived
assets, including goodwill and acquired intangible assets, were outside the
United States. As of October 31, 2008 and 2007, no single customer balances
exceeded 10% of our net trade accounts receivable or 10% of our investment in
sales-type leases and notes receivable. Additional information regarding our
foreign sales and long-lived assets by geographic region is included in Note 14
in “Item 8. Financial Statements and Supplementary Data”, included in this
Form 10-K





Seasonality andbusinessfluctuations. Quarterly
revenue and net income may vary based on the timing of the opening of new gaming
jurisdictions, the opening or closing of casinos or the expansion or contraction
of existing casinos, gaming regulatory approvals or denial of our products and
corporate licenses, the introduction of new products, the seasonality of
customer capital budgets, or fluctuation in general economic
conditions.





Employees. As
of October 31, 2008, we had approximately 624 employees.  We are not
subject to any collective bargaining agreements, and we believe that our
environment will continue to be union free.





18





ITEM
1A. FORWARD LOOKING STATEMENTS AND RISK FACTORS




RISKS
RELATED TO OUR BUSINESS




We
are dependent on our intellectual property and trade secrets, and we may be
unable to protect our intellectual property and trade secrets from infringement,
misappropriation, or claims of infringement or invalidity.





The gaming industry is characterized by
the use of various forms of intellectual property to entertain. We are dependent
upon patented technologies, trademarked brands and proprietary information for
our business. We endeavor to protect our intellectual property rights and our
products through a combination of patent, trademark, trade dress, copyright and
trade secret laws, as well as licensing agreements and third-party nondisclosure
and assignment agreements.





We have numerous patents and
trademarks, and we utilize patent protection in the United States relating to
certain existing and proposed processes and products. We cannot assure you that
all of our existing patents are valid or enforceable or will continue to be
valid or enforceable, or that any pending patent applications will be approved.
Our competitors have in the past challenged, are currently challenging and may
in the future challenge the validity or enforceability of certain of our
patents. The patents we own could be challenged, invalidated or circumvented by
others and may not be of sufficient scope or strength to provide us with any
meaningful protection or commercial advantage. Competitors may infringe our
patents and we may not have adequate resources or there may be other reasons we
do not enforce our patents. Our patents may not adequately cover a competitor's
products.





We also rely on unpatented proprietary
technology. It is possible that others will independently develop the same or
similar technology or otherwise obtain access to our unpatented technology. To
protect our trade secrets and other proprietary information, we generally
require employees, consultants, advisors and collaborators to enter into
confidentiality agreements. We cannot assure you that these agreements are fully
enforceableor will provide meaningful
protection for our trade secrets, know-how or other proprietary information in
the event of any unauthorized use, misappropriation or disclosure of such trade
secrets, know-how or other proprietary information. If we are unable to maintain
the proprietary nature of our technologies, it could have a material adverse
effect on our business.





We rely on our trademarks, trade names,
trade dress, copyrights and brand names to distinguish our products from the
products of our competitors. We have registered or applied to register many of
these trademarks. Our trademark applications may not be approved and/or all of
the above intellectual property may not remain valid or enforceable. We may not
be able to build and maintain goodwill in our trademarks or other intellectual
property or that any trademark, copyright, issued patent or other types of
intellectual property will provide competitive advantages for us. Third parties
may oppose our trademark applications or challenge our use of the trademarks.
Our trademarks may become so well known by the public that their use becomes
generic and they lose trademark protection. In the event that our trademarks are
successfully challenged, we could be forced to rebrand our products, which could
result in loss of brand recognition and could require us to devote resources
towards advertising and marketing new brands. Further, our competitors may
infringe our trademarks or other intellectual property and we may not have
adequate resources or there may be other reasons we do not enforce our
trademarks or other types of intellectual property.





Because of the differences in foreign
patent, trademark, trade dress, copyright and other laws concerning proprietary
rights, our intellectual property frequently does not receive the same degree of
protection in foreign countries as it would in the United States. Our failure to
possess, obtain or maintain adequate protection of our intellectual property
rights for any reason could have a material adverse effect on our business,
results of operations and financial condition.





We also face the risk that we may have
infringed or could in the future infringe third parties' intellectual property
rights and could be sued for the same. We have many competitors in both the
United States and foreign countries, some of which have substantially greater
resources and have made substantial investments in competing technologies. Some
competitors have applied for and obtained, and may in the future apply for and
obtain, patents that may prevent, limit or otherwise interfere with our ability
to make and sell our products. Any royalty, licensing or settlement agreements,
if required, may not be available to us on acceptable terms or at
all.





Significant litigation regarding
intellectual property rights exists in our industry. We have in the past made,
are currently making and may in the future make, enforcement claims against
third parties, and third parties have in the past made, are currently making and
may in the future make, claims of infringement, invalidity or enforceability
against us or against our licensees or manufacturers in connection with their
use of our technology. For more information, see “Item 3. Legal
Proceedings”, included in this Form 10-K.  A successful challenge
to or invalidation of one of our patents or


19


trademarks,
a successful claim of infringement by a third party against us, our products, or
one of our licensees in connection with the use of our technology, or an
unsuccessful claim of infringement made by us against a third party or its
products could adversely affect our business or cause us financial harm. We are
currently in litigation over various intellectual property matters. Any claims,
even those which are without merit, could:





·
            be
      expensive and time consuming to
defend;





·
            cause
      one or more of our patents to be ruled or rendered unenforceable or
      invalid;





·
            cause
      us to cease making, licensing or using products that incorporate the
      challenged intellectual property;





·
            require
      us to redesign, reengineer or rebrand our
  products;





·
            divert
      management's attention and
resources;





·
            require
      us to pay significant amounts in
damages;





·
            require
      us to enter into royalty, licensing or settlement agreements in order to
      obtain the right to use a necessary product, process or component;
      or





·
            limit
      our ability to bring new products to the market in the
    future.





In addition, the gaming industry is
characterized by the rapid development of new technologies, which requires us to
continuously introduce new products using these technologies and innovations, as
well as to expand into new markets that may be created. Therefore, our success
depends in part on our ability to continually adapt our products and systems to
incorporate new technologies and to expand into markets that may be created by
new technologies. However, to the extent technologies are protected by the
intellectual property rights of others, including our competitors, we may be
prevented from introducing products based on these technologies or expanding
into markets created by these technologies. If the intellectual property rights
of others prevent us from taking advantage of innovative technologies, our
financial condition, operating results or prospects may be harmed.





The
gaming industry is highly regulated and we must adhere to various regulations
and maintain our licenses to continue our operations.  Failure to
obtain and/or maintain our licenses could be disruptive to our business and
could adversely affect our operations.





We and our products are subject to
extensive regulation under federal, state, local and foreign laws, rules and
regulations of the jurisdictions in which we do business and our products are
used. These laws, rules and regulations generally concern the responsibility,
financial stability, character and suitability of our officers, directors, major
stockholders, key personnel or business partners in gaming operations, including
makers of gaming equipment such as ourselves. In many jurisdictions,
shareholders owning greater than 5% of our shares must be licensed under
applicable gaming regulations unless they qualify for and are able to obtain an
exemption or waiver from licensing in those jurisdictions. Some jurisdictions
empower their regulators to investigate participation by licensees in gaming
outside their jurisdiction and require access to periodic reports concerning
gaming activities. Violations of laws in one jurisdiction could result in
disciplinary action in other jurisdictions. Licenses, approvals or findings of
suitability may be revoked, suspended or conditioned. We may not be able to
obtain or maintain all necessary registrations, licenses, permits or approvals,
that the licensing process will not result in delays or adversely affect our
operations and our ability to maintain key personnel, or that complying with
these regulations will not increase our costs. For a summary of gaming
regulations that affect our business, see "Item 1. Business-Gaming
Regulation”, included in this Form 10-K.





We will also become subject to
regulation in any other jurisdiction where our customers operate in the future.
To expand into any such jurisdiction, we may need to be licensed, obtain
approvals of our products and/or seek licensure of our officers, directors,
major stockholders, key personnel or business partners. If we fail to seek, do
not receive or receive a revocation of a license in a particular jurisdiction
for our games, hardware or software, we would not be able to sell or place on a
leased or participation basis our products in that jurisdiction.





In
addition, legislative and regulatory changes may affect demand for or place
limitations on the placement of our products. Such changes could affect us in a
variety of ways. Legislation or regulation may introduce limitations on our
products or opportunities for the use of our products, and could foster
competitive games or technologies at our or our


20


customers'
expense. For example, current regulations in a number of jurisdictions where our
customers operate limit the amount of space allocable to our products and
substantial changes in those regulations may adversely affect demand for our
products. Our business will also suffer if our products became obsolete due to
changes in laws or the regulatory framework.





Legislative or regulatory changes
negatively impacting the gaming industry as a whole or our customers in
particular could also decrease the demand for our products. Opposition to gaming
could result in restrictions or even prohibitions of gaming operations in any
jurisdiction or could result in increased taxes on gaming revenues. Tax matters,
including changes in state, federal or other tax legislation or assessments by
tax authorities could have a negative impact on our business. A reduction in
growth of the gaming industry or in the number of gaming jurisdictions or delays
in the opening of new or expanded casinos could reduce demand for our products.
Changes in current or future laws or regulations or future judicial intervention
in any particular jurisdiction may have a material adverse effect on our
existing and proposed foreign and domestic operations. Any such adverse change
in the legislative or regulatory environment could have a material adverse
effect on our business, results of operations or financial
condition.





A
continued downturn in general worldwide economic conditions or in the gaming
industry or a reduction in demand for gaming may adversely affect our results of
operations.  As a result, the market price of our common stock may
decline.





Our business operations are affected by
international, national and local economic conditions. The current
recession and continued downturn in the general economy, or in a region
constituting a significant source of our customers, or a reduction in demand for
gaming, may harm the health of casino operators and our other customers and
consequently result in fewer customers leasing or purchasing our products, which
would adversely affect our revenues.





In 2008, general worldwide economic
conditions have experienced a downturn due to the sequential effects of the
subprime lending crisis, general credit, recession, market crisis, collateral
effects on the finance and banking industries, volatile energy costs, concerns
about inflation, slower economic activity, decreased consumer confidence,
reduced corporate profits and capital spending, adverse business conditions and
liquidity concerns. These conditions make it difficult for our customers and us
to accurately forecast and plan future business activities, and they could cause
our domestic and foreign customers to slow their spending on both our lease- and
sales-based products.  We cannot predict the effect or duration of
this economic slowdown or the timing or strength of a subsequent economic
recovery, worldwide or in the gaming industry. If the domestic and foreign
markets for our products significantly deteriorate due to these macroeconomic
effects, our business, financial condition and results of operations will likely
be materially and adversely affected.





The gaming industry has been notably
impacted by the general economic downturn.  Additionally, due to
recent disruptions in the financial markets, gaming operators have been less
able to secure financing for development projects and have scaled back such
projects considerably.  Clients have made significant cuts in
expenditures, including layoffs of workers and management employees as well as
delayed expansions or new openings.  For example, domestically,
Nevada’s Gaming Control Board has reported record decreases in winnings during
the final months of calendar 2008. Additionally, auto traffic into Las Vegas and
air travel to McCarran International airport has declined, resulting in lower
casino volumes.  Internationally, casino revenues in Macau have
decreased in the two most recent quarters and casino openings are expected to
decrease significantly in 2009.  Additionally, Chinese authorities
have placed restrictions on travel to Macau for residents of mainland China,
which may further impact the gaming industry in Macau.  Our exposures
to these economic conditions are not limited to these jurisdictions mentioned
above, as they are used for example purposes only.  These economic
conditions may cause both our domestic and international clients to decrease
their expenditures on gaming equipment and our financial condition, results of
operations and stock price may be negatively affected thereby.





Our
Domestic and Global Growth and Ability to Access Capital Markets are Subject to
a Number of Economic Risks.





Financial markets in the United States,
Europe and Asia have been experiencing extreme disruption in recent months,
including, among other things, extreme volatility in security prices, severely
diminished liquidity and credit availability, rating downgrades of certain
investments and declining valuations of others. Governments have taken
unprecedented actions intended to address extreme market conditions that include
severely restricted credit and declines in real estate values. It is possible
that there will be a further deterioration in financial markets and confidence
in major economies.





These economic developments affect our
business in a number of ways. The current tightening of credit in financial
markets adversely affects the ability of our customers to obtain financing for
purchases and operations and could result in a decrease in or cancellation of
lease and sale orders for our products and services.  Current economic
conditions could also affect our ability to raise funds in the capital and bank
lending markets.  Our senior secured credit facility (the “Senior
Secured Credit Facility”), which consists of a $65,000 term loan (the “Term
Loan”) and $100,000 revolving credit facility


21


(the
“Revolver”) matures on November 30, 2011. If economic conditions do not improve
by such time, we might not be able to refinance such facility on favorable
economic terms, or at all.





Additionally, as discussed in more
detail under “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Liquidity and Capital Resources” included in
this Form 10-K, we currently have outstanding $30,258 of 1.25% contingent
convertible senior notes (the “Notes”). The Notes provide the holders with a
repurchase option on April 15, 2009, which we expect them to exercise in full.
We intend to draw on the Revolver and/or use cash on hand to fund such
redemption. However, as discussed further under “Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations—Liquidity and
Capital Resources” and Note 7 in “Item 8. Financial Statements and Supplementary
Data,” both included in this Form 10-K, our Senior Secured Credit Agreement
places certain restrictive covenants on us. We are currently in compliance with
our Senior Secured Credit Agreement’s covenants and expect to continue to be in
compliance when the noteholders exercise their repurchase option. However, if we
are not in compliance at such time, we might not be able to borrow under our
Revolver. In such case, we would need to satisfy the redemption obligation
through a combination of cash on hand and additional fundraising. Current
economic conditions could make it difficult to raise such capital, and
accordingly in such circumstance there is a possibility that we could default in
our obligation to redeem such Notes. Such default could, if not rectified, lead
to cross acceleration under our Senior Secured Credit Facility.





Risks
that impact our customers may impact us.





If fewer players visit our customers'
facilities, if such players have less disposable income to spend at our
customers' facilities or if our customers are unable to devote resources to
purchasing and leasing our products, there could be an adverse effect on our
business. Such risks that affect our customers include, but are not limited
to:





·
            adverse
      economic and market conditions in gaming markets such as those being
      currently experienced, including recession, economic slowdown, higher
      interest rates, higher airfares and higher energy and gasoline
      prices;





·
            global
      geopolitical events such as terrorist attacks and other acts of war or
      hostility;





·
            natural
      disasters such as major fires, floods, hurricanes and earthquakes;
      and





·
            concerns
      about SARS, Avian flu or other influenza or contagious
      illnesses.





Economic,
political, legal and other risks associated with our international sales and
operations could adversely affect our operating results.





Since we sell or lease our products
worldwide, our business is subject to risks associated with doing business
internationally. Our sales to customers outside the United States, primarily
Canada, Europe, and Australasia accounted for approximately 53% of our
consolidated revenue from continuing operations for fiscal 2008. Accordingly,
our future results could be harmed by a variety of factors,
including:





·
            changes
      in foreign currency exchange rates;





·
            exchange
      controls;





·
            changes
      in regulatory requirements, such as, without limitation, caps on the
      number of table games in locations such as
  Macau;





·
            changes
      in a specific country's or region's political or economic
      conditions;





·
            tariffs,
      other trade protection measures and import or export licensing
      requirements;





·
            potentially
      negative consequences from changes in tax laws or application of such tax
      laws;





·
            difficulty
      in staffing and managing widespread
operations;





·
            changing
      labor regulations;


22


requirements
relating to withholding taxes on remittances and other payments by
subsidiaries;





·
            different
      regimes controlling the protection of our intellectual property and the
      ability for us to repossess our equipment or products in the event of a
      lease default;





·
            restrictions
      on our ability to own or operate subsidiaries, make investments or acquire
      new businesses in these jurisdictions;
and





·
            restrictions
      on our ability to repatriate dividends from our
    subsidiaries.





Our
international operations are affected by global economic and political
conditions. Changes in economic or political conditions in any of the countries
in which we operate could result in exchange rate movement, new currency or
exchange controls or other restrictions being imposed on our
operations.





We also have agreements with casinos in
Native American jurisdictions, which may subject us to sovereign immunity risks
and could subject us to additional compliance costs.





The
search for and possible transition to a new Chief Executive Officer, and the
search for and transition to a permanent Chief Financial Officer, could be
unsuccessful and/or disruptive to our business.  Additionally, the
employment contract of our Acting Chief Financial Officer is approaching
expiration and if such contract is not renewed, the search for and transition to
a replacement Chief Financial Officer could be unsuccessful and/or disruptive to
our business.





On December 10, 2007, we announced
that the board of directors had retained Spencer Stuart to conduct an executive
search to assist in evaluating and developing the long-term succession plans for
our Chief Executive Officer position. The search for a new Chief Executive
Officer is currently an active and ongoing process.





The employment contract of Mark
Yoseloff, Ph.D., our Chief Executive Officer, expires on October 31, 2009,
subject to earlier termination as set forth in the agreement. Dr. Yoseloff
has expressed a desire to possibly re-evaluate his role with us at the end, or
prior to the end, of his current employment contract.





In addition, on March 6, 2008, we
announced that effective March 1, 2008, Senior Vice President and Chief
Accounting Officer Coreen Sawdon was appointed as Acting Chief Financial
Officer, replacing Paul Meyer, our former President, Chief Operating Officer and
Acting Chief Financial Officer.  We are currently conducting the
search for a permanent Chief Financial Officer.





While Dr. Yoseloff and
Ms. Sawdon are fully cooperating with the search process, the search for or
transition to a new Chief Executive Officer and a permanent Chief Financial
Officer may not be smooth or successful.





Our success depends, in part and to
varying degrees, on having a successful Chief Executive Officer and Chief
Financial Officer, yet we face significant competition for these types of senior
executives. If Dr. Yoseloff or the Board elects to end Dr. Yoseloff's
ChiefExecutive Officer role, or we or he elect
to reduce or change his role, we may not be able to find a suitable successor,
and these outcomes could have a material adverse effect on our business.
Similarly, we may not be able to find a permanent Chief Financial Officer in a
timely manner. A new Chief Executive Officer or Chief Financial Officer may not
lead us in a successful manner. Any failure to find successors for the Chief
Executive Officer or Chief Financial Officer positions or implement a smooth and
successful transition to such successors could have a material adverse effect on
our business, results of operations or financial condition. Dr. Yoseloff
may not be successful if he remains in the Chief Executive Officer
role.





Additionally, should
Dr. Yoseloff's tenure as Chief Executive Officer end before the search
process for a new Chief Executive Officer has been completed, we may not have
successfully retained a permanent Chief Financial Officer by that time. The
additional instability caused by having both the Chief Executive Officer and
Chief Financial Officer positions filled on interim bases could have a material
adverse effect on our business, results of operations or financial
condition.





The employment agreement of
Ms. Coreen Sawdon, Acting Chief Financial Officer, Senior Vice President
and Chief Accounting Officer is due to expire on July 31,
2009.  No extension has been agreed to at this time, and there is no
guarantee that Ms. Sawdon or the Company will enter into such an extension.
Should we be unable to reach an agreement with Ms. Sawdon, a material adverse
effect on our business, results of operations or financial condition could
occur.


23


If we fail to retain, recruit and
motivate highly skilled personnel, our business and our ability to obtain new
customers, develop new products and provide acceptable levels of customer
service could suffer. The success of our business is heavily dependent on the
leadership of our key management personnel and on our key employees. If any of
these persons were to leave us it could be difficult to replace them, and our
business could be harmed. Competition for these persons is intense and we may
not be able to successfully recruit, train or retain qualified personnel. We do
not have "key-man" life insurance.





Our
ability to implement our renewed six-point strategic plan successfully is
subject to many factors, some of which are beyond our control, and if we are
unsuccessful in such implementation, we may experience organizational
inefficiencies which could adversely affect our results of
operations.





The success of our renewed six-point
strategic plan depends, in part, on the ability of our key management to
implement its initiatives. If we are unsuccessful in such implementation, we may
experience organizational inefficiencies which could have negative consequences
on our revenues or earnings, in which case we would be required to further
re-evaluate our strategic initiatives.





For example, the further success of our
shift of emphasis from selling to leasing our products predominantly in the
United States will depend, in part, on our customers' willingness to accept this
change in our business relationships. Additionally, if we are not successful in
implementing such shift, or if there is any loss or delay in market acceptance
of the leasing model, earnings may be impacted negatively.





Litigation
may subject us to significant legal expenses, damages and liability and is
inherently unpredictable and risky.





We are currently engaged in litigation
on a variety of matters, including, in particular, several suits regarding our
intellectual property rights and related anti-trust and trade practice issues.
For information on our current materiallitigation and our assessments, see "Item 3.
Legal Proceedings”, included in this Form 10-K. Our assessment of each
matter may change based on future unknown or unexpected events, or we may simply
be wrong. Litigation requires the expenditure of significant time and resources,
and is inherently unpredictable and risky. We are unable at this time to
estimate the likely outcome of pending litigation. An adverse judgment in any
pending or future litigation could have a material impact on our business
operations, intellectual property, results of operations or financial
position.





Our
products currently in development may not achieve commercial success and if we
are unable to maintain a competitive technological position, we may suffer a
material adverse effect on our business, results of operations or financial
condition.





We have a number of products in various
stages of development. We believe that our future success will depend in large
part upon our ability to enhance our existing products and to develop, introduce
and market new products and improvements to our existing products. As a result,
we expect to continue to make significant investments in product development, as
needed. Our development of products is dependent on factors such as reaching
definitive agreements with third parties, obtaining requisite governmental
approvals, having the necessary financial and other resources, and the
performance and financial and operational viability of various third
parties.





Future technological advances in the
gaming products industry may result in the availability of new products or
increase the efficiency of existing products. However, we may not be able to
finance capital expenditures for new technologies that are more cost-effective
or create superior products.  Existing, proposed or as yet undeveloped
technologies may render our current technology less profitable or less viable,
and we may not have available the financial and other resources to compete
effectively against companies possessing such technologies.





While we are pursuing and will continue
to pursue product development opportunities, we cannot assure you that such
products will come to fruition or become successful. Furthermore, a number of
those products are being tested, and we cannot provide any definite date by
which they will be commercially available. These products may not prove to be
commercially viable, and even if they do, we may not be able to obtain the
various gaming licenses necessary to distribute them to our customers.
Additionally, subsequent to the commercial introduction of such products, we may
experience operational problems that could delay or defeat the ability of such
products to generate revenue or operating profits. Future operational problems
could increase our costs, delay our plans or adversely affect our reputation or
our sales of other products which, in turn, could have a material adverse effect
on our success. We cannot predict which of the many possible future products, if
any, will meet evolving industry standards and consumer demands. Should we be
unable to adapt to such technological changes, offer such products on a timely
basis or establish or maintain a competitive position, we may suffer a material
adverse effect on our business, results of operations or financial
condition.


24


We
compete in a single industry, and our business may suffer if our products become
obsolete or demand for them decreases as a result of the downturn in the gaming
industry.





We derive substantially all of our
revenues from leasing, licensing, selling and other financing arrangements of
products for the gaming industry. The gaming industry is currently suffering
from a significant downturn, with several casinos announcing layoffs and major
reductions in spending. Because of this downturn, our business may materially
suffer if our products become obsolete or if use of our products decreases.
Additionally, if table games are particularly affected by this market downturn,
we may also materially suffer.  Our operating lease agreements with
our customers are typically month-to-month and provide for termination upon
30 days' prior notice by either party.  Accordingly, consistent demand
for and satisfaction with our products by our customers is critical to our
financial condition and future success, and problems, defects or
dissatisfaction with our products could cause us to lose customers or revenues
from leases with minimal notice. Additionally, our success depends on our
ability to keep pace with technological advances in our industry and to adapt
and improve our products in response to evolving customer needs and industry
trends. If demand for our products weakens due to lack of market acceptance,
technological change, competition, regulatory changes, or other factors, it
could have a material adverse effect on our business, results of operations or
financial condition.





Any
disruption in our manufacturing processes, any significant increase in
manufacturing costs or any inability to manufacture a sufficient number of our
products to meet demand could adversely affect our business and operating
results.





We manufacture our products at our
headquarters and manufacturing facility in Las Vegas, Nevada, as well as
Stargames in Milperra, New South Wales, Australia. We also outsource the
manufacturing of certain of our sub-assemblies in the United States, Europe and
Australasia. Should any of these manufacturing processes be disrupted, we cannot
provide assurance that we would be able to timely remedy such disruption. In
such a case, we may be unable to produce a sufficient quantity of our products
to meet the demand of our customers. In addition, manufacturing costs may
increase significantly and we may not be able to successfully recover these cost
increases with increased pricing to our customers. Either case could have an
adverse impact on our business, results of operations or financial
condition.





Our
gaming operations, particularly our Utility, ETS and EGM segments, may
experience losses due to technical difficulties or fraudulent
activities.





Our success partly depends on our
ability to avoid, detect, replicate and correct software and hardware errors and
fraudulent manipulation of our systems. We incorporate security features into
the design of our gaming products in order to prevent us or our patrons from
being defrauded. To the extent any of our gaming products or software experience
errors or fraudulent manipulation, our customers may replace our products and
services with those of our competitors. In addition, the occurrence of errors
in, or fraudulent manipulation of, our gaming products or software may give rise
to claims for lost revenues and related litigation by our customers and may
subject us to investigation or other action by gaming regulatory authorities,
including suspension or revocation of our gaming licenses and disciplinary
action, which may lead to a material adverse effect on our business, results of
operations or financial condition. Further, in the event of such issues with our
gaming products or software, substantial engineering and marketing resources may
be diverted from other areas to rectify the problem.





We
operate in a very competitive business environment; and if we do no adapt our
approach and our products to meet this demand, our business, results of
operations or financial condition could be adversely impacted.





There is intense competition in the
gaming products industry, which is characterized by dynamic customer demand and
rapid technological advances. We must continually adapt our approach and our
products to meet this demand and match these technological advances, and if we
cannot do so, our business, results of operations or financial condition may be
adversely impacted. Conversely, the development of new competitive products or
the enhancement of existing competitive products in any market in which we
operate could have an adverse impact on our business, results of operations or
financial condition.  Due to the downturn in the economy in general
and particularly in the gaming industry, we may not be able to adapt to the
market adequately.  If we are unable to remain dynamic in the face of
changes in the market, it could have a material adverse effect on our business,
results of operations or financial condition.





In general, we compete with other
gaming and entertainment products for space on the casino customers’ floor, as
well as for our customers' capital and operational spending. Some of the larger
gaming supply companies with whom we compete are IGT, Bally, WMS and Aristocrat.
New competitors may also enter our key markets.


25


In the Utility segment, namely
shufflers and other gaming equipment, we compete with hand shuffling and have
competed with Elixir Gaming Technologies, Inc., a company with a U.S.
presence that markets batch and continuous versions of shufflers, with the
Shuffle ProTM being their most recent competitive shuffler in the market.
Additionally, other companies may develop, "reverse engineer," or market
shufflers and seek to develop and obtain regulatory approvals of additional
shuffler products. A competitive product may gain substantial placements or
cause price erosion of our shufflers in the future.  Casinos may
choose to shift from automatic to hand shuffling which would cause price erosion
of our shufflers. Several companies also manufacture and sell chipper products
which are competitive with our Easy Chipper CTM product. Competition with
our i-Shoe card reading shoe is predominantly limited to
Angel Co. Ltd.'s Angel Eye® card reading shoe.





With respect to our PTG segment, in
addition to companies such as IGT, Bally, Aristocrat and WMS that primarily
market slot machines, we also compete with both public domain table games such
as blackjack, and several companies which primarily develop and license
proprietary table games. Some of our competitors' widely known proprietary table
game titles include Galaxy Gaming's Lucky LadiesTM and Emperor's Challenge, and
Masque Publishing's Spanish 21®. Competition in the table games segment is
typically on the basis of price, brand recognition, player appeal and the
strength of underlying intellectual property. Smaller developers and vendors are
able to participate in developing and marketing table games more easily,
compared to other gaming products, because of the lower cost and complexity
associated with the development of these products and a generally less stringent
regulatory environment.  In the future, slot manufacturers, as well as
table game competitors or others could market table games that might displace
our products.





With our acquisition of Stargames, we
have increased our ETS segment to expand our e-Table platforms. This product
line has significant competition, perhaps more than our traditional Utility and
PTG segment product offerings. There are numerous other companies that
manufacture and/or sell e-Table games, which are similar to our Table Master,
Vegas Star and Rapid Table Games. These companies include, but are not limited
to, Elektroncek (also known as Interblock), Aruze, PacificNet, Novomatic, IGT
and TableMAX.





Our EGM segment competes for casino
floor space with products of other gaming suppliers. The international slot
environment is competitive. The Australasia market reflects other worldwide
markets as most of the major international manufacturers have a
presence there. The major competitors in these markets are IGT, Bally,
Aristocrat, Konami, Aruze and Ainsworth. In Asia, these competitors are also
active along with further competition from myriad European slot
manufacturers.





Finally, some of our product segments
may compete against each other for space on the casino floor.





We
are dependent on the success of our customers and are subject to industry
fluctuations.





Our success depends on our customers
leasing or buying our products to expand their existing operations, replace
existing gaming products or equip a new casino. Any slowdown in the replacement
cycle as a result of the current downturn in the gaming industry may negatively
impact our operations.





Additionally, to the extent existing or
potential customers choose to allocate capital to expenditures other than gaming
products, such as real estate acquisitions, hotel furnishings, restaurants and
other improvements, or generally to reduce expenditures, particularly in
response to the current downturn in the gaming industry, we may suffer a
material adverse effect on our business, results of operations or financial
condition.





Certain
market risks may affect our business, results of operations and
prospects.





In the normal course of our business,
we are routinely subjected to a variety of market risks, examples of which
include, but are not limited to, interest rate movements, fluctuating
commodities markets, higher labor costs, increased fuel prices, collectibility
of receivables and recoverability of residual values on leased assets such as
those in certain international markets. Further, some of our customers may
experience financial difficulties, possibly as a result of the current downturn
in the gaming industry, or may otherwise not pay accounts receivable when due,
resulting in increased write-offs. Material losses may be incurred in these
areas in the future.





We
are exposed to foreign currency risk.





We are exposed to foreign currency
exchange rate risk inherent in our lease and sales commitments, anticipated
leases and sales, anticipated purchases of inventory in foreign jurisdictions,
and assets, liabilities and debt denominated in currencies other than the U.S.
dollar. We transact business in numerous countries around the world in a variety
of foreign currencies.  Fluctuations in the value of the Euro, the
Australian dollar, the Pataca or the Rand may adversely affect
our


26


results
of operations, of which the most significant to our operations for fiscal 2008
were the Australian dollar and the Euro. We expect that a significant portion of
the volume of our business will continue to be denominated in foreign currency
and because our financial results are reported in U.S. dollars, if we generate
sales or earnings in other currencies, the translation of those results into
U.S. dollars can result in a significant increase or decrease in the amount of
those sales or earnings. As such, we expect our cash flows and earnings to
continue to be exposed to the risks that may arise from fluctuations in
foreigncurrency exchange
rates.





We
could face considerable business and financial risk in implementing
acquisitions.





As part of our overall growth strategy,
we have in the past acquired, and will continue to seek to acquire,
complementary products, assets and businesses. We regularly engage in
discussions with respect to and investigate possible acquisitions. Future
acquisitions could result (and past acquisitions have resulted) in potentially
dilutive issuances of equity securities, significant expenditures of cash, the
incurrence of debt and contingent liabilities and an increase in amortization
expenses, which could have (and have, in the past, had) a material adverse
effect upon our business, financial condition and results of
operations.





The risks associated with acquisitions
could have (and have, in the past, had) a material adverse effect upon our
business, financial condition and results of operations. We may not be
successful in consummating future acquisitions on favorable terms or at all or
that any future acquisition will work out as we expect.





Our acquisitions of Stargames, PGIC's
Table Game Division (“TGD”) and any other future potential acquisitions may not
produce the revenues, earnings or business synergies that we anticipate, and may
not perform as expected for a variety of reasons, including:





·
            difficulties
      in the integration of the operations, financial reporting, technologies,
      products and personnel, including those caused by national, geographic and
      cultural differences;





·
            infringement
      of, invalidity of, or unenforceability of any acquired intellectual
      property;





·
            risks
      of entering markets in which we have no or limited prior
      experience;





·
            difficulties
      in the use, development or sale of intellectual property or future or
      present products;





·
            the
      potential loss of employees;





·
            currency
      fluctuations or changes in exchange rates in connection with sales to
      customers and the purchase of inventory in foreign
    currencies;





·
            diversion
      of management's attention away from other business
    concerns;





·
            expenses
      of any undisclosed or potential legal
  liabilities;





·
            difficulties
      in staffing and managing worldwide operations;
  and





·
            impairments
      in acquired assets.





Any one or a combination of these
factors may cause our revenues or earnings to decline.





If
our products contain defects, our reputation could be harmed and our results of
operations adversely affected.





Some of our products are complex and
may contain undetected defects. The occurrence of defects or malfunctions in one
or more of our products could result in financial losses for our customers and
in turn termination of leases, cancellation of orders, product returns and
diversion of our resources. Any of these occurrences could also result in the
loss of or delay in market acceptance of our products and loss of sales or
leases.





27





We may be unable to adequately comply
with public reporting requirements.





If we cannot maintain and execute
adequate internal controls over financial reporting or implement required new or
improved controls that provide reasonable assurance of the reliability of the
financial reporting and preparation of our financial statements for external
use, or we simply make an error in compiling our financial results, we may
suffer harm to our reputation, fail to meet our public reporting requirements on
a timely basis or be unable to properly report on our business and the results
of our operations.  Failure to meet reporting requirements on a timely
basis could cause a default under our Senior Secured Credit Facility and
accordingly inhibit our ability to borrow on available credit on our Revolver,
which could negatively impact our Notes satisfaction in April 2009 as well as
capital expenditure needs.  See “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Liquidity and Capital
Resources” included in this Form 10-K.Additionally, the
inherent limitations of internal control over financial reporting may not
prevent or detect all misstatements or errors, regardless of the adequacy of
those controls.




Our
continued compliance with our financial covenants in our Senior Secured Credit
Facility is subject to many factors, some of which are beyond our control, and
if we are unable to remain compliant under our financial covenants, our results
of operations could be adversely affected by servicing costs.





If our operating results decline, we
may need to seek an amendment to our existing facility or refinance the
indebtedness outstanding under such facility. Depending on the debt market
conditions at the time such an amendment or refinancing is necessary, it is
possible that such amendment or refinancing could lead to a significant increase
in debt service costs and interest expense, or result in additional restrictions
being put on our operations.





The
restrictive covenants in our Senior Secured Credit Facility may limit our
ability to finance future operations or capital needs or engage in other
business activities that may be in our interest.





The agreement governing the Revolver
and Term Loan imposes, and the terms of any future indebtedness may impose,
operating and other restrictions on us. Such restrictions will affect, and in
many respects limit or prohibit, among other things, our ability to take certain
actions.  See “Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations—Liquidity and Capital Resources" included in
this Form 10-K for further details.





Our available cash and access to
additional capital may be limited by our leverage.





We are leveraged as a result of our
debt service obligations. As of October 31, 2008, we had $125,149 of
indebtedness outstanding and total stockholders' equity of$102,858.  This level of indebtedness
could have important negative consequences to us and you,
including:





·
            we
      may have difficulty obtaining financing in the future for working capital,
      capital expenditures, acquisitions and other
  purposes;





·
            we
      will need to use a substantial portion of our available cash flow to pay
      interest and principal on our debt, which will reduce the amount of money
      available to finance our operations and other business
      activities;





·
            any
      indebtedness we incur to repurchase the outstanding remaining Notes will
      result in our having greater interest
expense;





·
            the
      indebtedness under the Revolver and Term Loan has variable rates of
      interest, which exposes us to the risk of increased interest
      rates;





·
            our
      debt level increases our vulnerability to general economic downturns and
      adverse industry conditions;





·
            our
      assets may become impaired;





·
            our
      debt level could limit our flexibility in planning for, or reacting to,
      changes in our business and in our industry in general;
  and





·
            our
      current debt level and the amount we need to pay to service our debt
      obligations could place us at a competitive disadvantage compared to our
      competitors that have less
debt.


28





See “Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations —Contractual
Obligations and Off-Balance Sheet Arrangements " included in this Form
10-K for years beyond 2008.





We and our subsidiaries may be able to
incur substantial additional indebtedness in the future. Although the agreement
governing our Revolver and Term Loan contain restrictions on the incurrence of
additional indebtedness, such restrictions are subject to a number of
qualifications and exceptions, and under certain circumstances indebtedness
incurred in compliance with such restrictions could be substantial.





Our
business is subject to quarterly fluctuation.





Historically, our operating results
have been highest in our fourth fiscal quarter ending October 31 and lowest
in our first fiscal quarter ending January 31, primarily due to the
seasonality of customer capital budgets. Our quarterly operating results may
vary based on the timing of the opening of new gaming jurisdictions, the opening
or closing of casinos, the expansion or contraction of existing casinos,
approval or denial of our products and corporate licenses under gaming
regulations, the introduction of new products, the seasonality of customer
capital budgets, the mix of domestic versus international sales and the mix of
lease and royalty revenue versus sales and service revenue. As a result, our
operating results and stock price could be volatile, particularly on a quarterly
basis.





SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS





This Form 10-K contains forward-looking
statements. The forward-looking statements are contained principally in the
sections entitled, "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," but are also
contained elsewhere in this Form 10-K. In some cases, you can identify
forward-looking statements by the following words: "may," "might," "will,"
"could," "would," "should," "expect," "intend," "plan," "objective,"
"anticipate," "believe," "estimate," "predict," "project," "potential,"
"continue," "ongoing" or the negative of these terms or other comparable
terminology intended to identify performance or achievements to be materially
different from the information expressed or implied by these forward-looking
statements. Although we believe that we have a reasonable basis for each
forward-looking statement contained in this Form 10-K, we caution you that these
statements are based on a combination of facts and factors currently known by us
and our projections of the future, about which we cannot be certain.
Forward-looking statements reflect and are subject to inherent known and unknown
risks and uncertainties that could cause actual results to differ materially
from those expressed or implied. Risk factors that could cause actual results to
differ materially from expectations include, but are not limited to, the
following:





·
            We
      are dependent on our intellectual property and trade secrets, and we may
      be unable to protect our intellectual property and trade secrets from
      infringement, misappropriation, or claims of infringement or
      invalidity;





·
            the
      gaming industry is highly regulated and we must adhere to various
      regulations and maintain our licenses to continue our
      operations.  Failure to obtain and/or maintain our licenses
      could be disruptive to our business and could adversely affect our
      operations;





·
            a
      continued downturn in general worldwide economic conditions or in the
      gaming industry or a reduction in demand for gaming may adversely affect
      our results of operations.  As a result, the market price of our
      common stock may decline;





·
            our
      domestic and global growth and ability to access capital markets are
      subject to a number of economic
risks;





·
            risks
      that impact our customers may impact
us;





·
            economic,
      political, legal and other risks associated with our international sales
      and operations could adversely affect our operating
    results;





·
            the
      search for and possible transition to a new Chief Executive Officer, and
      the search for and transition to a permanent Chief Financial Officer,
      could be unsuccessful and/or disruptive to our business. Additionally, the
      employment contract of our Acting Chief Financial Officer is approaching
      expiration and if such contract is not renewed, the search for and
      transition to a replacement Acting Chief Financial Officer could be
      unsuccessful and/or disruptive to our
business;


29





·
            our
      ability to implement our renewed six-point strategic plan successfully is
      subject to many factors, some of which are beyond our control, and if we
      are unsuccessful in such implementation, we may experience organizational
      inefficiencies which could adversely affect our results of
      operations;





·
            litigation
      may subject us to significant legal expenses, damages and liability and is
      inherently unpredictable and risky;





·
            our
      products currently in development may not achieve commercial success and
      if we are unable to maintain a competitive technological position, we may
      suffer a material adverse effect on our business, results of operations or
      financial condition;





·
            we
      compete in a single industry, and our business may suffer if our products
      become obsolete or demand for them decreases as a result of the downturn
      in the gaming industry;





·
            any
      disruption in our manufacturing processes or significant increases in
      manufacturing costs or any inability to manufacture a sufficient number of
      our products to meet demand could adversely affect our business and
      operating results;





·
            our
      gaming operations, particularly our Utility, ETS and EGM segments, may
      experience losses due to technical difficulties or fraudulent
      activities;





·
            we
      operate in a very competitive business environment; and if we do not adapt
      our approach and our products to meet this demand, our business, results
      of operations or financial condition could be adversely
      impacted;





·
            we
      are dependent on the success of our customers and are subject to industry
      fluctuations;





·
            certain
      market risks may affect our business, results of operations and
      prospects;





·
            we
      are exposed to foreign currency
risk;





·
            we
      could face considerable business and financial risk in implementing
      acquisitions;





·
            if
      our products contain defects, our reputation could be harmed and our
      results of operations adversely
effected;





·
            we
      may be unable to adequately comply with public reporting
      requirements;





·
            our
      continued compliance with our financial covenants in our Senior Secured
      Credit Facility is subject to many factors, some of which are beyond our
      control, and if we are unable to remain compliant under our financial
      covenants, our results of operations could be adversely affected by
      servicing costs;





·
            the
      restrictive covenants in our Senior Secured Credit Facility may limit our
      ability to finance future operations or capital needs or engage in other
      business activities that may be in our
interest;





·
            our
      available cash and access to additional capital may be limited by our
      leverage; and





·
            our
      business is subject to quarterly
fluctuation.





In addition, refer to the "Risk
Factors" section for a discussion of other important factors that may cause our
actual results to differ materially from those expressed or implied by our
forward-looking statements. As a result of these factors, we cannot assure that
the forward-looking statements will prove to be accurate. Furthermore, if our
forward-looking statements prove to be inaccurate, the inaccuracy may be
material. In light of the significant uncertainties in these forward-looking
statements, these statements should not be regarded as a representation or
warranty by us or any other person that we will achieve our objectives and plans
in any specified time frame, or at all. We undertake no obligation to publicly
update any forward-looking statements, whether as a result of new information,
future events or otherwise, except as required by law. Our actual future results
may be materially different from what we expect. We qualify all of our
forward-looking statements by each of these cautionary statements
above.


30


ITEM
1B. UNRESOLVED STAFF COMMENTS




None.







ITEM
2. PROPERTIES




Properties. We
lease facilities in various locations throughout North America for office,
research and development, warehouse, service and apartment rental space,
totaling approximately 106,000 square feet to support our Americas
operation.  Our corporate headquarters as well as the research and
development and manufacturing of our Utility and PTG products is located in Las
Vegas, Nevada and accounts for 76,000 square feet.





We lease facilities in various
locations throughout Australia and New Zealand, totaling approximately 54,000
square feet for office, service and warehouse space to support our
Australasia operations.  In addition, we own an approximately 59,000
square foot facility in Milperra, New South Wales, Australia that we use for
research and development and manufacturing space for our e-Table and EGM
products.





We lease facilities in Vienna, Austria,
totaling approximately 15,000 square feet for office, warehouse and
apartment rental space to support our Europe operations.





We lease an approximately 6,000
square foot facility in Macau, China for office and warehouse space to support
our Asia operations.





We lease an approximately 3,000
square foot facility in Johannesburg, South Africa for office and warehouse
space to support our Africa operations.





We believe that our existing properties
are suitable and adequate for our current needs and that additional
facilities/space are available to us to support expansion, if
required.





ITEM
3. LEGAL PROCEEDINGS




For information on Legal Proceedings,
see Notes 15 and 16 in “Item 8. Financial Statements and Supplementary Data
" included in this Form 10-K.




Litigation is inherently unpredictable
and risky. Our current assessment of each matter may change based on future
unknown or unexpected events. If any litigation were to have an adverse result
that we did not expect, there could be a material impact on our results of
operations or financial position. We believe costs associated with litigation
will not have a material impact on our financial position or liquidity, but may
be material to the results of operations in any given period. We assume no
obligation to update the status of pending litigation, except as may be required
by applicable law, statute or regulation. We believe that the final disposition
of these matters will not have a material adverse effect on our financial
position, results of operations or liquidity.




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




No matters were submitted to a vote of
our security holders during the fourth quarter of fiscal 2008.




31





PART
II


(In
thousands, except per share amounts)




ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES




Stock
Listing.  Our common stock is traded on The NASDAQ National
Market under the symbol SHFL. As of January 8, 2009, we had approximately
250 shareholders of record. There are a significantly greater number of
shareholders whose shares are held in street name. Based on information we
collected as of January 8, 2009, we estimate that we have approximately
11,800 beneficial holders in total. The following table sets forth quarterly
high and low prices for trades of our common stock during fiscal 2008 and
2007:




2008
            
            2007High
            
            Low
            
            High
            
            LowFirst
      Quarter
            $14.04
            
            $7.77
            
            $32.82
            
            $23.65Second
      Quarter
            10.24
            
            4.50
            
            27.75
            
            16.50Third
      Quarter
            8.38
            
            3.93
            
            19.78
            
            14.47Fourth
      Quarter
            5.89
            
            2.60
            
            17.87
            
            13.15




The closing price of our common stock
on January 8, 2009, was $5.40 per share.




Offering of
Securities and Use of Proceeds.  On July 25, 2008, we sold
17,647 shares of our common stock in a public offering at $4.25 per share (the
“Offering”), resulting in net proceeds of $69,974.  In conjunction
with the Offering, we granted the Underwriters an over-allotment option to
purchase up to 2,647 shares of our common stock at $4.25 per
share.  On August 1, 2008, the Underwriters exercised their
over-allotment option in full and purchased 2,647 shares, resulting in net
proceeds of $10,479.  As part of the Offering, we incurred certain
fees directly related to the transaction, including, but not limited to, an
underwriting fee, legal fees, independent registered public accountant fees and
printing fees. Total aggregate net proceeds from the Offering and the exercise
of the over-allotment option were $80,453 on 20,294 total shares.




Net proceeds from the Offering and the
over-allotment were used to repurchase a portion of the Notes tendered and
accepted as a result of the tender offer as well as to pay down our
Revolver.  For information related to our Notes and the tender offer,
see Note 2 in “Item 8. Financial Statements and Supplementary Data
" included in this Form 10-K.




Dividend
Policy.  We have not paid dividends on our common stock and
certain covenants in our Revolver and Term Loan restrict our ability to pay
dividends or make other distributions with respect to our equity
securities.  See Note 10 in “Item 8. Financial Statements and
Supplementary Data " included in this Form 10-K.




Transfer
Agent.  Our stock transfer agent and registrar is Wells Fargo
Bank Minnesota, N.A., Shareowner Services, 161 North Concord Exchange,
South St. Paul, Minnesota 55075, (800) 468-9716.




Securities
Authorized for Issuance Under Equity Compensation Plans.  The
information under the caption “Equity Compensation Plan Information” in our
2008 Proxy Statement is incorporated herein by reference.









32





Stock
Repurchases.  The following table provides monthly detail
regarding our share repurchases during the three month period ended
October 31, 2008 (in thousands, except per share amounts):




Period
            
            Total
      Number of
                Shares
      Purchased
            
            Average
      PricePaid
                per
      Share
            
            Total
      Number ofShares
      Purchased asPart
      of PubliclyAnnounced
      Plansor
      Programs
            
            Maximum
      DollarValue
      of Sharesthat
      May Yet BePurchased
      Under
                the
      Plans orPrograms*(In thousands, except per
      share amounts)Aug
      1—Aug 31
            —
            
            —
            
            —
            
            $28,203Sep
      1—Sep 30
            —
            
            —
            
            —
            
            $28,203Oct
      1—Oct 31
            2,000
            
            $3.56
            
            —
            
            $21,078Total
            2,000
            
            —
            
            —





In
September 2006, our board of directors authorized management to repurchase
up to $30,000 of our common stock in the open market under a share repurchase
program with no expiration. As of October 31, 2008, $21,078 remained
outstanding under our board authorization.




33





Performance
Graph.




The following graph compares a
shareholder’s cumulative total return for the last five fiscal years, assuming
$100 invested at October 31, 2003, with the reinvestment of all dividends,
as if such amounts had been invested in: (i) our common stock;
(ii) the stocks included in the S&P Small Cap 600 Index: (iii) the
stocks included in the NASDAQ Index Composite; (iv) the stocks included in
the Dow Jones US Gambling Index; and (v) an index of selected issuers in
our industry, or Peer group, composed of IGT, Aristocrat, WMS, Bally, and
PGIC.











Investment
      Value as of October 31,Company
      Name / Index
            
            2003
            
            2004
            
            2005
            
            2006
            
            2007
            
            2008Shuffle
      Master, Inc.
            $100
            
            $206.86
            
            $186.96
            
            $206.27
            
            $100.85
            
            $ 
      28.46S&P
      SmallCap 600 Index
            100
            
            116.78
            
            134.61
            
            156.28
            
            174.33
            
            117.77NASDAQ
      Index Composite
            100
            
            103.83
            
            112.24
            
            127.86
            
            155.38
            
            90.90Peer
      Group
            100
            
            113.80
            
            106.90
            
            158.37
            
            169.34
            
            61.54Dow
      Jones U.S. Gambling Index
            100
            
            130.45
            
            133.59
            
            186.98
            
            272.42
            
            80.22





34





ITEM
6. SELECTED FINANCIAL DATA





SELECTED
CONSOLIDATED FINANCIAL DATA





The following summary consolidated
financial data should be read in conjunction with, and are qualified by
reference to, “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and “Item 8. Financial Statements and
Supplementary Data” included in this Form 10-K.  The consolidated
statements of operations data for the years ended October 31, 2008, 2007,
2006, 2005 and 2004, and the consolidated balance sheet data are derived from
our consolidated financial statements. The historical results are not
necessarily indicative of future results.







Year
      Ended October 31,2008
            
            2007
            
            2006
            
            2005
            
            2004(In
      thousands, except per share and unit/seat amounts)Summary
      Financial Statements (a):RevenueUtility
            $   
      80,893
            
            $  
       78,457
            
            $  
        86,792
            
            $   
      67,029
            
            $   
      45,947Proprietary
      Table Games
            38,594
            
            33,125
            
            38,316
            
            39,517
            
            37,680Electronic
      Table Systems
            27,461
            
            27,890
            
            16,555
            
            6,022
            
            1,025Electronic
      Gaming Machines
            42,898
            
            39,269
            
            21,090
            
            —
            
            —Unallocated
      Corporate
            160
            
            110
            
            238
            
            292
            
            131Total
      revenue
            190,006
            
            178,851
            
            162,991
            
            112,860
            
            84,783Cost
      of revenue
            79,104
            
            74,985
            
            56,721
            
            29,260
            
            19,403Gross
      profit
            110,902
            
            103,866
            
            106,270
            
            83,600
            
            65,380Income
      (Loss)  from continuing operations
            (10,802)
            
            16,301
            
            5,339
            
            29,104
            
            22,517Discontinued
      operations, net of tax
            (1)
            
            78
            
            (246)
            
            76
            
            1,627Net
      Income (Loss)
            $
      (10,803)
            
            $  
       16,379
            
            $      
      5,093
            
            $   
      29,180
            
            $   
      24,144Earnings
      (Loss) Per Share - Continuing Operations:Earnings
      (loss) per share, basic(b)
            $     (0.27)
            
            $       
      0.47
            
            $        
      0.15
            
            $       
      0.83
            
            $       
      0.63Earnings
      (loss) per share, diluted (b)
            $    
      (0.27)
            
            $       
      0.46
            
            $        
      0.15
            
            $       
      0.80
            
            $       
      0.60Weighted
      average shares, basic (b)
            40,006
            
            34,680
            
            34,585
            
            34,924
            
            35,955Weighted
      average shares, diluted(b)
            40,006
            
            35,276
            
            36,052
            
            36,378
            
            37,308Balance
      Sheet Data (end of year):Cash,
      cash equivalents, and investments
            $     
      5,374
            
            $     
      4,392
            
            $      
      8,917
            
            $   
      34,088
            
            $   
      47,038Total
      assets
            $ 
      261,946
            
            $ 
      359,767
            
            $  
      305,207
            
            $ 
      193,117
            
            $ 
      185,292Total
      debt
            $ 
      125,149
            
            $ 
      235,011
            
            $  
      234,991
            
            $ 
      165,552
            
            $ 
      157,866Total
      liabilities
            $ 
      159,088
            
            $ 
      272,133
            
            $  
      272,658
            
            $ 
      179,717
            
            $ 
      170,563Shareholders'
      equity
            $ 
      102,858
            
            $   
      87,634
            
            $    
      32,549
            
            $   
      13,400
            
            $   
      14,729Cash
      Flow Data:Cash
      provided by operating activities
            $ 
        44,018
            
            $  
      33,048
            
            $    
      34,021
            
            $  
       34,508
            
            $  
       26,587Cash
      (used) by investing activities
            $ 
       (5,812)
            
            $(33,119)
            
            $(104,142)
            
            $  
      (6,526)
            
            $
      (56,540)Cash
      (used) provided by financing activities
            $
      (37,256)
            
            $ 
      (3,513)
            
            $    
      65,923
            
            $
      (35,027)
            
            $  
       47,859Installed
      Unit / Seat Base by Product (c):Shufflers
            28,080
            
            25,382
            
            22,347
            
            18,589
            
            15,289Proprietary
      Table Games
            5,642
            
            5,443
            
            4,219
            
            3,681
            
            3,233Electronic
      Table System Seats
            7,225
            
            6,136
            
            4,566
            
            500
            
            110Electronic
      Gaming Machine Seats
            21,321
            
            18,995
            
            16,279
            
            —
            
            —





(a)  In
September 2007, we purchased PGIC's table games division. Effective
February 1, 2006, we acquired Stargames. Effective May 1, 2004, we
acquired Casinos Austria Research & Development GmbH & Co KG (“CARD”).
These acquisitions, in addition to less significant acquisitions, are included
in our consolidated financial statements beginning on the effective date of the
transactions.





(b)  Earnings
per share and weighted average share amounts reflect the effects of our 3 for 2
common share stock splits in January 2005 and April 2004 as well as our equity
offering in July 2008 of an additional 20,294 common shares.  For
fiscal 2008, the dilution of 75 shares related to our options, restricted stock
and contingent convertible notes have not been included in the diluted loss per
share computation as their inclusion would be anti-dilutive.





(c)  Installed
units is the sum of the product units currently under lease or license
agreements plus the aggregate amount of units we have sold since our inception.
Similarly, installed seat base is the sum of the seats (with each chair at an
electronic gaming table considered a seat) currently under lease agreements plus
the aggregate amount of seats we have sold since our inception.


35





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


(In
thousands, except per share, unit/seat amounts and product lease/sale
prices)





The following is a discussion and
analysis of our financial condition, results of operations and liquidity and
capital resources as of October 31, 2008 and 2007 and for the fiscal years
ended October 31, 2008, 2007 and 2006. This discussion should be read
together with our audited consolidated financial statements and
related notes included in “Item 8. Financial Statements and Supplementary
Data” included in this Annual Report on Form 10-K (“Form
10-K”).  Some of the information contained in this discussion includes
forward-looking statements that involve risks and uncertainties; therefore our
"Special Note Regarding Forward-Looking Statements" and "Risk Factors" should be
reviewed  for a discussion of important factors that could cause
actual results to differ materially from the results described in, or implied
by, such forward-looking statements.





OVERVIEW





We develop, manufacture and market
technology and entertainment-based products for the gaming industry for
placement on the casino floor. We specialize in providing casino and other
gaming customers with products and services that improve their speed,
profitability, productivity and security. We offer our products worldwide in
markets that are highly regulated. We manufacture our products at our
headquarters and manufacturing facility in Las Vegas, Nevada, as well as at our
Australian headquarters in Milperra, New South Wales, Australia. In addition, we
outsource the manufacturing of certain of our sub-assemblies in the United
States, Europe and Australasia.





Our business is segregated into the
following four product segments: Utility, Proprietary Table Games (“PTG”),
Electronic Table Systems (“ETS”) and Electronic Gaming Machines (“EGM”). Each
segment's activities include the design, development, acquisition, manufacture,
marketing, distribution, installation and servicing of a distinct product
line.





See “Item 1. Business" included in this
Form 10-K for a more detailed discussion of our business, strategy and each of
our four segments.





Current
Economic Environment




The gaming industry in both the United
States and abroad has been particularly affected by the downturn in general
worldwide economic conditions, which has had negative consequences on our
results in fiscal 2008 and is likely to continue to have a negative impact in
fiscal 2009. The recent activity in the credit markets and in the broader global
economy and financial markets has exacerbated these trends and consumer
confidence has been significantly impacted, as seen in broader economic trends
such as declines in auto and other retail sales, the weakness in the housing
market and increased unemployment.





As a result, the outlook for the
gaming, travel and entertainment industries both domestically and
internationally remains highly uncertain.  Due to recent disruptions
in the financial markets, gaming operators have been less able to secure
financing for development projects and have scaled back such projects
considerably.  Clients have made significant cuts in expenditures,
including layoffs of workers and management employees as well as delayed
expansions or new openings.  For example, domestically, Nevada’s
Gaming Control Board has reported record decreases in winnings during the final
months of calendar 2008. Additionally, auto traffic into Las Vegas and air
travel to McCarran International airport has declined, resulting in lower casino
volumes.  Internationally, casino revenues in Macau have decreased in
the two most recent quarters and casino openings are expected to decrease
significantly in 2009.  Additionally, Chinese authorities have placed
restrictions on travel to Macau for residents of mainland China, which may
further impact the gaming industry in Macau.  Our exposures to these
economic conditions are not limited to these jurisdictions mentioned above, as
they are used for example purposes only.  These economic conditions
may cause both our domestic and international clients to decrease their
expenditures on gaming equipment and our financial condition, results of
operations and stock price may be negatively affected thereby.





Sources of
Revenue





We derive our revenue from the lease,
license and sale of our products and by providing service to our installed base.
Consistent with our strategy, we have a continuing emphasis on leasing our
products.  When we lease or license our products, we generally
negotiate month-to-month fixed fee contracts. Product lease contracts typically
include parts and service. When we sell our products, we offer our customers a
choice between a sale, a longer-term sales-type lease or other long-term
financing. We also offer a majority of our products for sale with an optional
parts and service contract. A more


36


detailed
discussion of our revenue components and related revenue recognition policies is
included under the heading "Critical Accounting Policies and Estimates"
below.





The following points should be noted as
they relate to our strategy to emphasize leasing over selling as this strategy
can differ by segment and geography:





·
            We
      expect to continue to increase our lease revenues in our Utility segment
      within the United States.  As it relates to geography, we expect
      to continue to realize a large proportion of our Utility revenues outside
      of the United States from sales rather than leases.  This
      segment has a planned replacement cycle which will always drive a fair
      amount of sales activity in any one
period.





·
            Our
      lease model is strongest in our PTG segment.  We already
      experienced strength in leasing in the United States. We are looking to
      expand our proprietary table games in other parts of the world where the
      current penetration of proprietary table games is
  lower.





·
            We
      expect to continue to increase our lease revenues in our ETS segment
      within the United States.  Geographically, we expect to continue
      to realize a large proportion of our ETS revenues outside of the United
      States from sales rather than
leases.





·
            Our
      EGM segment is predominately a sales model and we expect to continue to
      realize substantially all of our EGM revenues from sales of EGMs in our
      primary market, Australasia.





·
            To
      assist us with our strategy to encourage leasing, we have increased the
      retail sales price of many of our products across the Utility, PTG and ETS
      segments such that we believe the majority of customers are inclined to
      lease rather than purchase our
products.





Currently, Utility segment revenue is
derived substantially from our automatic card shufflers. In addition to leasing
shufflers, we also sell and service them. In the PTG segment, the majority of
games placed are licensed to our customers, which provides us with royalty
revenue. In the ETS segment, we derive revenue from leases, sales and service
contracts. In the EGM segment, we derive revenue from selling the full EGM
complement and conversion kits which allow existing EGM terminals to be
converted to other games on the PC3 and PC4 platform.





Expenses





Our direct expenses primarily include
cost of products sold, depreciation of leased assets, amortization of
product-related intangible assets, service, manufacturing overhead, shipping and
installation.  Indirect expenses include other costs directly
identified with each segment, such as research and development, product approval
costs, product-related litigation expenses, amortization of patents and other
product-related intellectual property, sales commissions and other
directly-allocable sales expenses.  We continue to spend significant
R&D efforts on the development of our newer generation shuffler products,
such as the i-Deal, our card recognition products, as well as other table
accessories, such as the i-Shoe and i-Score. With our expansion into the e-Table
markets, we continue to spend significant R&D dollars on developing and
implementing new game content, such as the i-Table, our newest e-Table that
combines a variety of our products to create an exciting new table game
experience.   Finally, we have incurred significant R&D
expense related to the operating system upgrades from the PC3 to the PC4
platforms for Vegas Star, Rapid Table Games and EGMs. We believe that one of our
strengths is identifying new and relevant product opportunities, as well as
refining current products. We expect to continue to spend a significant portion
of our annual revenue on R&D.





The amounts classified as unallocated
corporate expenses consist primarily of costs related to overall corporate
management and support functions. These include costs related to executive
management, accounting and finance, general sales support, legal and compliance
costs, office expenses, and other amounts for which allocation to specific
segments is not practicable.





Our infrastructure to support our
growing global business is expected to remain generally consistent with our
existing levels; however, our goal is to reduce these costs to improve our
overall operating margins.





Gross
Margin





The number and mix of products placed
and the average lease or sales price are the most significant factors affecting
our gross margins. Our continuing emphasis on leasing versus selling, the shift
in product mix, timing of installations and


37


related
upfront installation charges, as well as increases in non-cash depreciation and
amortization expenses attributable to our acquisitions have impacted our
margins.





In general, lease gross margin is
greater than the sales gross margin for the same products. However, total gross
profit on leased assets will be lower in a given reporting period than those of
a sale due to the much higher price of a sale versus a lease.  A
number of factors impact gross margins, including the number and mix of products
placed and the average lease or sales price of those products. For example, in
our PTG segment, certain proprietary table games warrant a higher average lease
price than a PTG add-on such as a felt side-bet or a progressive. For Utility
products, when a new shuffler is introduced into the market, we use introductory
lease pricing. This is consistent with our rollout strategy whereby we provide
very favorable lease rates at the inception of a lease to entice the customer to
try our new product. We expect the impact of introductory pricing to have a
short-term impact on our margins. Notwithstanding the factors that can impact
our gross margins during any given period, lease margins are greater than the
sales margins for the same product. Accordingly, we anticipate that gross
margins will increase under our lease model.





Our product pricing strategy reflects
our desire to shift to a lease model from a sales model. We have increased the
sales price of certain products such that the majority of customers are inclined
to lease rather than purchase our products.  Our leasing strategy is
primarily focused in the United States, in that many foreign customers prefer to
purchase rather than lease product. Lastly, our pricing strategy recognizes that
our Utility products are always subject to sales activity as part of our
"replacement cycle" whereby we sell our prior generation shufflers before the
introduction of our next generation product.





In addition to the lease versus sell
strategy, we expect to improve our gross margins through value engineering to
reduce manufacturing costs. Our focus is currently on savings attributable to
component parts, product redesign and lower cost manufacturing
opportunities.





ACQUISITIONS
AND OTHER SIGNIFICANT TRANSACTIONS





Contingent
convertible senior notes refinancing.  In our third quarter of
fiscal 2008, we engaged in a multi-step refinancing (the “Refinancing”) of our
1.25% contingent convertible senior notes (the “Notes”). We engaged in the
Refinancing because holders of the Notes have the option to require us to
repurchase all or a portion of such Notes on April 15, 2009 at 100% of the
principal amount of the Notes, plus accrued and unpaid interest. We currently
expect, and expected at the time of the Refinancing, that all holders of the
Notes that have not otherwise been retired will exercise this repurchase option
on April 15, 2009.





The Refinancing consisted of three
principal parts: (i) a tender offer for all the Notes, (ii) an amendment to our
Senior Secured Credit Facility and entry into a new term loan facility in
connection therewith and a (iii) primary share issuance.





The Tender
Offer.  On July 14, 2008,
we commenced a cash tender offer for our Notes (the “Tender
Offer”).  Pursuant to the Tender Offer, we purchased $89,350 in
aggregate principal amount of our outstanding Notes at 97.25% of the principal
amount thereof plus accrued and unpaid interest.  On September 29,
2008, we repurchased an additional $20,384 of our Notes in a separate
transaction on the open market.  As a result of the repurchases of our
Notes, we recognized a total gain of $1,773, net of external fees and direct
costs associated with the Tender Offer, for fiscal 2008.





New Term Loan and
amendment to credit facility.  On July 14, 2008,
we entered into a second amendment (the “Second Amendment”), to our Senior
Secured Credit Facility.  Among other things, the Second Amendment
provided for a new $65,000 term loan facility (the “Term Loan”), which was
funded in full on August 25, 2008, resulting in net proceeds of $63,438. The
amendment left in place our $100,000 revolving credit facility (the “Revolver”),
under which, as of October 31, 2008, we had drawn $16,000 and had availability
of $84,000.  In addition to the Term Loan and Revolver, our amended
Senior Secured Credit Facility provides a $35,000 incremental facility pursuant
to which we may request (but no lender is committed to provide) additional loans
under the facility, subject to customary conditions.





For a more detailed summary of our
Senior Secured Credit Facility, see “Senior Secured Credit Facility” under Note
7 in “Item 8. Financial Statements and Supplementary Data” included in this Form
10-K.





Securities
offering. On July
25, 2008, we sold 17,647 shares of our common stock in a public offering at
$4.25 per share (the “Offering”), resulting in net proceeds of
$69,974.  In conjunction with the Offering, we granted the
Underwriters an over-allotment option to purchase up to 2,647 shares of our
common stock at $4.25 per share.  On August 1, 2008, the Underwriters
exercised their over-allotment option in full and purchased 2,647 shares,
resulting in net proceeds of $10,479.


38


As part of the Offering, we incurred
certain fees directly related to the transaction, including, but not limited to,
an underwriting fee, legal fees, independent registered public accountant fees
and printing fees. Total aggregate net proceeds from the Offering and the
exercise of the over-allotment option were $80,453 on 20,294 total shares
..





Remaining
outstanding Notes.A portion of the net
proceeds from the Term Loan, the Offering and the exercise of the Underwriters’
over-allotment option were used to repurchase a portion of the outstanding Notes
as described above. The remaining net proceeds were applied to pay down our
Revolver.  As mentioned above, we purchased an additional $20,385 of
our Notes on September 29, 2008. In addition, on December 10, 2008 (subsequent
to the end of fiscal 2008), we settled an additional $10,000 of our Notes at a
discount in a separate open market transaction.  Accordingly, we
currently have $30,258 of Notes outstanding. We expect that the remaining
noteholders will exercise their repurchase option on April 15, 2009; as such we
classified the remaining $40,258 in aggregate principal amount of the Notes as
current debt as of October 31, 2008.  We intend to draw on the
Revolver and/or use cash on hand to redeem the remaining outstanding Notes. As
discussed under “Liquidity and Capital Resources” below and Note 7 in “Item 8.
Financial Statements and Supplementary Data”, included in this Form 10-K, our
Senior Secured Credit Agreement places certain restrictive covenants on us. We
are currently in compliance with our Senior Secured Credit Agreement’s covenants
and expect to continue to be in compliance when the noteholders exercise their
repurchase option. However, if we are not in compliance at such time, we might
not be able to borrow under our Revolver. In such case, we would need to satisfy
the redemption obligation through a combination of cash on hand and additional
fundraising. Current economic conditions could make it difficult to raise such
capital, and accordingly in such circumstance there is a possibility that we
could default in our obligation to redeem such Notes. Such default could, if not
rectified, lead to cross acceleration under our Senior Secured Credit
Facility.





Progressive
Gaming International Corporation (“PGIC”) Table Games Division
(“TGD”).  On September 28, 2007, we purchased PGIC’s TGD
business, including certain worldwide rights (excluding video and electronic
rights) and lease contracts for all of PGIC's table game titles including
Caribbean Stud® and Texas Hold' Em Bonus®. These assets are now part of our PTG
segment.





Under the terms of the purchase, we
made an upfront payment to PGIC of approximately $19,800. We also agreed to make
earn-out payments to PGIC, beginning in calendar 2008, including $3,500 in total
non-interest bearing guaranteed minimum payments over a four-year period, as
follows: For each of 2008 and 2009, the guaranteed minimum amounts are $1,000
each year, paid quarterly; and for 2010 and 2011, are $750 each year, also paid
quarterly. The future earn-out payments are based on the growth of the acquired
TGD business in excess of annual baseline revenue of approximately $4,800. For
2008 and 2009, the earn-out will be 23% of revenue above the baseline amount;
for 2010 and 2011, the earn-out will be 19% of revenue above the baseline; and
for 2012 to 2016, the earn-out will be 10.75% of revenue above the baseline.
Actual earn-out payments will be reduced by any guaranteed minimum payments
actually made. Future earn-out payments in excess of the minimum guaranteed
payments will be added to the purchase price in accounting for the business
combination. The baseline lease and service revenue for the twelve months ended
June 30, 2007 of the acquired TGD business totaled approximately $4,800. The
acquired installed lease base totaled approximately 600 tables.





In connection with the purchase, we
entered into a Software Distribution License Agreement with PGIC, pursuant to
which we acquired PGIC's Game ManagerTM software and related table hardware
(collectively, the "GMS"). We paid PGIC a $3,000 advance of royalties due under
the Software Distribution License Agreement. Once the $3,000 advance is fully
recouped, PGIC will receive recurring quarterly royalty payments for the
placement of PGIC's progressive technology on certain of our proprietary table
games, subject to our further recoupment of $1,750 related to an earlier
licensing transaction with PGIC.   The royalty rate under the
Software Distribution License Agreement for our proprietary table games is 15%
of the net incremental revenue attributable to adding the progressive element.
As of January 31, 2008, we started integrating the GMS with certain versions of
our proprietary table games in numerous jurisdictions.





Under the earlier licensing
transaction, we obtained "last license" rights to utilize an extensive portfolio
of jackpot wagering hardware and method patents held by PGIC. In connection with
the purchase of the TGD, the last license agreement was amended and restated and
we obtained certain expanded rights to those patents, as well as rights to
certain other related patents.  See subsequent events in Note 16 in
regards to the amended and restated last license agreement included in “Item 8.
Financial Statements and Supplementary Data” included in this Annual Report on
Form 10-K.





CRITICAL
ACCOUNTING POLICIES AND ESTIMATES





We prepare our consolidated financial
statements in conformity with accounting principles generally accepted in the
United States. Our accounting policies are more fully described in Note 1
in “Item 8. Financial Statements and Supplementary Data”, included in this Form
10-K.  Some of our accounting policies require us to make difficult,
complex and subjective judgments, often as a result of the need to make
estimates of matters that are inherently uncertain. We


39


periodically
evaluate our policies, estimates and related assumptions, and base our estimates
on historical experience, current trends, and expectations of the future. We
considered the following critical accounting policies to be the most important
to understanding and evaluating our financial results and require the most
subjective and complex judgments made by management. We have discussed the
development, selection and disclosure of our critical accounting
policies and estimates with the Audit Committee of our Board of Directors.
Actual results may differ from our estimatesunder different conditions
and assumptions.





Revenue
recognition. We recognize revenue when the following criteria are
met:





·
            persuasive
      evidence of an arrangement between us and our customer
    exists;





·
            shipment
      has occurred or services have been
rendered;





·
            the
      price is fixed or determinable; and





·
            collectibility
      is reasonably assured and/or
probable.





We earn our revenue in a variety of
ways. We offer our products for lease or sale as well as sell service and
warranty contracts for our sold equipment.





Product lease and royalty
revenue—Lease and royalty revenue is earned from the leasing of our
tangible products and the licensing of our intangible products, such as our
proprietary table games. We recognize revenue monthly, generally based on a
monthly fixed fee, generally through indefinite term operating leases. Lease and
royalty revenue commences upon the completed installation of the product. Lease
terms are generally cancellable with 30 days notice.





Product sales and service
revenue—We generate sales revenue through the sale of equipment in each
product segment, including sales revenue from sales-type leases and the sale of
lifetime licenses for our proprietary table games. Financing for intangible
property and sales-type leases for tangible property have payment terms ranging
generally from 30 to 60 months and are interest-bearing at market interest
rates. Revenue from the sale of equipment is recorded in accordance with the
contractual shipping terms. If a customer purchases existing leased equipment,
revenue is recorded on the effective date of the purchase agreement. Revenue on
service and warranty contracts is recognized as the services are provided over
the term of the contracts, which are generally one year. Revenue from the sale
of lifetime licenses, under which we have no continuing obligation, is recorded
on the effective date of the license agreement.





Certain of our products contain
software, and as such we have considered the guidance contained in Statement of
Position ("SOP") No. 97-2, "Software Revenue Recognition
" (“SOP 97-2”), as modified by SOP No. 98-9, "Software Revenue Recognition, With
Respect to Certain Transactions ". Under this guidance when leasing or
selling software we consider whether the software component is incidental to the
product as a whole based on the following criteria:





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





·
            Whether
      post-contract customer support or PCS (PCS includes the right to receive
      services or unspecified upgrades/enhancements, or both, offered to users
      or resellers) is provided.





·
            Whether
      the development and production costs of the software as a component of the
      cost of the product is incidental (as defined in Statement of Financial
      Accounting Standard ("SFAS") No. 86, "Accounting for the Costs of
      Computer Software to Be Sold, Leased, or Otherwise Marketed
      ").





·
            Whether
      an agreement includes service elements (other than PCS related services),
      such as training or installation, and whether such services are essential
      to the functionality of the software or whether such software is
      considered "off-the-shelf" (off-the-shelf software is software that is
      marketed as a stock item that can be used by customers with little or no
      customization). Conversely, "core software" requires significant
      customization of the software in order for the software to be used by the
      end customer.





Some of our revenue arrangements
contain multiple deliverables, such as a product sale combined with a service
element or the delivery of a future product. If an arrangement requires the
delivery or performance of multiple elements, we apply the guidance from
SOP 97-2, as amended, Emerging Issues Task Force ("EITF") No. 03-05, "Applicability of
AICPA


40


SOP97-2 to Non-Software Deliverables
in an Arrangement Containing More-Than-Incidental Software " and EITF
No. 00-21, "Revenue
Arrangements with Multiple Deliverables." Deliverables are divided into
separate units of accounting if:





·
            The
      delivered items have value to the customer on a stand alone
      basis;





·
            We
      have objective and reliable evidence of the fair value of the undelivered
      items; and





·
            Delivery
      of any undelivered item is considered probable and substantially in our
      control.





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





The subjective and complex judgments
for revenue recognition typically involve whether collectability is probable,
whether fees under an arrangement are fixed or determinable and the
identification of specific deliverables under multiple element arrangements. In
addition, multiple elements arrangements must be analyzed to determine the
relative fair value of each element, the amount of revenue to be recognized and
the period and conditions under which deferred revenue should be recognized. The
ability to establish vendor specific objective evidence of fair value for our
products and services also requires judgment by management.





Business
combinations. We
account for business combinations in accordance with SFAS No. 141, "Accounting for Business
Combinations " ("SFAS 141"). SFAS 141 requires that we record
the net assets of acquired businesses at fair value, and we must make estimates
and assumptions to determine the fair value of acquired assets and assumed
liabilities.





During fiscal 2007 and fiscal 2006, we
acquired Progressive Gaming International Corporation’s (“PGIC”) Table Game
Division (“TGD”) and Stargames Limited (“Stargames”), respectively.  As a
part of the valuation process, we applied significant judgment and utilized a
variety of assumptions in determining the fair value of acquired assets and
liabilities assumed, and in-process research and development, including market
data, estimated future cash flows, growth rates, current replacement cost for
similar capacity for certain fixed assets, market rate assumptions for
contractual obligations and settlement plans for contingencies and
liabilities.





Intangibleassets andgoodwill. We
have significant intangible assets and goodwill. Intangible assets primarily
include values assigned to acquired products, patents, trademarks, tradenames,
licenses and games. Significant accounting policies that affect the reported
amounts for these assets include the determination of the assets' estimated
useful lives and the evaluation of the assets' recoverability based on expected
cash flows and fair value.





Except for the trademarks related to
the Stargames and Casinos Austria Research & Development GmbH & Co
KG (“CARD”) acquisitions, which are not subject to amortization and are
tested periodically for impairment, all of our significant intangible assets are
definite lived and amortized over their expected useful lives. We estimate
useful lives based on historical experience, estimates of products' commercial
lives, the likelihood of technological obsolescence, and estimates of the
duration of commercial viability for patents, trademarks, licenses and games. We
amortize substantially all of our intangible assets proportionate to related
projected revenue from the utilization of the intangible asset. We believe this
method reflects the pattern in which the economic benefits of the intangible
asset are consumed or otherwise used up. For certain other intangibles, we use
the straight-line amortization method. Should the actual useful life of an asset
differ from the estimated useful life, future operating results could be
positively or negatively affected.





We review our definite lived intangible
assets for impairment when circumstances indicate that the carrying amount of an
asset may not be fully recoverable from undiscounted estimated future cash
flows.  We would record an impairment loss if the carrying amount of the
definite lived intangible asset is not recoverable and the carrying amount
exceeds its estimated fair value.





We review our indefinite lived
intangible assets for impairment annually in October or when circumstances
indicate that the carrying amount of an asset may not be fully recoverable from
discounted estimated future cash flows using the income approach.  We would
record an impairment loss if the carrying amount of the indefinite lived
intangible asset is not recoverable and the carrying amount exceeds its
estimated fair value.





We
review our goodwill for impairment annually in October or when
circumstances indicate that the carrying amount of an asset may not be fully
recoverable.  The review is performed at the reporting unit level,
which we have determined is the equivalent to our reportable segments. The
goodwill impairment test is a two-part test.  In the first step,
we


41


selected
a discounted cash flows model of the income approach and the Guideline Public
Company Model of the market approach to be used to assess the fair value of our
segment.  These two methodologies were equally weighted in determining
a fair value.  The fair value of the reporting unit is then compared
to the book value of the reporting unit, including its goodwill. If the fair
value is less than the book value, then we would perform a second step to
comparethe implied fair value of the
reporting unit's goodwill to its book value. The implied fair value of the
goodwill is determined based on the estimated fair value of the reporting unit
less the fair value of the reporting unit's identifiable assets and liabilities.
We would record an impairment charge to the extent that the book value of the
reporting unit's goodwill exceeds its implied fair value.





Tests for impairment and recoverability
of assets involve significant estimates and judgments regarding products' lives
and utility, related expected future cash flows and discount rates. While we
believe that our estimates are reasonable, different assumptions could
materially affect our assessment of useful lives, recoverability and fair
values. An adverse change to the estimate of these cash flows could necessitate
an impairment charge that could adversely affect operating results.







Inventories.  Inventories
are stated at the lower of cost, determined on a first-in-first-out basis, or
market.  Cost elements included in work-in-process and finished goods
include raw materials, direct labor and manufacturing overhead. We regularly
review inventory quantities and update estimates for the net realizable value of
inventories due to the subjectivity involved in projecting sales volumes, used
game sales values, refurbishment costs, and product demand. This process
includes examining the carrying values of new and used gaming devices, parts and
ancillary equipment in comparison to the current fair market values for such
equipment (less costs to sell or dispose). Some of the factors involved in this
analysis include the overall levels of our inventories, the current and
projected sales levels for such products, the projected markets for such
products, the costs required to sell the products, including refurbishment costs
and importation costs for international shipments, and the overall projected
demand for products once the next generation of products are scheduled for
release.




As
a result of our ongoing analysis of inventory, we recognized inventory
write-downs of $72, $1,415 and $345 for fiscal years 2008, 2007 and 2006,
respectively.  There was no such inventory write-down for fiscal
2008.  Additional valuation charges could occur in the future as a
result of changes in the factors listed above.





Provisions for
baddebts. We
maintain provisions for bad debts for estimated credit losses that result from
the inability of our customers to make required payments. Provisions for bad
debts are estimated based on historical experience and specific customer
collection issues. Changes in the financial condition of our customers could
result in the adjustment upward or downward in the provisions for bad debts,
with a corresponding impact to our operating results.





Incometaxes. We
account for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes"
("SFAS 109"). SFAS 109 requires the recognition of deferred tax
assets, net of applicable reserves, related to net operating loss carryforwards
and certain temporary differences. The standard requires recognition of a future
tax benefit to the extent that realization of such benefit is more likely than
not. Otherwise, a valuation allowance is applied. Except for certain foreign net
operating losses, we believe that it is more likely than not that our deferred
tax assets are fully realizable because of the future reversal of existing
taxable temporary differences and future projected taxable income.





In November 2007, we adopted Financial
Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes- an Interpretation of FASB Statement No. 109”(“FIN 48”), which creates a single
model to address uncertainty in income tax positions and prescribes the minimum
recognition threshold a tax position is required to meet before being recognized
in the financial statements. It also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting in interim
periods, disclosure and transition.





Share based
compensation.  We
account for stock-based compensation in accordance with SFAS No. 123
(revised 2004), "Share-Based
Payment" ("SFAS 123R"),
and Staff Accounting Bulletin (“SAB”) No. 107, "Share-Based
Payment" ("SAB 107"), requiring the measurement and recognition
of all share-based compensation under the fair value method. 
SFAS 123R requires that all stock-based compensation, including shares and
share-based awards to employees, be valued at fair value. We measure the fair
value of share-based awards using the Black-Scholes model.





Under the provisions of SFAS 123R,
compensation is attributed to the periods of associated service and such expense
is recognized on a straight-line basis over the vesting period of the awards.
Forfeitures are estimated at the time of grant, with such estimate updated when
actual forfeitures are recognized.





In addition, SFAS 123R requires
the excess tax benefit from stock-option exercises—tax deductions in excess of
compensation cost recognized—to be classified as a financing activity.
Previously, all tax benefits from stock option exercises were classified as
operating activities. We have evaluated the provisions of SFAS 123R-3,
"Transition
Election


42


Related to Accounting for Tax
Effects of Share-Based
Payment Awards" and have elected the alternative method for establishing
the APIC pool.





Contingencies. We
assess our exposures to loss contingencies including legal and income tax
matters and provide for an exposure if it is judged to be probable and
reasonably estimable. If the actual loss from a contingency differs from our
estimate, there could be a material impact on our results of operations or
financial position. Operating expenses, including legal fees, associated with
contingencies are expensed when incurred.





RECENTLY
ISSUED ACCOUNTING STANDARDS





In June 2008, the FASB issued FASB
Staff Position (“FSP”) EITF No. 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities”(“EITF 03-6-1”).  EITF 03-6-1
mandates that unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents be considered participating
securities and be included in the computation of earnings per share (“EPS”)
pursuant to the two-class method. This change will become effective for our
fiscal year beginning November 2009, and requires retrospective application for
all periods presented. We are currently evaluating the effect, if any, that EITF
03-6-1 will have on our consolidated financial statements.





In June 2008, the FASB ratified EITF
Issue No. 07-5, “Determining
Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock”(“EITF 07-5”). EITF 07-5 mandates a two-step process for evaluating
whether an equity-linked financial instrument or embedded feature is indexed to
the entity’s own stock. It is effective for our fiscal year beginning November
2009.  We are currently evaluating the effect, if any, that EITF 07-5
will have on our consolidated financial statements.





In May 2008, the FASB issued FSP
Accounting Principles Board (“APB”) No. 14-1,“Accounting For Convertible Debt
Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash
Settlement)”(“APB 14-1”).  APB 14-1 requires that convertible debt
instruments that may be settled in cash upon conversion be separated into a debt
and equity component. The debt component will be equal to the fair value of a
similar liability and reflect the entity's borrowing rate for nonconvertible
instruments. The equity component will be the residual difference between the
proceeds and the value of the debt component. The rule is effective for fiscal
years beginning after December 15, 2008 and interim periods within those fiscal
years and requires retrospective restatement of all periods presented.
This will be effective for our fiscal year beginning in November
2009.  We are currently evaluating the effect, if any, that APB 14-1
will have on our consolidated financial statements.





In April 2008, the FASB issued FSP No.
142-3,“Determination of the Useful Life of
Intangible Assets”(“FSP 142-3”), which amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS 142.  FSP 142-3 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. This will
be effective for our fiscal year beginning in November 2009.  The guidance
contained in this FSP for determining the useful life of a recognized intangible
asset shall be applied prospectively to intangible assets acquired after the
effective date. However, the disclosure requirements of FSP 142-3 must be
applied prospectively to all intangible assets recognized in the Company’s
financial statements as of the effective date. We are currently evaluating the
effect, if any, that FSP No. 142-3 will have on our consolidated financial
statements.





In March 2008, the FASB issued SFAS No.
161, “Disclosures about
Derivative Instruments and Hedging Activities – an amendment of SFAS No.133,Accounting for Derivative
Instruments and Hedging Activities”(“SFAS 161”). This
statement requires disclosures about derivatives and hedging activities
including enhanced disclosure about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under SFAS 133, and (c) how derivative instruments and related
hedged items affect financial position, financial performance, and cash flows.
This statement is effective for periods beginning after November 15,
2008.  This will be effective for our fiscal year beginning in
November 2009.   We are currently evaluating the effect, if any,
that SFAS 161 will have on our consolidated financial
statements.





In December 2007, the FASB issued SFAS
No. 141 (revised 2007), "Business Combinations"
("SFAS 141R"), which replaces SFAS 141.  SFAS 141R establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
any resulting goodwill, and any non-controlling interest in the acquiree.
 SFAS 141R also provides for disclosures to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination.  SFAS 141R will be effective for us beginning in
November 2009 and must be applied prospectively to business combinations
completed on or after that date.


43





In December 2007, the FASB issued SFAS
No. 160, "Non-controlling
Interests in Consolidated Financial Statements—an amendment of Accounting
Research Bulletin No. 51 " ("SFAS 160"), which establishes
accounting and reporting standards for non-controlling interests ("minority
interests") in subsidiaries. SFAS 160 clarifies that a non-controlling
interest in a subsidiary should be accounted for as a component of equity
separate from the parent's equity. SFAS 160 will be effective for us
beginning in November 2009 and must be applied prospectively, except for the
presentation and disclosure requirements, which will apply retrospectively. We
are currently evaluating the effect, if any, that SFAS 160 will have on our
consolidated financial statements.





See Note 1 in “Item 8. Financial
Statements and Supplementary Data”, included in this Form 10-K for additional
information regarding recently issued accounting standards that may impact us
upon adoption.


44





The following table presents our
various items of revenue and expense as a percentage of total
revenue:





CONSOLIDATED
STATEMENTS OF INCOME





Year
      Ended October 31,2008
            
            2007
            
            2006(In
      thousands)Revenue:Utility
            $  
      80,893
            
            42.5%
            
            $ 
      78,457
            
            43.9%
            
            $ 
      86,792
            
            53.2%Proprietary
      Table Games
            38,594
            
            20.3%
            
            33,125
            
            18.5%
            
            38,316
            
            23.5%Electronic
      Table Systems
            27,461
            
            14.5%
            
            27,890
            
            15.5%
            
            16,555
            
            10.2%Electronic
      Gaming Machines
            42,898
            
            22.6%
            
            39,269
            
            22.0%
            
            21,090
            
            13.0%Other
            160
            
            0.1%
            
            110
            
            0.1%
            
            238
            
            0.1%Total
      revenue
            190,006
            
            100.0%
            
            178,851
            
            100.0%
            
            162,991
            
            100.0%Cost
      of revenue
            79,104
            
            41.6%
            
            74,985
            
            41.9%
            
            56,721
            
            34.8%Gross
      profit
            110,902
            
            58.4%
            
            103,866
            
            58.1%
            
            106,270
            
            65.2%Selling,
      general and administrative
            71,350
            
            37.6%
            
            61,947
            
            34.6%
            
            51,299
            
            31.5%Research
      and development
            18,474
            
            9.7%
            
            17,337
            
            9.7%
            
            12,910
            
            7.9%Impairment
      of goodwill
            22,137
            
            11.7%
            
            —
            
            0.0%
            
            —
            
            0.0%Gain
      on sale of patent
            —
            
            0.0%
            
            —
            
            0.0%
            
            (4,566)
            
            (2.8%)Acquired
      in-process research and development
            —
            
            0.0%
            
            —
            
            0.0%
            
            19,145
            
            11.7%Income
      (Loss) from operations
            (1,059)
            
            (0.6%)
            
            24,582
            
            13.8%
            
            27,482
            
            16.9%Other
      expense:Interest
      income
            1,759
            
            0.9%
            
            1,644
            
            0.9%
            
            1,998
            
            1.2%Interest
      expense
            (6,630)
            
            (3.5%)
            
            (7,487)
            
            (4.2%)
            
            (6,863)
            
            (4.2%)Other,
      net
            1,261
            
            0.7%
            
            (4,131)
            
            (2.3%)
            
            (1,834)
            
            (1.1%)Total
      other expense
            (3,610)
            
            (1.9%)
            
            (9,974)
            
            (5.6%)
            
            (6,699)
            
            (4.1%)Gain
      on early extinguishment of debt
            1,773
            
            0.9%
            
            —
            
            0.0%
            
            —
            
            0.0%Impairment
      of investments
            (1,560)
            
            (0.8%)
            
            —
            
            0.0%
            
            (1,655)
            
            (1.0%)Equity
      method investment loss
            —
            
            0.0%
            
            (306)
            
            (0.2%)
            
            (416)
            
            (0.3%)Income
      (Loss) from continuing operations before tax
            (4,456)
            
            (2.4%)
            
            14,302
            
            8.0%
            
            18,712
            
            11.5%Income
      tax (benefit) provision
            6,346
            
            3.3%
            
            (1,999)
            
            (1.1%)
            
            13,373
            
            8.2%Income
      (Loss) from continuing operations
            (10,802)
            
            (5.7%)
            
            16,301
            
            9.1%
            
            5,339
            
            3.3%Discontinued
      operations, net of tax
            (1)
            
            (0.0%)
            
            78
            
            0.0%
            
            (246)
            
            (0.2%)Net
      income (loss)
            $(10,803)
            
            (5.7%)
            
            $ 
      16,379
            
            9.1%
            
            $   
      5,093
            
            3.1%





45





The following table provides additional
information regarding our revenue, gross profit, and gross margin:





REVENUE
AND GROSS MARGIN





Year
      Ended October 31,
            
            Percentage
      Change2008
            
            2007
            
            2006
            
            08
      vs. 07
            
            07
      vs. 06(In
      thousands)Revenue:Leases
      and royalties
            $ 
      70,898
            
            $ 
      56,426
            
            $
      49,551
            
            25.6%
            
            13.9%Sales
      and service
            118,948
            
            122,315
            
            113,202
            
            (2.8%)
            
            8.1%Other
            
            160
            
            110
            
            238
            
            45.5%
            
            (53.8%)Total
            $190,006
            
            $178,851
            
            $162,991
            
            6.2%
            
            9.7%Cost
      of revenue:Leases
      and royalties
            $ 
      21,866
            
            $ 
      17,221
            
            $
      11,794
            
            27.0%
            
            46.0%Sales
      and service
            57,238
            
            57,764
            
            44,927
            
            (0.9%)
            
            28.6%Total
            $ 
      79,104
            
            $ 
      74,985
            
            $
      56,721
            
            5.5%
            
            32.2%Gross
      profit:Leases
      and royalties
            $ 
      49,032
            
            $ 
      39,205
            
            $
      37,757
            
            25.1%
            
            3.8%Sales
      and service
            61,710
            
            64,551
            
            68,275
            
            (4.4%)
            
            (5.5%)Other
            
            160
            
            110
            
            238
            
            45.5%
            
            (53.8%)Total
            $110,902
            
            $103,866
            
            $106,270
            
            6.8%
            
            (2.3%)Gross
      margin:Leases
      and royalties
            69.2%
            
            69.5%
            
            76.2%Sales
      and service
            51.9%
            
            52.8%
            
            60.3%Total
            
            58.4%
            
            58.1%
            
            65.2%








Fiscal
2008 compared to Fiscal 2007





Revenue





Our revenue in fiscal 2008 increased
$11,155, or 6.2%, to $190,006 as compared to $178,851 in fiscal 2007, primarily
due to the following:





·
            Significant
      increases in lease revenues reflecting our continued emphasis on leasing
      predominantly in the United States and increases in leased units/seats in
      all of our segments, except for our EGMs which are generally not
      leased.





·
            Lease
      revenue growth in our PTG segment was the most significant, increasing
      $7,665, or 29.5%, in fiscal 2008 as compared to fiscal 2007, due in part
      to the approximate 600 unit installed base that we acquired in connection
      with the purchase of PGIC’s TGD business in late fiscal 2007 and strong
      placements of our premium game titles as well as table game
      add-ons.





·
            Lease
      revenue in our ETS and Utility segments also grew substantially from
      fiscal 2007.  ETS lease revenue grew $3,419, or 60.1%, in fiscal
      2008 as compared to fiscal 2007.  Utility lease revenue
      increased $3,417, or 13.8%, in fiscal 2008 as compared to fiscal
      2007.  This growth is due to both increases in placements as
      well as increases in our average monthly lease
  prices.





·
            Sales
      of our EGMs and the associated parts and peripherals increased $3,662, or
      9.3%, in fiscal 2008 as compared to fiscal 2007.  This increase
      is due to the strength of our titles which has led to increased average
      sales prices.


46





·
            These
      increases were partially offset by reductions in sales revenue, again as
      part of our strategic focus on leases.  ETS sales decreased
      $4,624, or 23.7%, as compared to fiscal 2007.  Utility shuffler
      and PTG sales decreased $4,459, or 10.6%, and $2,648, or 37.9%,
      respectively, in fiscal 2008 as compared to fiscal
  2007.





Gross
margin





Our gross margin in fiscal 2008
increased 0.3%, to 58.4% in fiscal 2008 as compared to 58.1% in fiscal 2007,
reflecting the following:





·
            A
      proportionate increase in lease revenue as compared to sales and service
      revenue.  Lease revenues overall generate higher gross margins
      than sales and service revenue.





·
            Increases
      in average monthly lease prices in our Utility, PTG and ETS
      segments.





·
            Leasing
      of second and third generation Utility products, namely shufflers, at a
      higher average monthly lease price.





·
            These
      increases were partially offset by introductory pricing of our new Utility
      products, such as our i-Deal shuffler, and to a lesser extent installation
      costs on our newly installed
e-Tables.





·
            Gross
      margins in our PTG segment were adversely affected by amortization
      associated with the PGIC table games acquired in late fiscal
      2007.  In addition, depreciation on progressive table games
      reduced gross margins in our ETS
segment.





·
            Additional
      depreciation and amortization expense of product related intangibles
      included in cost of leases and sales and service also affected our gross
      profit and margin. This includes purchase related depreciation and
      amortization for acquired products from PGIC's TGD, Stargames and
      CARD.





Fiscal
2007 compared to Fiscal 2006





Revenue





Our
      revenue increased $15,860, or 9.7%, to $178,851 in fiscal 2007 as compared
      to $162,991 in fiscal 2006 due to the
following:





·
            Lease
      revenue increased due to our continued emphasis on leasing predominantly
      in the United States and increases in leased
  units/seats.





·
            Strong
      overall revenue growth in our ETS and EGM segments also contributed to the
      increase in revenue, due in part to fiscal 2007 including a full year of
      Stargames' revenue compared to nine months in fiscal
  2006.





·
            Sales
      of our EGMs also contributed to the increase in our revenue. The
      Australasian market, where the majority of EGMs are placed, is
      predominantly a "sales-based" market. Additionally, our e-Tables have
      performed very well in certain markets that are also predominantly
      sales-based.


47


Gross
margin





Our gross margin in fiscal 2007
decreased by 7.1% to 58.1% in fiscal 2007 as compared to 65.2% in fiscal 2006,
primarily due to the following:





·
            The
      gross profit decline related to our continued shift in the mix of products
      leased and sold and the inclusion of Stargames' results of operations for
      a full year in fiscal 2007, compared to nine months in fiscal 2006. The
      margins on Stargames products, particularly those included in the EGM
      segment, are lower than those traditionally experienced in our Utility,
      PTG and ETS segments.





·
            Additional
      depreciation and amortization expense of product related intangibles
      included in cost of leases and sales and service also affected our gross
      profit and margin. These include purchase related depreciation and
      amortization for acquired products from PGIC's TGD, Stargames and
      CARD.





·
            A
      number of factors related to our Stargames' operations negatively impacted
      our gross profit and margin in fiscal 2007. We incurred a minimum royalty
      shortfall associated with our WMS agreement of approximately $2,900.
      Additionally, we recognized approximately $2,800 in inventory write-offs
      and recognized a charge in the amount of approximately $400 for the return
      of certain Stargames products that were sold prior to our acquisition of
      Stargames.





The
following table provides additional information regarding our operating
expenses:





OPERATING
EXPENSES







Year
      Ended October 31,
            
            Percentage
      Change2008
            
            2007
            
            2006
            
            08
      vs. 07
            
            07
      vs. 06(In
      thousands)Selling,
      general and administrative
            $ 
      71,350
            
            $
      61,947
            
            $ 
       51,299
            
            15.2%
            
            20.8%Percentage
      of revenue
            37.6%
            
            34.6%
            
            31.5%Research
      and development
            $ 
      18,474
            
            $
      17,337
            
            $
        12,910
            
            6.6%
            
            34.3%Percentage
      of revenue
            9.7%
            
            9.7%
            
            7.9%Impairment
      of goodwill
            $ 
      22,137
            
            —
            
            —
            
            100.0%
            
            0.0%Percentage
      of revenue
            11.7%
            
            0.0%
            
            0.0%Gain
      on sale of patent
            —
            
            —
            
            $ 
      (4,566)
            
            0.0%
            
            100.0%Percentage
      of revenue
            0.0%
            
            0.0%
            
            (2.8%)Acquired
      in-process research and development
            —
            
            —
            
            $  
      19,145
            
            0.0%
            
            (100.0%)Percentage
      of revenue
            0.0%
            
            0.0%
            
            11.7%Total
      operating expenses
            $111,961
            
            $
      79,284
            
            $  
      78,788
            
            41.2%
            
            (0.6%)Percentage
      of revenue
            58.9%
            
            44.3%
            
            48.3%





Fiscal
2008 compared to Fiscal 2007





SG&A
expenses.


SG&A
increased $9,403, or 15.2%, to $71,350 in fiscal 2008 as compared to $61,947 in
fiscal 2007.  The increase in SG&A expenses primarily reflects the
following:





·
            Personnel
      costs increased to $42,840 in fiscal 2008, as compared to $36,295 in
      fiscal 2007, due to staffing our newly established corporate division,
      adding to the sales and service staff in our Shuffle Master Americas
      division to support the growth of our newer products and expanding into
      new territories, including South
Africa.





·
            Additional
      costs of $2,413 associated with increased facilities and office related
      expenses for our Shuffle Master Asia division, our Macau operation, to
      enhance our competitive presence in that
market.


48





·
            Net
      increases of approximately $1,978 at our foreign subsidiaries due to the
      weakening of the U.S. dollar for fiscal 2008 as compared to fiscal
      2007.·
            A
      write-off of prepaid licensing costs of $1,124 in fiscal 2008 associated
      with the abandonment of a project.





·
            Severance
      costs of approximately $1,023 associated with the departure of a senior
      executive at our corporate office, in addition to other subsidiary senior
      management.





·
            Corporate
      legal expense marginally decreased $154, or 2.6%, to $5,714 in fiscal 2008
      as compared to $5,868 in fiscal 2007.  Corporate legal costs
      principally related to the VendingData II and Prime Table Games, LLC
      litigations and other general corporate matters.  Corporate
      legal expense decreased as a result of lower legal expenses incurred on
      our pending cases, which primarily included VendingData II and Awada, as
      well as settlement of prior cases in fiscal 2008, which primarily included
      MP Games LLC. We expect that our legal fees will continue to vary from
      period to period depending on the level of legal activity required to
      protect our intellectual property and defend the shareholder derivative
      claims and class action lawsuit.  See Note 15 in “Item 8.
      Financial Statements and Supplementary Data” included in this Form 10-K
      for further information on our legal
  proceedings.





·
            Total
      SG&A expenses were offset by a gain of $738 recognized on the sale of
      our fractional ownership in a Net Jets, Inc. (“Net Jets”) corporate
      airplane. Effective February 27, 2008, we sold our interest in the
      airplane. This sale, carried out as part of our strategic initiative to
      monetize certain non-core assets, resulted in proceeds of approximately
      $1,309.





Research and Development (“R&D”)
expenses. R&D expense increased $1,137, or 6.6%, to $18,474 in fiscal
2008 as compared to $17,337 in fiscal 2007.  Our R&D is
distributed among all of our product lines, as we have continued to invest in
new product development.





The increase in R&D expenses can be
attributed to our newly created Corporate Products Group ("CPG"), which was
formed in our fourth quarter of fiscal 2007. The CPG is responsible for
overseeing the creation and development of our existing and future product lines
as well as overseeing our global products R&D. In fiscal 2008, approximately
$1,266 was expended by the newly formed CPG as compared to $233 in fiscal 2007,
primarily for general operational purposes.





The increase in R&D expenses can
also be attributed to net increases of approximately $566 at our foreign
subsidiaries due to the weakening of the U.S. dollar in fiscal 2008 as compared
to fiscal 2007.





We believe that one of our strengths is
identifying new product opportunities, developing new products and refining
current products.  We expect R&D expense as a percentage of
revenue to remain at current levels.





Impairment of goodwill.In October 2008, we
performed our annual goodwill impairment analysis.  The goodwill
impairment test is a two-part test.  We selected a discounted cash
flows model of the income approach and the Guideline Public Company Model of the
market approach to be used to assess the fair value of our reporting
units.  These two methodologies were equally weighted in determining a
fair value.  Step one of the impairment test compares the fair value
of each of our segments to their carrying value.  If the fair value is
less than the carrying value for any of our reporting units, step two must be
completed.  Based on the step one analysis performed, we concluded the
fair value was less than the net carrying value of the assets assigned to our
ETS reporting unit.  As such, step two of the goodwill impairment test
was performed.  Step two required that we allocate the fair value of
the ETS segment to all of the assets and liabilities, as if the segment was
acquired in a business combination.  The goodwill calculated in step
two is then compared to the recorded goodwill, with an impairment charge
recorded in the amount that the book value of goodwill exceeds the amount
calculated in this step.  Based on the step two analysis performed, we
concluded that the goodwill assigned to our ETS segment was impaired as of
October 31, 2008.  As such, we recorded an impairment charge related
to the goodwill assigned to the ETS segment of $22,137 on our consolidated
statements of operation in “Item 8. Financial Statements and Supplementary Data”
included in this Annual Report on Form 10-K.  No tax benefit is
associated with this impairment charge.




49





Fiscal
2007 compared to Fiscal 2006





SG&A
expenses.  SG&A increased $10,648, or 20.8%, to $61,947 in
fiscal 2007 as compared to $51,299 in fiscal 2006.  The increase in
SG&A expenses primarily reflects the following:





·
            Twelve
      months of SG&A expenses from Stargames in the current fiscal year as
      compared to nine months in the prior fiscal year. Total Stargames related
      SG&A expenses were $17,728 and $10,520 during fiscal 2007 and 2006,
      respectively.





·
            Personnel
      costs increased in fiscal 2007. These expenses were $36,295 for fiscal
      2007 as compared to $33,306 in fiscal 2006. The increase in personnel
      costs year-over-year was primarily due to the acquisition of Stargames in
      February 2006, and an increase in the number of employees and temporary
      consultants in order to support the growth of our global business. We also
      recognized an employee severance charge of approximately $500 in the
      fourth quarter of fiscal 2007.





·
            Corporate
      legal expenses were $5,868 in fiscal 2007 as compared to $4,946 in fiscal
      2006.  The legal costs in fiscal 2007 principally related to the
      VendingData II and MP Games I litigation and secondarily to our class
      action lawsuit. We expect that our legal fees will continue to vary from
      period to period depending on our level of legal activity to protect our
      intellectual property.





R&D
expenses.  R&D expenses increased $4,427, or 34.3%, in
fiscal 2007 as compared to fiscal 2006. The increase was attributable to twelve
months of R&D associated with Stargames as compared to nine months in the
prior year. R&D expenses at Stargames in fiscal 2007 were $9,397 as compared
to $5,359 in fiscal 2006.





Gain on sale of
patent.In fiscal 2006, we entered into an agreement with IGT
whereby we sold to IGT our remaining 50% ownership in certain patents (the
“ENPAT patents”). This agreement rescinded certain provisions of a prior
agreement whereby we assigned, transferred and conveyed to IGT our 50% share of
the first $3,000 of future royalties from the licensing of the ENPAT patents to
any third party or from otherwise permitting any third party to use the ENPAT
patents. The consideration for the remaining 50% ownership of the ENPAT patents
was $3,000 previously received from IGT pursuant to a prior agreement between us
and IGT, plus a payment of an additional $4,500. This payment was in lieu of
$4,875 that would have been due, at IGT’s discretion, under the patent purchase
agreement entered into in fiscal 2005 between us and IGT. As a result, IGT shall
receive 100% of the future royalties on the ENPAT patents until IGT has earned a
total of $17,400 in gross royalties; thereafter IGT will pay us 171/2% of any
gross royalties. This fiscal 2006 transaction has been reflected in the
accompanying consolidated statements of income by recording a gain on sale of
patent of $4,566.





Acquired in-process research and
development ("IPR&D").  IPR&D is defined as a
development project that has been initiated and has achieved material progress
but has not yet resulted in a commercially viable product and has no alternative
future use. We determined the fair-value of the product using the income
approach on a project-by-project basis. This method is based on the present
value of earnings attributable to the asset or costs avoided as a result of
owning the assets. This method includes risk factors, which include applying an
appropriate discount rate that reflects the project's stage of completion, the
nature of the product, the scientific data associated with the technology, the
current patent situation and market competition. The expensing of IPR&D
through purchase accounting allows for the expensing of certain R&D efforts
at the acquisition date consistent with the expensing of R&D efforts as they
are incurred for in-house development efforts.





As required by FASB Interpretation
No. 4, "Applicability of FASB Statement No. 2 to Business Combinations
Accounted for by the Purchase Method " ("FIN 4"), the portion of the
purchase price allocated to IPR&D of $19,145 was immediately expensed during
the three months ended April 30, 2006.


50





DEPRECIATION
AND AMORTIZATION EXPENSES





Year
      Ended October 31,
            
            Percentage
      Change2008
            
            2007
            
            2006
            
            08
      vs. 07
            
            07
      vs. 06(In
      thousands)Gross
      margin:Depreciation
            $  
      5,929
            
            $  
      5,266
            
            $  
      5,057
            
            12.6%
            
            4.1%Amortization
            12,037
            
            9,725
            
            7,773
            
            23.8%
            
            25.1%Total
            17,966
            
            14,991
            
            12,830
            
            19.8%
            
            16.8%Operating
      expenses:Depreciation
            2,780
            
            2,833
            
            2,560
            
            (1.9%)
            
            10.7%Amortization
            2,694
            
            1,597
            
            1,272
            
            68.7%
            
            25.6%Total
            5,474
            
            4,430
            
            3,832
            
            23.6%
            
            15.6%Total:Depreciation
            8,709
            
            8,099
            
            7,617
            
            7.5%
            
            6.3%Amortization
            14,731
            
            11,322
            
            9,045
            
            30.1%
            
            25.2%Total
            $
      23,440
            
            $
      19,421
            
            $
      16,662
            
            20.7%
            
            16.6%








Fiscal
2008 compared to Fiscal 2007





Depreciation expense is primarily
comprised of depreciation associated with products leased and held for lease and
to a lesser extent depreciation of property, plant and equipment. Amortization
expense is primarily comprised of amortization associated with intellectual
property, acquired developed technology, and customer relationships.
Depreciation and amortization expenses increased $4,019, or 20.7%, to $23,440 in
fiscal 2008, as compared to $19,421 in fiscal 2007.





Depreciation and amortization included
in gross margin increased $2,975, or 19.8%, to $17,966 in fiscal 2008, as
compared to $14,991 in fiscal 2007.  Increased depreciation in gross
margin is attributable to increases in leased assets consistent with our lease
strategy.  Increased amortization in gross margin relates to
previously acquired intangible assets, including 12 months of amortization
related to product specific intangible assets acquired in our PGIC
TGD.  Depreciation and amortization included in operating expenses
increased $1,044, or 23.6%, to $5,474 in fiscal 2008, as compared to $4,430 in
fiscal 2007. This increase is attributable to amortization of customer
relationships and covenant not to compete related to the PGIC TGD acquisition in
the fourth quarter of fiscal 2007.





Fiscal
2007 compared to Fiscal 2006





Depreciation and amortization expenses
increased $2,759, or 16.6%, to $19,421 in fiscal 2007 as compared to $16,662 in
fiscal 2006.





The increase is attributable to the
depreciation and amortization of assets associated with the Stargames
acquisition, effective February 1, 2006, approximately one month of
depreciation and amortization related to the PGIC TGD acquisition in fiscal
2007, and an increase in the amortization related to our acquired products from
CARD over the period of the prior year.  Depreciation and amortization
included in gross margin increased $2,161 or 16.8%, to $14,991 in fiscal 2007,
as compared to $12,830 in fiscal 2006.  Depreciation and amortization
included in SG&A increased $598, or 15.6%, to $4,430 in fiscal 2007, as
compared to $3,832 in fiscal 2006.


51





The following table provides additional
information regarding our non-operating expenses:





NON-OPERATING
EXPENSES





Other
expense, gain on early extinguishment of debt, net and impairment of
investment








Year
      Ended October 31,
            
            Percentage
      Change2008
            
            2007
            
            2006
            
            08
      vs. 07
            
            07
      vs. 06(In
      thousands)Other
      expenseInterest
      income
            $  
      1,759
            
            $   
      1,644
            
            $    
       1,998
            
            7.0%
            
            (17.7%)Interest
      expense
            (6,630)
            
            (7,487)
            
            (6,863)
            
            11.4%
            
            (9.1%)Other,
      net
            1,261
            
            (4,131)
            
            (1,834)
            
            130.5%
            
            (125.2%)Total
      other expense
            $(3,610)
            
            $
      (9,974)
            
            $  
      (6,699)
            
            63.8%
            
            (48.9%)Gain
      on early extinguishment of debt, net
            $1,773
            
            $     
         —
            
            $          —
            
            100.0%
            
            0.0%Impairment
      of investment
            $(1,560)
            
            $        
      —
            
            $  
      (1,655)
            
            (100.0%)
            
            100.0%





Fiscal
2008 compared to Fiscal 2007





Total other expense decreased $6,364,
or 63.8%, in fiscal 2008 as compared to fiscal 2007, primarily due to the
following:





·
            Net
      foreign currency gains of $2,655 in fiscal 2008 as compared to net foreign
      currency losses of $3,109 in fiscal 2007.  This year over year
      change was primarily caused by the strengthening of the U.S. dollar versus
      the Australian dollar and the Euro during our fourth quarter of fiscal
      2008.  Our foreign subsidiaries engage in activities with us and
      certain customers in U.S. dollar and other foreign denominated
      contracts. As of our third quarter of fiscal 2008, we began net settling
      all inter-company trade balances, which has resulted in the recognition of
      additional foreign currency fluctuations pursuant to SFAS No. 52,
      “Foreign Currency
      Translation.”





·
            A
      decrease in interest expense of $857, to $6,630 in fiscal 2008 as compared
      to $7,487 in fiscal 2007.  Interest expense in fiscal 2008
      primarily related to interest on our Revolver, Term Loan and
      Notes.  Interest expense in fiscal 2007 primarily related to
      interest on our Revolver and our Notes.  Interest expense
      decreased as the outstanding balance of our Revolver and Notes decreased
      as well as a decrease in the effective interest rate on the
      Revolver.





Gain on early extinguishment of debt,
net relates to the following:





·
            A
      net gain of $1,773 was realized from the early extinguishment of our Notes
      in fiscal 2008, pursuant to the Tender Offer discussed in Note 2 in “Item
      8. Financial Statements and Supplementary Data” included in this Form
      10-K.  The gain on the early extinguishment of our Notes was net
      of direct costs associated with the Tender
  Offer.





Impairment of investment in fiscal 2008
related to our investment in Sona Mobile Holdings Corp. (“Sona”), due to the
following:





·
            We
      review our investments for other than temporary impairment whenever events
      or changes in business circumstances indicate that the carrying amount of
      the investments may not be fully recoverable.  During our third
      quarter ended July 31, 2008, we analyzed our cost method investment in
      Sona and, due to the severity and duration in the decline in fair value,
      we recorded a $1,486 impairment write-down, as we determined that the
      investment was other than temporarily impaired.  This impairment
      write-down represented the difference between our historical book value
      and fair market value at July 31, 2008.  Additionally, we sold
      our investment in Sona in the fourth quarter of fiscal 2008 and recorded
      an additional pre-tax loss of $74 in impairment of investments, net of $65
      proceeds received from the sale, for a total of $1,560, which is reflected
      in the consolidated statements of operations included in “Item 8.
      Financial Statements and Supplemental Data” in this Form 10-K for fiscal
      2008.  There were no such impairment losses recorded during
      fiscal 2007.


52


Fiscal
2007 compared to Fiscal 2006





Total other expense increased $3,275,
or 48.9%, in fiscal 2007 as compared to fiscal 2006, primarily due to the
following:





·
            An
      increase in other expense of $2,297 primarily due to fluctuations in
      foreign currency.  Net foreign currency losses of $3,109 as
      compared to net foreign currency losses of $414 in fiscal
      2006.  This year over year change was due to the weakening of
      the U.S. dollar versus the Australian dollar and the
  Euro.





·
            Interest
      income decreased $354 to $1,664 in fiscal 2007 as compared to $1,998 in
      fiscal 2006 as a result of a $5,386 decrease in our investment in
      sales-type leases and notes receivable portfolio. This decrease is
      consistent with our continued emphasis on leasing versus
      selling.





·
            An
      increase in interest expense of $624, to $7,487 in fiscal 2007 as compared
      to $6,863 in fiscal 2006.  Interest expense in both fiscal 2007
      and 2006 primarily related to interest on our Notes and
      Revolver.  Interest expense increased as the outstanding balance
      of our Revolver increased.





Impairment of investment in fiscal 2006
related to our investment in Sona, due to the following:





·
            As
      of October 31, 2006, we analyzed our investment in Sona which was
      previously accounted for under the equity method and, due to the severity
      and duration in the decline in fair value, determined that such investment
      was impaired. Accordingly, we recorded a $1,655 impairment write-down,
      which represents the difference between our historical book value and fair
      market value of our investment as of October 31, 2006. Such impairment
      charge was reflected in impairment of investment in the consolidated
      statements of income included in “Item 8. Financial Statements and
      Supplemental Data” included in this Form 10-K for fiscal 2006. No
      such impairment charge was recorded for fiscal
  2007.





INCOME
TAXES








Year
      Ended October 31,
            
            Percentage
      Change2008
            
            2007
            
            2006
            
            08
      vs. 07
            
            07
      vs. 06(In
      thousands)Income
      tax provision (benefit)
            $  
      6,346
            
            $
      (1,999)
            
            $
      13,373
            
            (417.5%)
            
            (114.9%)Effective
      tax rate
            142.4%
            
            (14.0%)
            
            71.5%





Our effective income tax rate may
fluctuate due to changes in our amount and mix of United States and foreign
income, changes in tax legislation, changes in our estimates of federal tax
credits, changes in our assessment of uncertainties as valued under FIN 48, as
well as accumulated interest and penalties and other deductions.





Fiscal
2008 compared to Fiscal 2007





Income tax provision and the respective
effective tax rate increased for fiscal 2008 as compared to fiscal 2007,
primarily due to the following:





·
            Our
      income tax provision and effective tax rate for continuing operations were
      $6,346 and 142.4%, respectively, for fiscal 2008.  Our income
      tax benefit and effective tax rate for continuing operations were $(1,999)
      and (14.0%), respectively, for fiscal 2007.  For the fiscal year
      ended October 31, 2008, we recognized no tax benefit on the impairment of
      $22,137 of financial statement goodwill.  Excluding the impact
      of this goodwill impairment, the effective tax rate for the year ended
      October 31, 2008 would have been 35.9%.  For the fiscal year
      ended October 31, 2007, a $6,707 decrease to income tax expense and
      corresponding increase to deferred tax assets were recorded to account for
      additional tax basis recognized in conjunction with newly enacted
      Australian tax consolidation rules.  Excluding the impact of
      this adjustment, the effective tax rate for the twelve months ended
      October 31, 2007 would have been
32.9%.


53


Fiscal
2007 compared to Fiscal 2006





Income tax provision and the respective
effective tax rate decreased in fiscal 2007 as compared to fiscal 2006,
primarily due to the following:





·
            Our
      income tax benefit and effective tax rate for continuing operations were
      $(1,999) and (14.0%), respectively, for fiscal 2007.  Our income
      tax provision and effective tax rate for continuing operations were
      $13,373 and 71.5%, respectively, for fiscal 2006. The difference between
      the federal statutory rate and our effective income tax rate were
      primarily due to the relative size of certain significant permanent items
      (e.g. interest expense and research & development tax benefits) to
      book income.





SEGMENT
BUSINESS INFORMATION





Segment revenues include leasing,
licensing, or selling of products within each reportable segment. We measure
segment revenue performance in terms of dollars and installed unit/seat base.
Installed unit/seat base is the sum of product units/seats under lease or
license agreements and inception-to-date sold units/seats. Due to their modular
design, both the Rapid Table Games and Vegas Star products are best analyzed
based upon number of seats leased or sold. Our Table Master is a fixed five-seat
station. We believe that installed base is an important gauge of segment
performance because it measures historical market placements of leased and sold
units/seats and it provides insight into potential markets for next-generation
products and service. Some sold units/seats may no longer be in use by our
casino customers or may have been replaced by other models or products.
Accordingly, we are unable to determine precisely the number of units or seats
currently in active use.





The amounts classified as unallocated
corporate expenses consist primarily of costs related to overall corporate
management and support functions. These include costs related to executive
management, accounting and finance, general sales support, legal and compliance
costs, office expenses, and other amounts for which allocation to specific
segments is not practicable.





We evaluate the performance of our
operating segments based on net revenues, gross profit and operating income.
Segment operating income includes net revenues attributable to third parties and
expenses directly and indirectly associated with the product lines included in
each segment. Our direct expenses primarily include cost of products sold,
depreciation of leased assets, amortization of product-related intangible
assets, service, manufacturing overhead, shipping and
installation.  Indirect expenses include other costs directly
identified with each segment, such as research and development, product approval
costs, product-related litigation expenses, amortization of patents and other
product-related intellectual property, sales commissions and other
directly-allocable sales expenses.  Operating income for each segment
excludes other income and expense and certain expenses that are managed outside
of the operating segments. The amounts classified as unallocated corporate
expenses consist primarily of costs related to overall corporate management and
support functions. These include costs related to executive management,
accounting and finance, general sales support, legal and compliance costs,
office expenses, and other amounts for which allocation to specific segments is
not practicable.





54





SEGMENT
OPERATING RESULTS





(In
thousands, except units, per unit/seat amounts and product lease/sale
prices)





Utility
Segment Operating Results





Fiscal
2008 compared to Fiscal 2007








Year
      EndedOctober
      31,
            
            Increase
            
            Percentage2008
            
            2007
            
            (Decrease)
            
            Change(In
      thousands, except for units and per unit/seat amounts)Utility
      Segment Revenue:Lease
            $ 
      28,145
            
            $ 
      24,728
            
            $  
      3,417
            
            13.8%Sales
      - Shuffler
            37,738
            
            42,197
            
            (4,459)
            
            (10.6)Sales
      - Chipper
            3,992
            
            2,582
            
            1,410
            
            54.6Service
            6,718
            
            5,631
            
            1,087
            
            19.3Other
            4,300
            
            3,319
            
            981
            
            29.6Total
      sales and service
            52,748
            
            53,729
            
            (981)
            
            (1.8)Total
      Utility segment revenue
            $ 
      80,893
            
            $ 
      78,457
            
            $   2,436
            
            3.1Utility
      segment gross profit
            $ 
      46,097
            
            $ 
      48,086
            
            $(1,989)
            
            (4.1)Utility
      segment gross margin
            57.0%
            
            61.3%Utility
      segment operating income
            $ 
      36,078
            
            $ 
      33,783
            
            $2,295
            
            6.8Utility
      segment operating margin
            44.6%
            
            43.1%Shuffler
      Installed Base:Lease
      units, end of year
            5,318
            
            4,986
            
            332
            
            6.7Sold
      units, inception-to-dateBeginning
      of year
            20,396
            
            17,630
            
            2,766
            
            15.7Sold
      during year
            2,624
            
            3,076
            
            (452)
            
            (14.7)Less
      trade-ins and exchanges
            (258)
            
            (310)
            
            52
            
            16.8Sold
      units, end of year
            22,762
            
            20,396
            
            2,366
            
            11.6Total
      shuffler installed base
            28,080
            
            25,382
            
            2,698
            
            10.6Chipper
      Installed BaseLease
      units, end of year
            26
            
            17
            
            9
            
            52.9Sold
      units, inception-to-dateBeginning
      of year
            721
            
            620
            
            101
            
            16.3Sold
      during year
            154
            
            101
            
            53
            
            52.5Sold
      units, end of year
            875
            
            721
            
            154
            
            21.4Total
      Chipper installed base
            901
            
            738
            
            163
            
            22.1%





Utility segment revenue increased
$2,436, or 3.1% to $80,893 for fiscal 2008, as compared to $78,457 for fiscal
2007.  The Utility segment revenue increase can be attributed
primarily to increases in Utility lease revenue as well as chipper sales revenue
and service revenue.





The $3,417, or 13.8%, increase in
Utility lease revenue for fiscal 2008 compared to fiscal 2007 primarily
reflects:





·
            An
      increase in shuffler lease revenue of $3,364, or 13.7%, as a result of
      increases in leased units and average lease
  pricing.





·
            A
      net increase of 332, or 6.7%, of leased shuffler units to 5,318 from
      4,986, which is consistent with our continued emphasis on leasing versus
      selling, predominantly in the United States.  The increase was
      predominantly attributable to increased leased units of our i-DealTM,
      MD2® and
      DeckMate®shufflers.





·
            An
      increase in shuffler average monthly lease price to approximately $440
      from approximately $410. The increase was
      largely attributable to increased lease pricing for the i-DealTM and
      one2six® shufflers.


55






The $1,410, or 54.6%, increase in
chipper sales revenue for fiscal 2008 compared to fiscal 2007 primarily
reflects:





·
            A
      net increase of 53, or 52.5%, of sold chipper units to 154 from
      101.





·
            An
      increase in chipper average sales price to approximately $25,900 from
      approximately $25,600, driven primarily by increased sales of ChipmasterTM
      units, which have a higher sale price than our Easy Chipper
    C.





The $1,087, or 19.3%, increase in
service revenue for fiscal 2008 compared to fiscal 2007 primarily
reflects:





·
            An
      increase in service contracts and parts sold of $1,029, or 18.5%, which
      relate to previously sold
shufflers.





The $4,459 decrease in shuffler sales
and service revenue for fiscal 2008 as compared to fiscal 2007 primarily relates
to:





·
            A
      decrease of 452 shuffler units sold to 2,624 units in fiscal 2008 from
      3,076 units in fiscal 2007.





·
            Offsetting
      the decline in sold shuffler units was an increase in the average sales
      price of our shufflers to approximately $14,400 in fiscal 2008 from
      approximately $13,700 in fiscal 2007. This increase reflects the higher
      sales price of our newer shuffler models plus the impact of an overall
      price increase on almost all of our shuffler
  models.





·
            Conversions
      from leased shufflers to sold shufflers of 266 units in fiscal 2008 as
      compared to 418 units in fiscal 2007, reflecting our continued emphasis on
      leasing versus selling.





Utility gross profit decreased $1,989,
or 4.1%, to $46,097 for fiscal 2008 as compared to $48,086 for fiscal
2007.  Utility gross margin also decreased 4.3% to 57.0% for fiscal
2008 as compared to 61.3% for fiscal 2007.  These decreases in both
gross profit and gross margin primarily related to the following:





·
            Introductory
      pricing on new products, such as our i-Deal
  shuffler.





·
            The
      continued reduction in leased shuffler conversions referred to
      above.  Conversions traditionally generate higher initial gross
      margins.





·
            An
      increase in amortization expense associated with the one2six shuffler and
      Easy Chipper to $5,763 for fiscal 2008 as compared to $4,555 for fiscal
      2007.





Utility operating income increased
$2,295, or 6.8%, to $36,078 for fiscal 2008 as compared to $33,783 for fiscal
2007.  Utility operating margin also increased 1.5% to 44.6% for
fiscal 2008 as compared to 43.1% for fiscal 2007.  These increases in
both operating income and operating margin primarily related to the
following:





·
            A
      reduction of approximately $1,000 in legal costs specifically related to
      the Utility segment.


56





Fiscal
2007 compared to Fiscal 2006








Year
      EndedOctober
      31,
            
            Increase
            
            Percentage2007
            
            2006
            
            (Decrease)
            
            Change(In
      thousands, except for units and per unit/seat amounts)Utility
      Segment Revenue:Lease
            $
      24,728
            
            $ 
      24,048
            
            $680
            
            2.8%Sales
      - Shuffler
            42,197
            
            50,363
            
            (8,166)
            
            (16.2)Sales
      - Chipper
            2,582
            
            5,367
            
            (2,785)
            
            (51.9)Service
            5,631
            
            4,111
            
            1,520
            
            37.0Other
            3,319
            
            2,903
            
            416
            
            14.3Total
      sales and service
            53,729
            
            62,744
            
            (9,015)
            
            (14.4)Total
      Utility segment revenue
            $
      78,457
            
            $ 
      86,792
            
            $(8,335)
            
            (9.6)Utility
      segment gross profit
            $
      48,086
            
            $ 
      55,707
            
            $(7,621)
            
            (13.7)Utility
      segment gross margin
            61.3%
            
            64.2%Utility
      segment operating income
            $
      33,783
            
            $ 
      42,445
            
            $(8,662)
            
            (20.4)Utility
      segment operating margin
            43.1%
            
            48.9%Shuffler
      Installed Base:Lease
      units, end of year
            4,986
            
            4,717
            
            269
            
            5.7Sold
      units, inception-to-dateBeginning
      of year
            17,630
            
            13,780
            
            3,850
            
            27.9Sold
      during year
            3,076
            
            4,297
            
            (1,221)
            
            (28.4)Less
      trade-ins and exchanges
            (310)
            
            (447)
            
            137
            
            30.6Sold
      units, end of year
            20,396
            
            17,630
            
            2,766
            
            15.7Total
      shuffler installed base
            25,382
            
            22,347
            
            3,035
            
            13.6Chipper
      Installed Base*Lease
      units, end of year
            17
            
            15
            
            2
            
            13.3Sold
      units, inception-to-dateBeginning
      of year
            620
            
            368
            
            252
            
            68.5Sold
      during year
            101
            
            252
            
            (151)
            
            (59.9)Sold
      units, end of year
            721
            
            620
            
            101
            
            16.3Total
      Chipper installed base
            738
            
            635
            
            103
            
            16.2%





*Chipper units have been adjusted in fiscal 2006 for 273 units to include
the Chipmaster product which was previously excluded as it was an older
generation product acquired from CARD. As we continue to receive orders for this
product, we have decided to include the installed base in all periods
presented.





For fiscal 2007, Utility segment
revenue decreased 9.6% compared to fiscal 2006, primarily due to a 14.4%
decrease in Utility products sales and service revenue. Such decrease was offset
in part by a small increase in our Utility products lease revenue.





The slight increase in Utility products
lease revenue for fiscal 2007 compared to fiscal 2006 reflects:





·
            An
      increase of 269 shuffler units to 4,986 units at the end of fiscal 2007
      compared to 4,717 units at the end of fiscal
  2006.





·
            Although
      leased shuffler units increased, we experienced a small decrease in the
      average monthly lease price primarily related to the timing of lease
      installations and, to a lesser extent, introductory
    pricing.





·
            Conversions
      from leased shufflers to sold shufflers of 418 units in fiscal 2007 as
      compared to 1,122 units in fiscal 2006, reflecting our continued emphasis
      on leasing versus selling.





57





The decrease in Utility products sales
and service revenue for fiscal 2007 as compared to fiscal 2006 primarily relates
to:





·
            A
      decrease of 1,221 shuffler units sold to 3,076 units in fiscal 2007 from
      4,297 units in fiscal 2006.





·
            As
      discussed above, a decrease in leased shuffler
  conversions.





·
            Offsetting
      the decline in sold shuffler units was an increase in the average selling
      prices of our shufflers. The average sales price increased to
      approximately $13,700 in 2007 from approximately $11,700 in fiscal 2006.
      This increase reflects the higher selling price of our newer shuffler
      models plus the impact of an overall price increase on almost all of our
      shuffler models. Included in shuffler sales revenue for 2007 is
      approximately $1,400 of card recognition upgrade kits which have no
      corresponding unit count.





·
            Sales
      of 101 chipper units during fiscal 2007 as compared to 252 units in fiscal
      2006. The decrease was due to a large Easy Chipper sale to one customer in
      fiscal 2006. Total revenue contributed from chipper sales was
      approximately $2,582 during fiscal 2007, as compared to $5,367 in fiscal
      2006.





Utility gross profit decreased $7,621,
or 13.7%, to $48,086 for fiscal 2007 as compared to $55,707 for fiscal
2006.  Utility gross margin also decreased 2.9% to 61.3% for fiscal
2007 as compared to 64.2% for fiscal 2006.  These decreases in both
gross profit and gross margin primarily related to the following:





·
            The
      decline in total Utility revenue attributable to our continued emphasis on
      leasing, as compared to the number of sales and conversions in the period
      of the prior year.





·
            The
      decrease in conversions referred to above.  Conversions
      traditionally generate higher initial gross
  margins.





·
            Increased
      amortization expense associated with the one2six shuffler and Easy Chipper
      in the amount of $4,555 in fiscal 2007, compared to $3,534 in fiscal
      2006.





Utility operating income decreased
$8,662, or 20.4%, to $33,783 for fiscal 2007 as compared to $42,445 for fiscal
2006.  Utility operating margin also decreased 5.8% to 43.1% for
fiscal 2007 as compared to 48.9% for fiscal 2006.  These decreases in
both operating income and operating margin primarily related to the
following:





·
            Increased
      expenses directly related to our Utility segment. The expense increase
      relates principally to legal fees incurred defending our Utility
      intellectual property.


58





Proprietary Table Games Segment
Operating Results





Fiscal
2008 compared to Fiscal 2007








Year
      EndedOctober
      31,
            
            Increase
            
            Percentage2008
            
            2007
            
            (Decrease)
            
            Change(In
      thousands, except for units and per unit/seat amounts)PTG
      segment revenue:Royalties
      and leases
            $
      33,639
            
            $ 25,974
            
            $  
      7,665
            
            29.5%Sales
            4,332
            
            6,980
            
            (2,648)
            
            (37.9)Service
            276
            
            157
            
            119
            
            75.8Other
            347
            
            14
            
            333
            
            2,378.6Total
      sales and service revenue
            4,955
            
            7,151
            
            (2,196)
            
            (30.7)Total
      PTG segment revenue
            $
      38,594
            
            $ 33,125
            
            $  
      5,469
            
            16.5PTG
      segment gross profit
            $
      31,983
            
            $ 28,154
            
            $  
      3,829
            
            13.6PTG
      segment gross margin
            82.9%
            
            85.0%PTG
      segment operating income
            $
      28,957
            
            $ 23,465
            
            $  
      5,492
            
            23.4PTG
      segment operating margin
            75.0%
            
            70.8%PTG
      installed base:Royalty
      units, end of year
            4,051
            
            4,006
            
            45
            
            1.1Sold
      units, inception-to-dateBeginning
      of year
            1,437
            
            1,233
            
            204
            
            16.5Sold
      during year
            154
            
            204
            
            (50)
            
            (24.5)Sold
      units, end of year
            1,591
            
            1,437
            
            154
            
            10.7Total
      installed base
            5,642
            
            5,443
            
            199
            
            3.7%








Total PTG segment revenue increased
$5,469, or 16.5%, to $38,594 for fiscal 2008, as compared to $33,125 in fiscal
2007.  The PTG segment revenue increase was primarily due to the
increase in PTG royalty and lease revenue. This increase was offset by a
decrease in PTG sales revenue.





The $7,665, or 29.5%, increase in PTG
royalty and lease revenue for fiscal 2008 compared to fiscal 2007 primarily
reflects:





·
            An
      increase in revenue of $4,648, or 1,117.3%, to $5,064 from $416 related to
      the approximate 600 unit installed base that we acquired in connection
      with the purchase of PGIC’s TGD business in late fiscal
    2007.





·
            An
      increase of $2,395, or 9.6%, to $27,317 from $24,922 related to growth in
      our traditional non-PGIC table games. This primarily relates to increases
      of our Ultimate Texas Hold’em and Fortune Pai Gow Poker table
      games.





·
            An
      increase in PTG average monthly lease price to approximately $690 from
      $540. The increase was predominantly attributable to the presence of
      revenues from our PGIC acquired table games for a full year in 2008 as
      compared to one month in fiscal 2007, as well as strong performance by our
      premium table games.





·
            A
      net increase of 206, or 60.2%, in table game bonusing option add-ons,
      predominantly related to the increase in our Progressive Fortune Pai Gow
      Poker and Let It Ride Bonus table games.  These table game
      bonusing option add-ons generally have a lower monthly average lease price
      than our premium game titles.





·
            $563
      related to license fees for the use of certain of our proprietary table
      game content on certain legalized internet gaming sites in fiscal 2008 as
      compared to $663 in fiscal 2007.








59





The $2,648, or 37.9%, decrease in PTG
sales revenue for fiscal 2008 compared to fiscal 2007 can be directly attributed
to:





·
            A
      net decrease of 50, or 24.5%, of sold units to 154 from 204, comprised
      primarily of decreases of our Three Card Poker and Four Card Poker table
      games, which both have a higher average sales price than our overall
      average PTG sales price.  This decrease in sales is consistent
      with our continued emphasis on leasing versus
  selling.





·
            A
      decrease in PTG average sales price to approximately $28,100 from
      approximately $34,200 as a result of selling approximately 90 Fortune Pai
      Gow Poker table games in fiscal 2008 and the sale of certain lifetime
      licenses through an Asian distributor.  The average sales price
      of our Fortune Pai Gow Poker table game is lower than that of our premium
      game titles.





·
            A
      decrease of 48, or 42.9%, of PTG conversions from leased to sold table
      games in fiscal 2008, comprised primarily of decreases of our Three Card
      Poker and Four Card Poker table game conversions, which both have a higher
      average sales price than our overall average PTG sales
      price.  This decrease in conversions from leased to sold table
      games is consistent with our continued emphasis on leasing versus
      selling.





PTG gross profit increased $3,829, or
13.6%, to $31,983 for fiscal 2008 as compared to $28,154 for fiscal
2007.  Although PTG gross profit increased, PTG gross margin decreased
2.1% to 82.9% for fiscal 2008 as compared to 85.0% for fiscal
2007.  The increase in gross profit and decrease in gross margin were
a result of the following:





·
            The
      increase in PTG gross profit was a result of the royalty and lease revenue
      increases offset by the decrease in sold royalty units discussed
      above.





·
            The
      decrease in conversions noted above.  Conversions traditionally
      generate higher gross margins.





·
            The
      decrease in PTG gross margin was due to a full year of amortization
      associated with the PGIC table games acquired in late
  2007.





PTG operating income increased
$5,492, or 23.4%, to $28,957 for fiscal 2008 as compared to $23,465 for fiscal
2007.  PTG operating margin also increased 4.2% to 75.0% for fiscal
2008 as compared to 70.8% for fiscal 2007.  These increases in both
operating income and operating margin primarily related to the
following:





·
            The
      increased gross profit referred to
above.





·
            Notwithstanding
      the decline in gross margin referred to above, operating income and
      operating margin were favorably impacted by a reduction of approximately
      $960 of R&D and legal costs specifically related to our PTG
      segment.


60





Fiscal
2007 compared to Fiscal 2006








Year
      EndedOctober
      31,
            
            Increase
            
            Percentage2007
            
            2006
            
            (Decrease)
            
            Change(In
      thousands, except for units and per unit/seat amounts)PTG
      segment revenue:Royalties
      and leases
            $
      25,974
            
            $
      23,887
            
            $  
      2,087
            
            8.7%Sales
            6,980
            
            14,083
            
            (7,103)
            
            (50.4)Service
            157
            
            164
            
            (7)
            
            (4.3)Other
            14
            
            182
            
            (168)
            
            (92.3)Total
      sales and service revenue
            7,151
            
            14,429
            
            (7,278)
            
            (50.4)Total
      PTG segment revenue
            $
      33,125
            
            $
      38,316
            
            $(5,191)
            
            (13.5)PTG
      segment gross profit
            $
      28,154
            
            $
      33,742
            
            $(5,588)
            
            (16.5)PTG
      segment gross margin
            85.0%
            
            88.1%PTG
      segment operating income
            $
      23,465
            
            $
      30,451
            
            $(6,986)
            
            (22.9)PTG
      segment operating margin
            70.8%
            
            79.5%PTG
      installed base:Royalty
      units, end of year
            4,006
            
            2,986
            
            1,020
            
            34.2Sold
      units, inception-to-dateBeginning
      of year
            1,233
            
            768
            
            465
            
            60.5Sold
      during year
            204
            
            465
            
            (261)
            
            (56.1)Sold
      units, end of year
            1,437
            
            1,233
            
            204
            
            16.5Total
      installed base
            5,443
            
            4,219
            
            1,224
            
            29.0%





For fiscal 2007, PTG segment revenue
decreased 13.5% compared to fiscal 2006, primarily due to a decrease in lifetime
license sales of our proprietary table games. This decrease is consistent with
our strategic initiative to emphasize the licensing of our proprietary table
games as opposed to selling these products. Specifically, proprietary table game
conversions from royalty units to lifetime license sales decreased to 160 units
in fiscal 2007 from 434 units in fiscal 2006.





The decrease in lifetime license sales
was partially offset by an increase in total PTG royalty and lease revenue of
$2,087 in fiscal 2007, as compared to fiscal 2006. This increase primarily
reflects:





·
            A
      net increase of 1,020 table game royalty units on lease. This increase
      includes an approximate 600 unit installed base that we acquired in
      connection with the purchase of PGIC's TGD business. Excluding units from
      this acquisition, our table game royalty units increased by approximately
      400 during fiscal 2007 as compared to fiscal
  2006.





·
            The
      increase in units on lease was partially offset by a decrease of 20.9% in
      the average monthly lease price. This decrease is mostly attributable to
      the inclusion of only one month of PGIC TGD revenue on the acquired
      installed base of approximately 600 tables. If the PGIC revenue and
      corresponding units were excluded from the calculation, the average
      monthly lease price would have decreased
8.4%.





·
            A
      net increase of 155, or 82.9%, in table game bonusing option add-ons,
      predominantly related to the increase in our Let It Ride Bonus and Basic
      table games.  These table game bonusing option add-ons have a
      lower monthly average lease price than our premium game
      titles.





·
            During
      fiscal 2007, royalties and leases revenue also includes $663 related to
      license fees for the use of certain of our proprietary table game content
      on certain legalized internet gaming
sites.





61





PTG gross profit decreased $5,588, or
16.5%, to $28,154 for fiscal 2007 as compared to $33,742 for fiscal
2006.  PTG gross margin also decreased 3.1% to 85% for fiscal 2007 as
compared to 88.1% for fiscal 2006.  These decreases in gross profit
and gross margin were a result of the following:





·
            Significant
      decrease in lifetime license sales discussed
  above.





·
            Gross
      profit in fiscal 2007 includes amortization of approximately $40
      associated with the PGIC TGD acquisition effective September 26,
      2007.





PTG operating income decreased
$6,986, or 22.9%, to $23,465 for fiscal 2007 as compared to $30,451 for fiscal
2006.  PTG operating margin also decreased 8.7% to 70.8% for fiscal
2007 as compared to 79.5% for fiscal 2006.  These decreases in both
operating income and operating margin primarily related to the
following:





·
            Decreases
      in gross profit and gross margin referred to
  above.





·
            Operating
      margin in fiscal 2007 was negatively impacted by increased costs
      associated with the development and acquisition of new proprietary table
      games.


62





Electronic
Table Systems Segment Operating Results





Fiscal
2008 compared to Fiscal 2007





Year
      EndedOctober
      31,
            
            Increase
            
            Percentage2008
            
            2007
            
            (Decrease)
            
            Change(In
      thousands, except for units and per unit/seat amounts)ETS
      segment revenue:Royalties
      and leases
            $    
      9,110
            
            $  5,691
            
            $    
      3,419
            
            60.1%Sales
            14,911
            
            19,535
            
            (4,624)
            
            (23.7)Service
            405
            
            373
            
            32
            
            8.6Other
            3,035
            
            2,291
            
            744
            
            32.5Total
      sales and service revenue
            18,351
            
            22,199
            
            (3,848)
            
            (17.3)Total
      ETS segment revenue
            $  
      27,461
            
            $27,890
            
            $    
      (429)
            
            (1.5)ETS
      segment gross profit
            $  
      13,068
            
            $13,891
            
            $    
      (823)
            
            (5.9)ETS
      segment gross margin
            47.6%
            
            49.8%ETS
      segment operating income
            $(16,105)
            
            $6,600
            
            $(22,705)
            
            (344.0)ETS
      segment operating margin
            (58.6%)
            
            23.7%ETS
      installed base:Lease
      seats, end of year
            1,445
            
            1,096
            
            349
            
            31.8Sold
      seats, inception-to-dateBeginning
      of year
            5,040
            
            4,142
            
            898
            
            21.7Sold
      during year
            740
            
            918
            
            (178)
            
            (19.4)Less
      returns and exchanges
            —
            
            (20)
            
            20
            
            100.0Sold
      units, end of year
            5,780
            
            5,040
            
            740
            
            14.7Total
      installed base
            7,225
            
            6,136
            
            1,089
            
            17.7%





Total ETS segment revenue decreased
$429, or 1.5%, to $27,461 for fiscal 2008 as compared to $27,890 for fiscal
2007. The ETS segment revenue decrease was primarily due to a decrease in ETS
sales revenue.  This decrease was offset by an increase in ETS royalty
and lease revenue and secondarily to an increase in service and other revenue,
which is comprised of ETS parts and other peripheral sales.





The $4,624, or 23.7%, decrease in ETS
sales revenue for fiscal 2008 as compared to fiscal 2007, primarily
reflects:





·
            A
      decrease of 178, or 19.4%, ETS sold seats to 740 from 918, predominantly
      related to decreases of our Vegas Star sold seats, which also have a
      higher average sales price than our overall average ETS sales
      price.   This is consistent with our continued emphasis on
      leasing versus selling.





·
            A
      decrease in the average ETS sales price per seat to approximately $20,200
      from approximately $21,300, primarily caused by sales to a South American
      distributor and the decrease in Vegas Star sold seats discussed
      above.





The $3,419, or 60.1%, increase in ETS
lease and royalty revenue for fiscal 2008 compared to fiscal 2007, primarily
reflects:





·
            A
      net increase of 349, or 31.8%, of e-Table seats on lease, which included
      320 incremental seats of Table MasterTM seats on lease.  This
      increase was primarily related to leases of our Royal Match 21, Three Card
      Poker and Ultimate Texas Hold’em proprietary games.  The
      increase of 349 seats includes the impact of conversions of leased seats
      to sales offset by newly placed leased
seats.





·
            The
      increase in Table MasterTM leased seats mentioned above was primarily
      related to the five year exclusive agreement with the Delaware State
      Lottery System as well as several properties in Nevada and
      Pennsylvania.





·
            An
      increase in ETS average monthly lease price to approximately $530 from
      approximately $430. The increase was predominantly
      attributable to increased lease pricing for Table MasterTM and the
      associated popular game titles mentioned
  above.


63







The $744, or 32.5%, increase in ETS
other revenue for fiscal 2008 compared to fiscal 2007, primarily
reflects:





·
            Increased
      parts and other peripheral sales related to previously sold ETS seats,
      primarily relating to our Vegas Star products and secondarily relating to
      our Rapid Table Games.





ETS gross profit decreased $823, or
5.9%, to $13,068 for fiscal 2008 as compared to $13,891 for fiscal
2007.  ETS gross margin also decreased 2.6% to 47.2% for fiscal 2008
as compared to 49.8% for fiscal 2007.  These decreases in both gross
profit and gross margin primarily related to the following:





·
            Increase
      of approximately $1,400 in depreciation associated with new leased
      units.





·
            Increased
      installation costs of approximately $400 on newly placed
      units.





ETS operating income decreased
$22,705, or 344.0%, to ($16,105) for fiscal 2008 as compared to $6,600 for
fiscal 2007.  ETS operating margin also decreased 81.8% to (58.1%) for
fiscal 2008 as compared to 23.7% for fiscal 2007.  These decreases in
both operating income and operating margin primarily related to the
following:





·
            The
      $22,137 impairment of goodwill associated with our ETS segment, as
      previously referred to in the discussion of our operating
      expenses.





Fiscal
2007 compared to Fiscal 2006





Year
      EndedOctober
      31,
            
            Increase
            
            Percentage2007
            
            2006
            
            (Decrease)
            
            Change(In
      thousands, except for units and per unit/seat amounts)ETS
      segment revenue:Royalties
      and leases
            $
      5,691
            
            $  
        1,616
            
            $ 
      4,075
            
            252.2%Sales
            19,535
            
            14,617
            
            4,918
            
            33.6Service
            373
            
            128
            
            245
            
            191.4Other
            2,291
            
            194
            
            2,097
            
            1,080.9Total
      sales and service revenue
            22,199
            
            14,939
            
            7,260
            
            48.6Total
      ETS segment revenue
            $27,890
            
            $  
      16,555
            
            $11,335
            
            68.5ETS
      segment gross profit
            $13,891
            
            $9,936
            
            $3,955
            
            39.8ETS
      segment gross margin
            49.8%
            
            60.0%ETS
      segment operating income
            $6,600
            
            $
      (16,638)
            
            $23,238
            
            139.7ETS
      segment operating margin
            23.7%
            
            (100.5%)ETS
      installed base:Lease
      seats, end of year
            1,096
            
            424
            
            672
            
            158.5Sold
      seats, inception-to-dateBeginning
      of year
            4,142
            
            300
            
            3,842
            
            1,280.7Sold
      during year
            918
            
            811
            
            107
            
            13.2Less
      returns and exchanges
            (20)
            
            —
            
            (20)
            
            (100.0)Stargames
      acquired base
            —
            
            3,031
            
            (3,031)
            
            (100.0)Sold
      units, end of year
            5,040
            
            4,142
            
            898
            
            21.7Total
      installed base
            6,136
            
            4,566
            
            1,570
            
            34.4%





For fiscal 2007, ETS segment revenue
increased $11,335, or 68.5%, to $27,890 in fiscal 2007 as compared to $16,555
for fiscal 2006, primarily due to an increase in the total installed base
of e-Table seats. The total installed base of e-Table seats was 6,136 for fiscal
2007 compared to 4,566 for fiscal 2006. Additionally, fiscal 2007 included a
full year of operating results related to the e-Tables acquired from Stargames,
compared to nine months of such results during the year ended October 31,
2006.


64





The increase in ETS royalty and lease
revenue for fiscal 2007 compared to fiscal 2006 primarily reflects:





·
            A
      net increase of 672 e-Table seats on lease. This increase was primarily
      related to the five year exclusive agreement with the Delaware State
      Lottery System to place 54 units or 270 seats, plus an additional 195
      seats leased to several properties in Pennsylvania, of which 55 were
      converted to sales by year-end.





·
            A
      36.1% increase in the monthly average lease price in fiscal 2007 compared
      to fiscal 2006.





The increase in ETS sales and service
revenue for fiscal 2007 compared to fiscal 2006 was primarily due to the
following:





·
            An
      increase in sales of Vegas Star to approximately $14,000 in fiscal 2007 as
      compared to approximately $8,000 in fiscal
2006.





·
            Service
      and other revenue increased during fiscal 2007 to $2,664 compared to $322
      during fiscal 2006. This increase is principally related to the increase
      in our installed base of e-Table
seats.





ETS
gross profit increased $3,955, or 39.8%, to $13,891 for fiscal 2007 as compared
to $9,936 for fiscal 2006.  Although ETS gross profit increased, ETS
gross margin decreased 10.2% to 49.8% for fiscal 2007 as compared to 60% for
fiscal 2006.  The increase in gross profit and decrease in gross
margin were a result of the following:





·
            The
      increase in gross profit was principally due to the increase in revenue
      referred to above.





·
            Gross
      profit and gross margin in fiscal 2007 were negatively impacted by initial
      installation costs related to our Table Master and other e-Tables on
      lease.





·
            An
      increase in the amortization expense primarily related to
      Stargames.





·
            ETS
      gross profit and gross margin were also negatively impacted in fiscal 2007
      by a charge of approximately $400 associated with the return of
      certain Stargames products that had been sold prior to our acquisition of
      Stargames.





ETS operating income increased
$23,238, or 139.7%, to $6,600 for fiscal 2007 as compared to ($16,638) for
fiscal 2006.  ETS operating margin also increased 124.2% to 23.7% for
fiscal 2007 as compared to (100.5%) for fiscal 2006.  These increases
in both operating income and operating margin primarily related to the
following:





·
            A
      one-time IPR&D charge applicable to the ETS segment recognized during
      fiscal 2006, related to the acquisition of Stargames. ETS segment
      operating margin, excluding the fiscal 2006 IPR&D charge, for fiscal
      2007, increased to 23.7% from 15.1%. Such increase relates to the
      increases in gross profit and gross margin discussed
  above.


65





Electronic
Gaming Machines Segment Operating Results





Fiscal
2008 compared to Fiscal 2007








Year
      EndedOctober
      31,
            
            Increase
            
            Percentage2008
            
            2007
            
            (Decrease)
            
            Change(In
      thousands, except for units and per unit/seat amounts)EGM
      segment revenue:Lease
      revenue
            $     
      —
            
            $33
            
            $ 
      (33)
            
            (100.0%)Sales
            32,946
            
            30,955
            
            1,991
            
            6.4Other
            9,952
            
            8,281
            
            1,671
            
            20.2Total
      sales and service revenue
            42,898
            
            39,236
            
            3,662
            
            9.3Total
      EGM segment revenue
            $42,898
            
            $39,269
            
            $3,629
            
            9.2EGM
      segment gross profit
            $19,662
            
            $14,027
            
            $5,635
            
            40.2EGM
      segment gross margin
            45.8%
            
            35.7%EGM
      segment operating income
            $11,693
            
            $7,390
            
            $4,303
            
            58.2EGM
      segment operating margin
            27.3%
            
            18.8%EGM
      installed base:Lease
      seats, end of year
            —
            
            2
            
            (2)
            
            (100.0)Sold
      seats, inception-to-dateBeginning
      of year
            18,993
            
            16,279
            
            2,714
            
            16.7Sold
      during year
            2,328
            
            2,714
            
            (386)
            
            (14.2)Sold
      units, end of year
            21,321
            
            18,993
            
            2,328
            
            12.3Total
      installed base
            21,321
            
            18,995
            
            2,326
            
            12.2%





Total EGM segment revenue increased
$3,629, or 9.2%, to $42,898 for fiscal 2008 as compared to $39,269 for fiscal
2007. The EGM segment revenue increase was primarily due to increases in EGM
sales and EGM other revenue.





A $1,991, or 6.4%, increase in EGM
sales revenue for fiscal 2008 compared to fiscal 2007 is primarily attributable
to:





·
            A
      significant increase in the average sales price to approximately $14,200
      from approximately $11,400.  The increase in average sales price
      is being driven primarily from the success of some of our more popular
      titles, including the Pink Panther linked series of games, the successful
      rollout of newer games on the PC4 platform, and a large number of used
      machine sales negatively impacting the average sales price in the prior
      year.





·
            Offset
      by a 386 unit decrease in the number of sold
  units.





The $1,671, or 20.2%, increase in EGM
other revenue for fiscal 2008 compared to fiscal 2007 can be directly
attributable to:





·
            An
      increase of $4,189, or 193.0%, to $6,359 from $2,170 of parts and other
      peripheral sales related to previously sold EGM
  seats.





·
            Offset
      by a decrease of $2,268, or 38.7%, to $3,592 from $5,860 of EGM conversion
      kits sales.





EGM gross profit increased $5,635, or
40.2%, to $19,662 for fiscal 2008 as compared to $14,027 for fiscal
2007.  EGM gross margin also increased 10.1% to 45.8% for fiscal 2008
as compared to 35.7% for fiscal 2007.  These increases in both gross
profit and gross margin primarily related to the following:





·
            Substantial
      increases in the average sales price of our EGMs as noted
      above.





·
            The
      increased amount of peripheral sales which have a substantially higher
      margin than completed units.




66


·
            Prior
      year margins were adversely impacted by a minimum royalty shortfall of
      $2,900 and inventory write-offs of $2,800 recognized at
      Stargames.





EGM operating income increased
$4,303, or 58.2%, to $11,693 for fiscal 2008 as compared to $7,390 for fiscal
2007.  EGM operating margin also increased 8.5% to 27.3% for fiscal
2008 as compared to 18.8% for fiscal 2007.  These increases in both
operating income and operating margin primarily related to the
following:





·
            The
      revenue increases as noted in our gross profit discussion, offset by an
      increase of $1,300 in the amount of R&D costs directly related to the
      EGM segment.




67





Fiscal
2007 compared to Fiscal 2006





Year
      EndedOctober
      31,
            
            Increase
            
            Percentage2007
            
            2006
            
            (Decrease)
            
            Change(In
      thousands, except for units and per unit/seat amounts)EGM
      segment revenue:Lease
      revenue
            $     
      33
            
            $     
      —
            
            $
            33
            
            100.0%Sales
            30,955
            
            13,687
            
            17,268
            
            126.2Other
            8,281
            
            7,403
            
            878
            
            11.9Total
      sales and service revenue
            39,236
            
            21,090
            
            18,146
            
            86.0Total
      EGM segment revenue
            $39,269
            
            $21,090
            
            $18,179
            
            86.2EGM
      segment gross profit
            $14,027
            
            $7,225
            
            $ 
      6,802
            
            94.1EGM
      segment gross margin
            35.7%
            
            34.3%EGM
      segment operating income
            $
      7,390
            
            $3,528
            
            $ 
      3,862
            
            109.5EGM
      segment operating margin
            18.8%
            
            16.7%EGM
      installed base:Lease
      seats, end of year
            2
            
            —
            
            2
            
            100.0Sold
      seats, inception-to-dateBeginning
      of year
            16,279
            
            —
            
            16,279
            
            100.0Sold
      during year
            2,714
            
            1,607
            
            1,107
            
            68.9Stargames
      acquired base
            —
            
            14,672
            
            (14,672)
            
            (100.0)Sold
      units, end of year
            18,993
            
            16,279
            
            2,714
            
            16.7Total
      installed base
            18,995
            
            16,279
            
            2,716
            
            16.7%





For fiscal 2007, EGM segment revenue
increased $18,179, or 86.2%, to $39,269 in fiscal 2007 as compared to $21,090
for fiscal 2006, primarily due to an increase of 1,107 in EGM seats sold from
1,607 to 2,714. In addition, fiscal 2007 includes a full year of operating
results related to Stargames as compared to nine months in fiscal
2006.





EGM gross profit increased $6,802, or
94.1%, to $14,027 for fiscal 2007 as compared to $7,225 for fiscal
2006.  EGM gross margin also increased 1.4% to 35.7% for fiscal 2007
as compared to 34.3% for fiscal 2006.  Theses increases in gross
profit and gross margin were a result of the following:





·
            An
      approximate 33.9% increase in EGM average sales price from fiscal 2006,
      improving profit margins on units
sold.





·
            Offset
      by a minimum royalty shortfall related to our arrangement with WMS in the
      amount of $2,900, and a total of $2,800 in inventory write-offs recognized
      at Stargames.





·
            In
      fiscal 2006, EGM gross margins were negatively impacted by the applicable
      portion of a book to physical inventory adjustment of $1,300 related to
      Stargames.





EGM operating income increased
$3,862, or 109.5%, to $7,390 for fiscal 2007 as compared to $3,528 for fiscal
2006.  EGM operating margin also increased 2.1% to 18.8% for fiscal
2007 as compared to 16.7% for fiscal 2006.  These increases in both
operating income and operating margin primarily related to the
following:





·
            The factors
      that contributed to the gross profit and gross margin effects noted
      above.





·
            A
      slight proportionate decrease in the amount of R&D costs directly
      related to the EGM segment.





68





LIQUIDITY
AND CAPITAL RESOURCES


(In
thousands, except ratios and per share amounts)





Our primary historical source of
liquidity and capital resources has been cash on hand, cash from operations and
various forms of debt. We use cash to fund growth in our operating assets,
including inventory, products leased and held for lease and sales-type leases
and to fund new products through both research and development and strategic
acquisitions of businesses and intellectual property.





We have outstanding Notes due in
2024.  The holders of the Notes may require us to repurchase all or a
portion of their Notes on April 15, 2009, 2014 and 2019, at 100% of the
principal amount of the Notes, plus accrued and unpaid interest, if any, up to
but not including the date of repurchase, payable in cash. Upon a change in
control, as defined in the indenture governing the Notes, holders may require us
to repurchase all or a portion of their Notes, payable in cash equal to 100% of
the principal amount of the Notes plus accrued and unpaid interest.





On July 14, 2008, we commenced a Tender
Offer for our Notes.  Pursuant to the Tender Offer, we purchased
$89,350 in aggregate principal amount of our outstanding Notes at 97.25% of the
principal amount thereof plus accrued and unpaid interest.  On
September 29, 2008, we repurchased an additional $20,384 of our Notes in a
separate transaction on the open market. In addition, on December 10, 2008
(subsequent to the end of fiscal 2008), we settled an additional $10,000 of our
Notes in a separate open market transaction.  Accordingly, we
currently have $30,258 of Notes outstanding. We continue to expect that the
remaining noteholders will exercise their repurchase option on April 15,
2009.





We intend to draw on the Revolver
and/or use cash on hand to satisfy the remaining outstanding
Notes.  As of October 31, 2008, we had $16,000 drawn under our
Revolver and approximately $84,000 of available remaining credit under the
Revolver.  Any remaining amount available under the Revolver will be
used to satisfy the remaining outstanding Notes, for working capital, capital
expenditures and general corporate purposes, including share repurchases.
The Revolver will mature on November 30, 2011.





On July 14, 2008, we entered into the
Second Amendment to our Senior Secured Credit Facility.  Among other
things, the Second Amendment provided for a new $65,000 Term Loan and reduced
our incremental facility from $100,000 to $35,000.  The Term Loan was
funded in full on August 25, 2008, resulting in net proceeds of
$63,438.





Our Senior Secured Credit Facility
contains two financial maintenance covenants: a Total Leverage Ratio and an
Interest Expense Coverage Ratio.  Under the facility, we are required
to maintain a Total Leverage Ratio, as defined therein, of not more than 4.25 to
1.0.  Our Total Leverage Ratio as of October 31, 2008 was 2.3 to
1.0.  We are also required to maintain an Interest Coverage Ratio, as
defined therein, in excess of 3.0 to 1.0. Our Interest Coverage Ratio as of
October 31, 2008 was 8.3 to 1.0.





On July 25, 2008, we sold 17,647 shares
of our common stock in a public offering at $4.25 per share, resulting in net
proceeds of $69,974.  In conjunction with the Offering, we granted the
Underwriters an over-allotment option to purchase up to 2,647 shares of our
common stock at $4.25 per share.  On August 1, 2008, the Underwriters
exercised their over-allotment option in full and purchased 2,647 shares,
resulting in net proceeds of $10,479.  As part of the Offering, we
incurred certain fees directly related to the transaction, including, but not
limited to, an underwriting fee, legal fees, independent registered public
accountant fees and printing fees. Total aggregate net proceeds from the
Offering and the exercise of the over-allotment option were $80,453 on 20,294
total shares.





Net proceeds from the Term Loan, the
Offering and the exercise of the Underwriters’ over-allotment option have been
used to repurchase a portion of the Notes as described above and to pay down our
Revolver.


69





Working capital







The following summarizes our cash, cash
equivalents and working capital:





October
      31,
            
            Increase
            
            Percentage2008
            
            2007
            
            (Decrease)
            
            Change(In
      thousands, except ratios)Cash
      and cash equivalents
            $5,374
            
            $ 
      4,392
            
            $       
      982
            
            22.4%Working
      capital
            $7,739
            
            $61,768
            
            $(54,029)
            
            (87.5%)Current
      ratio
            1.1
      : 1
            
            2.6
      : 1
            
            (1.5)
            
            (57.7%)





The decline of our working capital and
current ratio year over year primarily relates to long term debt classifications
to current debt.  This debt is expected to be satisfied through either
cash on hand or a draw on our Revolver, which matures in November
2011.





CASH
FLOWS SUMMARY





Fiscal
2008 compared to Fiscal 2007





Year
      EndedOctober
      31,
            
            Provided
            
            Percentage2008
            
            2007
            
            (Used)
            
            Change(In
      thousands)Operations
            $ 
      44,018
            
            $ 
      33,048
            
            $ 
      10,970
            
            33.2%Investing
            (5,812)
            
            (33,119)
            
            27,307
            
            82.5%Financing
            (37,256)
            
            (3,513)
            
            (33,743)
            
            (960.5%)Effects
      of exchange rate changes on cash
            32
            
            (930)
            
            962
            
            103.4%Net
      Change
            $   
         982
            
            $
      (4,514)
            
            $   
      5,496
            
            121.8%





Capital
expenditures





We expect our capital expenditures to
grow in a proportionate ratio to our revenue and/or mix of revenue, as our
leasing model extends into our more capital-intensive
products.  Significant items included in cash flows related to capital
expenditures are as follows:








Year
      endedOctober
      31,
            
            Provided
            
            Percentage2008
            
            2007
            
            (Used)
            
            Change(In
      thousands)Payments
      for products leased and held for lease
            $(13,670)
            
            $(10,085)
            
            $(3,585)
            
            (35.5%)Purchases
      of property and equipment
            (2,554)
            
            (2,774)
            
            220
            
            7.9%Purchases
      of intangible assets
            (1,202)
            
            (2,397)
            
            1,195
            
            49.9%Total
      capital expenditures
            $(17,426)
            
            $(15,256)
            
            $(2,170)
            
            (14.2%)





Operations





Cash
flows provided by operating activities increased $10,970, or 33.2%, to $44,018
for fiscal 2008 as compared to $33,048 for fiscal 2007, primarily due to the
following:


70


Non-cash
goodwill impairment charge of $22,137 in fiscal 2008 which did not exist in
fiscal 2007.





·
            Reductions
      in inventory of $8,580 in fiscal 2008 as compared to cash used for
      inventory of ($5,803) in fiscal
2007.





·
            Increased
      depreciation and amortization expense of $4,019, or 20.7%, to $23,440 in
      fiscal 2008 as compared to $19,421 in fiscal 2007. This increase is due to
      the acquisition of the PGIC TGD business effective September 28, 2007, in
      addition to our increased leased asset base as a result of our continued
      emphasis on leasing versus selling.





·
            Increase
      of $1,560 due to an impairment and sale of our investment in
      Sona.





·
            Offset
      by a gain on the early extinguishment of our Notes of $1,773 for fiscal
      2008 as compared to $0 in fiscal
2007.





·
            Offset
      by a gain on the sale of our fractional ownership corporate airplane of
      $738 for fiscal 2008 as compared to $0 in fiscal 2007. See SG&A
      discussion in “Item 7. Management’s Discussion and Analysis of Financial
      Condition and Results of Operations” for more
  information.





·
            Offset
      by a gain on sale of leased assets of $7,238 for fiscal 2008 as compared
      to $2,511 in fiscal 2007.





We experienced reductions in our
inventory balances as a result of a formal emphasis on inventory management,
improved forecasting and strong revenue performance. Our goal is to reduce
manufacturing costs across all of our product lines. We expect to reduce the
cost of manufacturing through cost savings initiatives. While these initiatives
are in place, they did not impact our results of operations, financial position,
or cash flows until the end of fiscal 2008 and will continue to impact future
periods. The result of our formal emphasis on inventory management was first
demonstrated in our first quarter of fiscal 2008 and has continued in future
periods. Our general inventory reduction plan includes the following key
components: the addition of operations personnel in certain facilities, improved
forecasting resulting in better demand planning and specific inventory reduction
goals for operations personnel.




Investing





Cash flows used by investing activities
decreased $27,307, or 82.5%, to ($5,812) for fiscal 2008 as compared to
($33,119) in fiscal 2007 primarily due to the following:





·
            Proceeds
      received from the sale of our fractional ownership in a corporate airplane
      of approximately $1,309.





·
            Proceeds
      received from the sale of leased assets of $9,247 in fiscal 2008 as
      compared to $4,070 in fiscal 2007.





·
            Decrease
      in cash used in business acquisitions of $21,946, or 100%, to $0 for
      fiscal 2008 as compared to $21,946 in fiscal 2007. The prior year amounts
      relate to our acquisition of the PGIC TGD.  See Note 2 in “Item
      8. Financial Statements and Supplementary Data” included in this Form 10-K
      for more information.





·
            Offset
      by an increase in payments for products leased and held for lease of
      $3,585, or 35.5%, to ($13,670) for fiscal 2008 as compared to ($10,085) in
      fiscal 2007. Consistent with our strategy of leasing versus selling, we
      expect this trend to continue.




Financing





Cash flows used by financing activities
increased $33,743, or 960.5%, to ($37,256) for fiscal 2008, as compared to
($3,513) in fiscal 2007 primarily due to the following:





·
            Increase
      in debt payments of $113,444, or 122.8%, to ($205,823) for fiscal 2008 as
      compared to ($92,379) in fiscal 2007. For fiscal 2008, debt payments
      related to our Notes and Revolver.  For fiscal 2007, the debt
      payments primarily included payments made on our Old Credit
      Agreement.





·
            Increase
      in repurchases of our common stock of $5,192, or 268.6%, to ($7,125) for
      fiscal 2008 as compared to ($1,933) for fiscal
  2007.





·
            Offset
      by cash received from the Offering, which resulted in total net proceeds
      of $80,453.  See Note 2 in “Item 8. Financial Statements and
      Supplementary Data” included in this Form 10-K for more
      information.




71





Fiscal
2007 compared to Fiscal 2006










Year
      EndedOctober
      31,
            
            Provided
            
            Percentage2007
            
            2006
            
            (Used)
            
            Change(In
      thousands)Operations
            $ 
      33,048
            
            $   
      34,021
            
            $   
      (973)
            
            (2.9%)Investing
            (33,119)
            
            (104,142)
            
            71,023
            
            68.2%Financing
            (3,513)
            
            65,923
            
            (69,436)
            
            (105.3%)Effects
      of exchange rates
            (930)
            
            (175)
            
            (755)
            
            (431.4%)Net
      Change
            $ 
      (4,514)
            
            $   (4,373)
            
            $   
      (141)
            
            (3.2%)





Capital
expenditures





We expect our capital expenditures to
grow in a proportionate ratio to our revenue and/or mix of revenue, as our
leasing model extends into our more capital-intensive
products.  Significant items included in cash flows related to capital
expenditures are as follows:








Year
      endedOctober
      31,
            
            Provided
            
            Percentage2007
            
            2006
            
            (Used)
            
            Change(In
      thousands)Payments
      for products leased and held for lease
            $(10,085)
            
            $ 
      (9,167)
            
            $(918)
            
            (10.0%)Purchases
      of property and equipment
            (2,774)
            
            (2,196)
            
            (578)
            
            (26.3%)Purchases
      of intangible assets
            (2,397)
            
            (4,313)
            
            1,916
            
            44.4%Total
      capital expenditures
            $(15,256)
            
            $(15,676)
            
            $ 
      420
            
            2.7%





Operations





Cash flows provided by operating
activities decreased $973, or 2.9%, to $33,048 for fiscal 2007 as compared to
$34,021 for fiscal 2006, primarily due to the following:





·
            A
      decrease in non-cash items of $11,613, or 30.2%, to $26,875 for fiscal
      2007 as compared to $38,488 for fiscal 2006, substantially due to the
      impact of the one-time IPR&D charge that occurred during fiscal 2006,
      in relation to the Stargames acquisition. Non-cash items are
      comprised of depreciation and amortization, amortization of debt issuance
      costs, share based compensation expense, provision for bad debts,
      write-down for inventory obsolescence and equity method investment
      loss.





·
            A
      decrease in income tax related items of $8,333, or 255.1%, to ($11,599)
      for fiscal 2007 as compared to ($3,266) for fiscal 2006.  Income
      tax related items include prepaid income taxes, deferred income taxes, tax
      benefit from stock option exercises, income taxes, net of stock option
      exercise, and are net of excess tax benefit from stock option
      exercises.





·
            An
      increase in sales-type leases and notes receivable of $9,260, or 376.6%,
      to $6,801 for fiscal 2007 as compared to ($2,459) for fiscal
      2006.  We have historically utilized sales-type leases and notes
      receivable as a means to provide financing alternatives to our customers
      for certain of our products. It was our intent to continue offering a
      variety of financing alternatives, predominantly operating leases and
      secondarily sales, sales-type leases and notes receivable, to meet our
      customers’ product financing needs, which may vary from year to year and
      even quarter to quarter.  However, as we shifted more towards a
      leasing versus selling model, predominantly in the United States, we
      also significantly increased the interest rates on new sales-type leases
      and notes receivables.





·
            Other
      changes in operating assets and liabilities primarily consisted of net
      changes in accounts receivable,


72


·
            inventories,
      accounts payable, accrued liabilities and customer deposits and deferred
      revenue. The increase in inventories is related to our EGMs and e-Tables
      as compared to our traditional shufflers and live proprietary table games.
      The increase in raw materials inventory is related to the rollout of our
      i-Deal shuffler and component parts related to our next generation PC4
      platform.





Investing





Cash flows used by investing activities
decreased $71,023, or 68.2%, to ($33,119) for fiscal 2007 as compared to
($104,142) in fiscal 2006 primarily due to the following:





·
            A
      decrease in cash used by business acquisitions of $92,662, or 80.9%, to
      ($21,946) for fiscal 2007 as compared to ($114,608) for fiscal
      2006.  In fiscal 2007, business acquisitions included PGIC TGD
      and Stargames.  In fiscal 2006, business acquisitions included
      Stargames.





Financing





Cash flows used by financing activities
increased $69,436, or 105.3%, to ($3,513) for fiscal 2007, as compared to
$65,923 in fiscal 2006 primarily due to the following:




·
            An
      increase in debt repayments of $36,812, or 66.2%, to ($92,379) for fiscal
      2007 as compared to ($55,567).  Debt repayments for fiscal 2007
      included payments on the Old Credit Agreement, our Revolver and our
      Notes.  Debt repayments for fiscal 2006 included payments on the
      Old Credit Agreement and our Notes.




·
            A
      decrease in debt proceeds of $30,715, or 25.9%, to $87,884 for fiscal 2007
      as compared to $118,599 for fiscal 2006.  Debt proceeds for
      fiscal 2007 primarily related to our Revolver and debt proceeds for fiscal
      2006 primarily related to our
Notes.




73


CONTRACTUAL
OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS




Contractual
Obligations.  The following table summarizes our current and
long-term liabilities, material obligations and commitments to make future
payments under certain contracts, including current and long-term debt
obligations, purchase commitments and operating leases.





Less
      than
            
            1
      - 3
            
            3
      - 5
            
            More
      thanTotal
            
            1
      Year
            
            Years
            
            Years
            
            5
      Years(In
      thousands)Contractual
      obligations:DebtTerm
      Loan (1)
            
            $ 
      65,000
            
            $    
      650
            
            $64,350
            
            $    
      —
            
            $    
      —Interest
      on the Term Loan (2)
            6,094
            
            2,925
            
            3,169
            
            —
            
            —Contingent
      convertible senior notes (the "Notes") (3)
            40,258
            
            40,258
            
            —
            
            —
            
            —Interest
      on the Notes (4)
            
            251
            
            251
            
            —
            
            —
            
            —Senior
      secured revolving credit facility (the "Revolver") (5)
            16,000
            
            —
            
            16,000
            
            —
            
            —Interest
      on the Revolver (6)
            2,150
            
            1,032
            
            1,118
            
            —
            
            —PGIC
      TGD contingent consideration, including imputed interest
    (7)
            2,444
            
            845
            
            1,415
            
            184
            
            —BTI
      acquisition contingent consideration (8)
            527
            
            —
            
            —
            
            —
            
            527Kings
      Gaming Inc. contingent consideration, including imputed interest
      (9)
            508
            
            —
            
            508
            
            —
            
            —Magnum
      Gaming (Bet the Set "21") (10)
            412
            
            —
            
            —
            
            —
            
            412OtherPurchase
      commitments (11)
            10,805
            
            10,805
            
            —
            
            —
            
            —Operating
      leases (12)
            
            8,281
            
            2,080
            
            3,268
            
            2,574
            
            359FIN
      48 tax liability (13)
            
            1,739
            
            —
            
            —
            
            —
            
            —Other
      (14)
            
            944
            
            172
            
            151
            
            170
            
            451Total
      contractual obligations
            $155,413
            
            $59,018
            
            $89,979
            
            $2,928
            
            $1,749





(1)
            Represents
      the outstanding amount on our $65,000 Term Loan, entered into on July 14,
      2008, in connection with the Second Amendment to our Senior Secured Credit
      Facility.  The Term Loan matures on November 30,
      2011.





(2)
            Represents
      interest on the outstanding balance of the Term
  Loan.





(3)
            Represents
      the remaining Notes that were not purchased as part of our Tender
      Offer for the Notes, expected to be put back to us by the holders on April
      15, 2009.





(4)
            Represents
      interest on the remaining Notes.





(5)
            Represents
      the amount on our $100,000 Revolver as of October 31, 2008.  The
      Revolver matures on November 30,
2011.





(6)
            Represents
      interest on the outstanding balance, as of October 31, 2008, on the
      Revolver assuming no changes to such
balance.





(7)
            Represents
      minimum consideration in connection with our acquisition of PGIC’s
      worldwide table game division.





(8)
            Represents
      contingent installment payments in connection with our acquisition of Bet
      Technology, Inc. (“BTI”), which were computed as the excess fair value of
      the acquired assets over the fixed installments and other direct
      costs.





(9)
            Represents
      contingent interest payments in connection with our purchase of the Play
      Four Poker patent and trademark
      from Kings
Gaming Inc.


74




(10)
            Represents
      contingent consideration in connection with our acquisition of Bet the Set
      "21".





(11)
            Represents
      short-term open purchase orders with our
  vendors.





(12)
            Represents
      operating lease agreements for our Las Vegas headquarters, Stargames
      facilities and other field service
facilities.





(13)
            Represents
      the total unrecognized tax benefits under FIN 48.  We are unable
      to determine the unrecognized tax benefits due each
  year.





(14)
            Represents
      other current and long term
liabilities.





Off-Balance Sheet
Arrangements. We do not have any material off-balance sheet
arrangements with unconsolidated entities or other persons.





Impact of
Inflation. To date, inflation has not had a material effect on our
operations.


75





SELECTED
QUARTERLY FINANCIAL DATA








Quarter
      EndedJanuary
      31,
            
            April
      30,
            
            July
      31,
            
            October
      31,(In
      thousands, except per share amounts)2008:Revenue
            
            
            $37,897
            
            $49,003
            
            $49,492
            
            $53,614Gross
      profit
            
            
            21,846
            
            29,190
            
            29,131
            
            30,735Income
      (Loss) from continuing operations
            (1,803)
            
            3,049
            
            2,998
            
            (15,046)Net
      income (loss)
            
            
            (1,803)
            
            3,048
            
            2,998
            
            (15,046)Earnings
      (Loss) per share - continuing operations:Earnings
      (Loss) per share, basic (a)
            (0.05)
            
            0.09
            
            0.08
            
            (0.28)Earnings
      (Loss)  per share, diluted(a)
            (0.05)
            
            0.09
            
            0.08
            
            (0.28)2007:Revenue
            
            
            $37,341
            
            $44,644
            
            $45,135
            
            $51,731Gross
      profit
            
            
            23,173
            
            26,675
            
            25,913
            
            28,104Income
      from continuing operations
            1,951
            
            3,427
            
            2,736
            
            8,187Net
      income
            
            
            2,025
            
            3,440
            
            2,735
            
            8,179Earnings
      per share - continuing operations:Earnings
      per share, basic
            
            
            0.06
            
            0.10
            
            0.08
            
            0.24Earnings
      per share, diluted
            
            
            0.05
            
            0.10
            
            0.08
            
            0.23





(a)
Due to the effect of the equity offering of 20,294 common shares in July 2008,
the earnings (loss) per share calculation by quarter does not sum to our total
annual earnings per share reported in our Consolidated Statements of Income in
“Item 8. Financial Statements and Supplementary Data” included in this
Form 10-K due to the weighting of those shares for each period
presented.


76








ITEM
7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK


(In
thousands)





We are exposed to market risks, which
arise during the normal course of business from changes in interest rates and
foreign exchange rates. A discussion of our primary market risks is presented
below.





Contingent
convertible senior notes. We
estimate that the fair value of our Notes, as of October 31, 2008, was $39,050.
The fair value of our Notes is sensitive to changes in both our stock and
interest rates. Assuming our stock price is held constant, we estimate a 10%
increase in interest rates would decrease the fair value of our Notes by
$12. Assuming interest rates are held constant, we estimate a 10% decrease
in our stock price would have no effect on the fair value of our Notes as the
market value of our stock is significantly below the conversion
price.  These changes would have no impact on interest expense as the
Note bears a fixed interest rate.





Interest rate
risk.  As of October 31,
2008, we had approximately $81,000 of variable rate debt. Assuming a 1% change
in the average interest rate as of October 31, 2008, our annual interest cost
would change by approximately $810.





Foreign currency
risk.  We are exposed to foreign currency exchange rate risk
inherent in our leases and sales commitments, anticipated leases and sales,
anticipated purchases, and assets, liabilities and debt denominated in
currencies other than the U.S. dollar. We transact business in numerous
countries around the world using numerous currencies, of which the most
significant to our operations for the fiscal years ended 2008, 2007 and 2006,
were the Australian dollar and the Euro.  We net settle inter-company
trade balances, which results in the recognition of foreign currency
fluctuations pursuant to SFAS No. 52, “Foreign Currency
Translation”.  We expect that a significant portion of the
volume of our business will continue to be denominated in foreign currencies. As
such, we expect our cash flows and earnings to continue to be exposed to the
risks that may arise from fluctuations in foreign currency exchange
rates.


77


ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





INDEX
TO CONSOLIDATED FINANCIAL
STATEMENTS





PageReport of Independent Registered Public Accounting
      Firm
            
            
            79Consolidated Statements
      of Operations for the years ended October 31, 2008, 2007 and
      2006
            
            
            80Consolidated Balance
      Sheets as of October 31, 2008 and 2007
            
            
            81Consolidated Statements of Changes in
      Shareholders’ Equity for the years ended October 31, 2008, 2007 and
      2006
            
            
            82Consolidated Statements of Cash Flows for
      the years ended October 31, 2008, 2007 and 2006
            
            
            83Notes to consolidated
      financial statements
            
            
            85Financial Statement Schedule II—Valuation and
      Qualifying Accounts for the years ended October 31, 2008, 2007 and
      2006
            
            
            122


78







REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM







To the
Board of Directors and Stockholders of


Shuffle
Master, Inc.


Las
Vegas, Nevada







We have
audited the accompanying consolidated balance sheets of Shuffle Master, Inc. and
subsidiaries (the "Company") as of October 31, 2008 and 2007, and the related
consolidated statements of operation, shareholders' equity, and cash flows for
each of the three years in the period ended October 31, 2008.  Our
audits also included financial statement Schedule II – Valuation and Qualifying
Accounts for each of the three years in the period ended October 31,
2008.  These financial statements and financial statement schedule are
the responsibility of the Company's management.  Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement.  An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the 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 and subsidiaries as of
October 31, 2008 and 2007, and the results of their operations and their cash
flows for each of the three years in the period ended October 31, 2008, in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.




As
discussed in Note 13 to the consolidated financial statements, the Company
adopted the provisions of Financial Accounting Standards Board Interpretation
No. 48, Accounting for
Uncertainty in Income Taxes – an interpretation of FASB Statement No.
109, on November 1, 2007.




We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company's internal control over financial
reporting as of October 31, 2008, based on the criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated January 14, 2009 expressed an adverse
opinion on the Company's internal control over financial reporting because of a
material weakness.







/s/
Deloitte & Touche LLP











Las
Vegas, Nevada




January
14, 2009










79





SHUFFLE
MASTER, INC.


CONSOLIDATED
STATEMENTS OF OPERATION









Year
      Ended October 31,2008
            
            2007
            
            2006(In
      thousands, except per share amountsRevenue:Product
      leases and royalties
            $ 
      70,898
            
            $
      56,426
            
            $
      49,551Product
      sales and service
            118,948
            
            122,315
            
            113,202Other
            160
            
            110
            
            238Total
      revenue
            190,006
            
            178,851
            
            162,991Costs
      and expenses:Cost
      of leases and royalties
            21,866
            
            17,221
            
            11,794Cost
      of sales and service
            57,238
            
            57,764
            
            44,927Gross
      profit
            110,902
            
            103,866
            
            106,270Selling,
      general and administrative
            71,350
            
            61,947
            
            51,299Research
      and development
            18,474
            
            17,337
            
            12,910Impairment
      of goodwill
            22,137
            
            —
            
            —Gain
      on sale of patent
            —
            
            —
            
            (4,566)Acquired
      in-process research and development
            —
            
            —
            
            19,145Total
      costs and expenses
            191,065
            
            154,269
            
            135,509Income
      (Loss)  from operations
            (1,059)
            
            24,582
            
            27,482Other
      expense:Interest
      income
            1,759
            
            1,644
            
            1,998Interest
      expense
            (6,630)
            
            (7,487)
            
            (6,863)Other,
      net
            1,261
            
            (4,131)
            
            (1,834)Total
      other expense
            (3,610)
            
            (9,974)
            
            (6,699)Gain
      on early extinguishment of debt
            1,773
            
            —
            
            —Impairment
      of investment
            (1,560)
            
            —
            
            (1,655)Equity
      method investment loss
            —
            
            (306)
            
            (416)Income
      (Loss) from continuing operations before tax
            (4,456)
            
            14,302
            
            18,712Income
      tax provision (benefit)
            6,346
            
            (1,999)
            
            13,373Income
      (Loss) from continuing operations
            (10,802)
            
            16,301
            
            5,339Discontinued
      operations, net of tax
            (1)
            
            78
            
            (246)Net
      income (loss)
            $(10,803)
            
            $
      16,379
            
            $  
      5,093Basic
      earnings  (loss)  per share:Continuing
      operations
            $  
      (0.27)
            
            $    
      0.47
            
            $    
      0.15Discontinued
      operations
            —
            
            —
            
            —Net
      income (loss)
            $  
      (0.27)
            
            $     0.47
            
            $    
      0.15Diluted
      earnings (loss)  per share:Continuing
      operations
            $  
      (0.27)
            
            $    
      0.46
            
            $    
      0.15Discontinued
      operations
            —
            
            —
            
            (0.01)Net
      income (loss)
            $  
      (0.27)
            
            $    
      0.46
            
            $    
      0.14Weighted
      average shares outstanding:Basic
            40,006
            
            34,680
            
            34,585Diluted
            40,006
            
            35,276
            
            36,052





See notes
to consolidated financial statements





80





SHUFFLE
MASTER, INC.


CONSOLIDATED
BALANCE SHEETS









October
      31,2008
            
            2007(In
      thousands, except per share amounts)ASSETSCurrent
      assets:Cash
      and cash equivalents
            $   
      5,374
            
            $   
      4,392Accounts
      receivable, net of allowance for bad debts of $584 and
$476
            28,915
            
            35,045Investment
      in sales-type leases and notes receivable, net of
allowance
            5,655
            
            9,092for
      bad debts of $202 and $236Inventories
            22,753
            
            34,081Prepaid
      income taxes
            7,459
            
            4,110Deferred
      income taxes
            5,318
            
            7,959Other
      current assets
            4,925
            
            5,286Total
      current assets
            80,399
            
            99,965Investment
      in sales-type leases and notes receivable, net of current
      portion
            1,961
            
            6,124Products
      leased and held for lease, net
            21,054
            
            15,886Property
      and equipment, net
            9,143
            
            11,242Intangible
      assets, net
            66,153
            
            91,343Goodwill
            60,929
            
            105,354Deferred
      income taxes
            10,013
            
            14,476Other
      assets
            12,294
            
            15,377Total
      assets
            $261,946
            
            $359,767LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
            $ 
      10,645
            
            $ 
      11,548Accrued
      liabilities
            13,269
            
            15,015Customer
      deposits
            2,211
            
            2,213Deferred
      revenue
            4,610
            
            5,489Current
      portion of long-term debt and other current liabilities
            41,925
            
            3,932Total
      current liabilities
            72,660
            
            38,197Long-term
      debt, net of current portion
            83,396
            
            231,339Other
      long-term liabilities
            2,659
            
            1,359Deferred
      income taxes
            373
            
            1,238Total
      liabilities
            159,088
            
            272,133Commitments
      and Contingencies (See Note 15)Shareholders'
      equity:Common
      stock, $0.01 par value; 151,368 shares authorized; 53,535
    and35,198
      shares issued and outstanding
            535
            
            352Additional
      paid-in capital
            83,710
            
            6,492Retained
      earnings
            26,823
            
            38,770Accumulated
      other comprehensive income (loss)
            (8,210)
            
            42,020Total
      shareholders' equity
            102,858
            
            87,634Total
      liabilities and shareholders' equity
            $261,946
            
            $359,767





See notes
to consolidated financial statements


81





SHUFFLE
MASTER, INC.


CONSOLIDATED
STATEMENTS CHANGES IN SHAREHOLDERS’ EQUITY





Accumulated
            
            TotalAdditional
            
            Deferred
            
            
            
            Other
            
            Share-Common
      Stock
            
            Paid-in
            
            Compen-
            
            Retained
            
            Comprehensive
            
            holders'Shares
            
            Amount
            
            Capital
            
            sation
            
            Earnings
            
            Income
      (loss)
            
            Equity(In
      thousands)Balance,
      November 1, 2005
            34,527
            
            $ 345
            
            $     
       —
            
            $ (5,788)
            
            $ 17,298
            
            $ 1,545
            
            $ 13,400Comprehensive
      Income:Net
      Income
            —
            
            —
            
            —
            
            —
            
            5,093
            
            —
            
            5,093Currency
      translation
            —
            
            —
            
            —
            
            —
            
            —
            
            7,382
            
            7,382Reclassification
      of loss on investments
            —
            
            —
            
            —
            
            —
            
            —
            
            165
            
            165Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            12,640Reclass
      deferred compensation to APIC
            —
            
            —
            
            (5,788)
            
            5,788
            
            —
            
            —
            
            —Stock
      repurchased
            (317)
            
            (3)
            
            (8,662)
            
            —
            
            —
            
            —
            
            (8,665)Options
      exercised
            697
            
            7
            
            7,867
            
            —
            
            —
            
            —
            
            7,874Shares
      surrendered and retired for stock option exercises
            (76)
            
            (1)
            
            (2,119)
            
            —
            
            —
            
            —
            
            (2,120)Share-based
      compensation expense
            —
            
            —
            
            5,512
            
            —
            
            —
            
            —
            
            5,512Tax
      benefit from stock option exercises
            —
            
            —
            
            3,908
            
            —
            
            —
            
            —
            
            3,908Issuance
      of restricted stock
            64
            
            1
            
            (1)
            
            —
            
            —
            
            —
            
            —Balance,
      October 31, 2006
            34,895
            
            349
            
            717
            
            —
            
            22,391
            
            9,092
            
            $32,549Comprehensive
      Income:Net
      Income
            —
            
            —
            
            —
            
            —
            
            16,379
            
            
            
            16,379Currency
      translation
            —
            
            —
            
            —
            
            —
            
            —
            
            32,850
            
            32,850Reclassification
      of loss on investments
            —
            
            —
            
            —
            
            —
            
            —
            
            78
            
            78Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            49,307Stock
      repurchased
            (77)
            
            (1)
            
            (1,962)
            
            —
            
            —
            
            —
            
            (1,963)Options
      exercised
            229
            
            3
            
            2,544
            
            —
            
            —
            
            —
            
            2,547Shares
      surrendered and retired for stock option exercises
            (76)
            
            (1)
            
            (750)
            
            —
            
            —
            
            —
            
            (751)Share-based
      compensation expense
            —
            
            —
            
            4,812
            
            —
            
            —
            
            —
            
            4,812Tax
      benefit from stock option exercises
            —
            
            —
            
            1,133
            
            —
            
            —
            
            —
            
            1,133Issuance
      of restricted stock
            227
            
            2
            
            (2)
            
            —
            
            —
            
            —
            
            —Balance,
      October 31, 2007
            35,198
            
            352
            
            6,492
            
            —
            
            38,770
            
            42,020
            
            $87,634Comprehensive
      Income:Net
      Income (loss)
            —
            
            —
            
            —
            
            —
            
            (10,803)
            
            —
            
            (10,803)Currency
      translation
            —
            
            —
            
            —
            
            —
            
            —
            
            (50,152)
            
            (50,152)Reclassification
      of loss on investments
            —
            
            —
            
            —
            
            —
            
            —
            
            (123)
            
            (123)Tax
      on unrealized loss on investments
            
            
            
            
            
            
            
            
            
            
            45
            
            45Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            (61,033)Stock
      issued
            20,294
            
            202
            
            80,250
            
            —
            
            —
            
            —
            
            80,452Stock
      repurchased
            (2,000)
            
            (20)
            
            (7,105)
            
            —
            
            —
            
            —
            
            (7,125)Shares
      surrendered and retired for stock option exercises
            (16)
            
            —
            
            —
            
            —
            
            —
            
            —
            
            —Share-based
      compensation expense
            —
            
            —
            
            4,189
            
            —
            
            —
            
            —
            
            4,189Tax
      effect from stock option exercises
            —
            
            —
            
            (115)
            
            —
            
            —
            
            —
            
            (115)FIN
      48 Adoption
            —
            
            —
            
            —
            
            —
            
            (1,144)
            
            —
            
            (1,144)Issuance
      of restricted stock
            59
            
            1
            
            (1)
            
            
            
            
            
            
            
            —Balance,
      October 31, 2008
            53,535
            
            $535
            
            $83,710
            
            $—
            
            $26,823
            
            $(8,210)
            
            $102,858








See notes
to consolidated financial statements


82


SHUFFLE
MASTER, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS




Year
      Ended October 31,2008
            
            2007
            
            2006(In
      thousands)Cash
      flows from operating activities:Net
      income (loss)
            $(10,803)
            
            $ 
      16,379
            
            $     
      5,093Adjustments
      to reconcile net income to cash provided by operating
      activities:Depreciation
      and amortization
            23,440
            
            19,421
            
            16,662Amortization
      of debt issuance costs
            1,339
            
            1,327
            
            1,511Gain
      on early extinguishment of debt
            (1,773)
            
            —
            
            —Share-based
      compensation
            4,189
            
            4,812
            
            5,512Acquired
      in-process research and development
            —
            
            —
            
            19,145Gain
      on patent sale
            —
            
            —
            
            (4,566)Equity
      method investment loss
            —
            
            306
            
            416Impairment
      of investment
            1,560
            
            —
            
            1,655Impairment
      of goodwill
            22,137
            
            —
            
            —Provision
      for bad debts
            92
            
            (406)
            
            (537)Write-down
      for inventory obsolescence
            72
            
            1,415
            
            345Gain
      on sale of assets
            (738)
            
            —
            
            —Gain
      on sale of leased assets
            (7,238)
            
            (2,511)
            
            —Excess
      tax benefit from stock option exercises
            —
            
            (854)
            
            (3,682)Tax
      benefit from stock option exercises
            —
            
            279
            
            226Changes
      in operating assets and liabilities:
            —Accounts
      receivable
            2,256
            
            1,245
            
            (2,407)Investment
      in sales-type leases and notes receivable
            7,597
            
            6,801
            
            (2,459)Inventories
            8,580
            
            (5,803)
            
            (4,033)Accounts
      payable and accrued liabilities
            (5,639)
            
            5,505
            
            (2,434)Customer
      deposits and deferred revenue
            (1,411)
            
            (232)
            
            3,382Income
      taxes, net of stock option exercises
            (9)
            
            (20)
            
            —Deferred
      income taxes
            2,893
            
            (8,315)
            
            (3,042)Prepaid
      income taxes
            (3,937)
            
            (2,690)
            
            3,232Other
            
            1,411
            
            (3,611)
            
            2Net
      cash provided by operating activities
            44,018
            
            33,048
            
            34,021Cash
      flows from investing activities:Proceeds
      from sale and maturities of investments
            65
            
            13
            
            49,232Proceeds
      from sale of assets
            2,302
            
            —
            
            —Proceeds
      from sale of leased assets
            9,247
            
            4,070
            
            1,845Proceeds
      from sale of patent, net
            —
            
            —
            
            7,500Purchases
      of investments
            —
            
            —
            
            (32,435)Payments
      for products leased and held for lease
            (13,670)
            
            (10,085)
            
            (9,167)Purchases
      of property and equipment
            (2,554)
            
            (2,774)
            
            (2,196)Purchases
      of intangible assets
            (1,202)
            
            (2,397)
            
            (4,313)Acquisition
      of businesses, net of cash acquired
            —
            
            (21,946)
            
            (114,608)Net
      cash used by investing activities
            (5,812)
            
            (33,119)
            
            (104,142)Cash
      flows from financing activities:Debt
      proceeds
            97,500
            
            89,606
            
            119,153Debt
      repayments
            (205,823)
            
            (92,379)
            
            (55,567)Debt
      issuance costs
            (2,261)
            
            (1,722)
            
            (554)Proceeds
      from issuances of common stock, net
            80,453
            
            2,061
            
            7,874Repurchases
      of common stock
            (7,125)
            
            (1,933)
            
            (8,665)Excess
      tax benefit from stock option exercises
            —
            
            854
            
            3,682Net
      cash (used) provided by financing activities
            (37,256)
            
            (3,513)
            
            65,923Effect
      of exchange rate changes on cash
            32
            
            (930)
            
            (175)Net
      increase (decrease) in cash and cash equivalents
            982
            
            (4,514)
            
            (4,373)Cash
      and cash equivalents, beginning of year
            4,392
            
            8,906
            
            13,279Cash
      and cash equivalents, end of year
            $    
      5,374
            
            $    
      4,392
            
            $     
      8,906





See notes
to the consolidated financial statements


83





SHUFFLE
MASTER, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS





Supplemental Disclosures of Cash Flows
Information—










Year
      Ended October 31,2008
            
            2007
            
            2006(In
      thousands)Non-cash
      Investing and Financing transactions:Accrued
      direct acquisition costs related to acquisitions
            $—
            
            $ 
      792
            
            $ 
      1,750Note
      payable and contingent consideration issued inconnection
      with the acquisition of a business or assets
            —
            
            2,922
            
            —Issuance
      of restricted stock
            686
            
            5,773
            
            2,113Non-cash
      prepaid royalty
            —
            
            1,750
            
            —Cash
      paid for:Income
      taxes, net of refunds
            $6,007
            
            $8,475
            
            $11,033Interest
            
            6,815
            
            5,844
            
            5,559







See notes
to consolidated financial statements


84


SHUFFLE
MASTER, INC.





Notes
to Consolidated Financial Statements


(In
thousands, except per share amounts)




1.
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES





Description of
business.  Unless the context indicates otherwise, references
to “Shuffle Master, Inc.”, “we”, “us”, “our”, or the “Company”, includes
Shuffle Master, Inc. and its consolidated subsidiaries.





We develop, manufacture and market
technology and entertainment-based products for the gaming industry for
placement on the casino floor. Our products primarily relate to our casino
customers’ table game activities and focus on either increasing their
profitability, productivity and security or expanding their gaming entertainment
offerings. Our business is segregated into the following four operating
segments: Utility, Proprietary Table Games (“PTG”), Electronic Table Systems
(“ETS”), and Electronic Gaming Machines (“EGM”).





Utility.  Our
Utility segment develops products for our casino customers that enhance table
game speed, productivity, profitability and security. Utility products include
automatic card shufflers and roulette chip sorters. Additionally, we have
acquired or are developing products, such as our i-Shoe AutoTM card reading shoe,
that gather data and enable casinos to track table game play and our i-ScoreTM
baccarat viewer that displays current game results and trends. These products
are intended to cost-effectively provide casinos and our other customers with
data on table game play for security and marketing purposes, which in turn
allows them to increase their profitability.





We plan to develop and market shufflers
with advanced features and capabilities to replace our older generation
shufflers over time, while at the same time, increasing the penetration of our
shufflers in the marketplace. Our current shuffler product portfolio consists of
seven distinct models, including both second and third generation shufflers, in
the categories of single deck, multi-deck batch and multi-deck continuous card
shufflers.





Proprietary Table
Games.Our
PTG segment develops and delivers proprietary table games that enhance our
casino customers' and other licensed operators' table game operations. Products
in this segment include our proprietary table games as well as proprietary
features added to public domain games such as poker, baccarat, pai gow poker,
and blackjack table games.





We intend to broaden our PTG content
through development and acquisition. By enhancing the value of our existing
installed base with add-on features and capabilities and increasing our presence
with new titles, we hope to increase our domestic market penetration and expand
further into international markets. We have also begun to install proprietary
progressives and side bets on public domain table games as well as on our
proprietary table games. Additionally, to maximize the reach of our broad
intellectual property portfolio, we have licensed several of our popular
proprietary table game titles to a variety of other companies including Delta
Rangers, Inc. Delta Rangers' Malta-based subsidiary, Guardian Gaming, operates
Shuffle Master Live!, a play for fun and, where legal, play for real internet
gaming site that offers several Shuffle Master proprietary titles as well as a
wide range of public domain content in jurisdictions where internet gaming is
legal. Internet gaming is not legal in the United States. Guardian Gaming
launched Shuffle Master Live! in November 2007.





Electronic Table
Systems.Our ETS segment
develops and delivers various products involving popular table game content
using e-Table game platforms. Our primary ETS products are the i-TableTM, Table
MasterTM, Vegas Star®, and Rapid Table GamesTM.  Our i-Table platform
combines an electronic betting interface with a live dealer who deals the cards
from a Shuffle Master card reading shoe or shuffler to dramatically improve game
speed and security while reducing many operating expenses associated with live
tables. Our Table Master and Vegas Star feature a virtual dealer which enables
us to offer table game content in markets where live table games are not
permitted, such as racinos, video lottery and arcade markets. Our Rapid Table
GamesTM product enables the automation of certain components of traditional table
games such as data collection, placement of bets, collection of losing bets and
payment of winning bets combined with live dealer and game outcomes. This
automation provides benefits to both casino operators and players, including
greater security and faster speed of play.





Electronic Gaming
Machines.  Our EGM segment develops and delivers our PC-based
video slot machines into select markets, primarily in
Australasia.  Through our Australian subsidiary, Stargames Limited
(“Stargames”), we offer an extensive selection of video slot titles which
include a range of bonus round options that can be configured as a network of
machines or as stand-alone units. In addition to selling the full EGM
complement, we sell software conversion kits that allow existing EGM terminals
to be converted to other games on the PC3 and PC4 platform. Popular titles for
our EGMs include


85


Drifting
Sands 3, Ninja 3, The Pink Panther series of linked games (iChing, Kelly
Country, Deep Sea Dollars, Cuba, Galapagos Wild, Sunset on the Serengeti and
Lonesome George), and the new Grand Central progressive link.





We lease, license and sell our
products. When we lease or license our products, we generally negotiate a
month-to-month operating lease. When we sell our products, we offer our
customers a choice between a sale, a longer-term sales-type lease or other
long-term financing. We offer our products worldwide in markets that are highly
regulated. We manufacture our products at our headquarters and manufacturing
facility in Las Vegas, Nevada, as well as at our headquarters and manufacturing
facility in Milperra, New South Wales, Australia. In addition, we outsource the
manufacturing of certain of our sub-assemblies in the United States, Europe and
Australasia.





Principles of
consolidation. Our consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC") and in accordance with accounting principles generally
accepted in the United States ("GAAP") and include all adjustments necessary to
fairly present our consolidated results of operations, financial position and
cash flows for each period presented.





Our consolidated financial statements
include the accounts of Shuffle Master, Inc. and our wholly-owned domestic
and foreign subsidiaries. All inter-company accounts and transactions have been
eliminated. We have no unconsolidated subsidiaries.





Use ofestimates andassumptions. The
preparation of our consolidated financial statements in conformity with
Generally Accepted Accounting Principles (“GAAP”) requires the use of estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenues and expenses during
the reporting periods. Significant estimates and assumptions are used for, but
not limited to: (1) The subjective and complex judgments for revenue recognition
typically involve whether collectibility is probable, whether fees under an
arrangement are fixed or determinable and the identification of specific
deliverables under multiple element arrangements.  In addition, multiple
element arrangements must be analyzed to determine the relative fair value of
each element, the amount of revenu to be recognized and the period and
conditions under which deferred revenue should be recognized.  The ability
to establish vendor specific objective evidence of fair value for our products
and services also requires judgement by management.  (2) allowance for
doubtful accounts; (3) asset impairments, including determination of the
fair value of goodwill and indefinite lived trade names; (4) depreciable
lives of assets; (5) useful lives of intangible assets; (6) income tax
valuation allowances and uncertain tax positions; (7) fair value of stock
options; and (8) the need for contingency and litigation reserves. Future
events and their effects cannot be predicted with certainty; accordingly, our
accounting estimates require the exercise of judgment. The accounting estimates
used in the preparation of our consolidated financial statements will change as
new events occur, as more experience is acquired, as additional information is
obtained and as our operating environment changes. We evaluate and update our
assumptions and estimates on an ongoing basis. Actual results could differ from
those estimates.





Concentration of
credit risk. Our financial instruments that have potential
concentrations of credit risk include cash and cash equivalents, accounts
receivable, investments in sales-type leases and notes receivable. We maintain
cash balances that exceed federally insured limits; however, we have incurred no
losses on such accounts. Accounts receivable, investments in sales-type
leases and notes receivable have concentration of credit risk because they all
relate to our customers in the gaming industry.  We grant customers
credit terms for periods of 120 days or less or may grant extended credit
terms, with interest at prevailing rates, and are generally collateralized by
the related equipment sold, although the value of such equipment, if
repossessed, may be less than the receivable balance outstanding and the
ability to actually repossess the equipment may not always be undisputed or able
to be effectively executed.





From time to time, we make significant
sales to customers that exceed 10% of our then-outstanding accounts receivable
balance. As of October 31, 2008 and 2007, no customer balances exceeded 10%
of our net trade accounts receivable. As of October 31, 2008 and 2007, no
single customer's balance exceeded 10% of our investment in sales-type leases
and notes receivable.  For the fiscal years ended 2008, 2007 and 2006, no
individual customer accounted for more than 10% of consolidated
revenue.





Provisions forbaddebts. We
maintain provisions for bad debts for estimated credit losses that result from
the inability of our customers to make required payments. Provisions for bad
debts are estimated based on historical experience and specific customer
collection issues. Changes in the financial condition of our customers could
result in the adjustment upward or downward in the provisions for bad debts,
with a corresponding impact to our operating results.





Investment in
Sona andotherinvestments. Our
investment in and the operating results of Sona Mobile Holdings Corp. ("Sona")
which is not required to be consolidated in our consolidated financial
statements, was previously accounted for in accordance with Accounting
Principles Board ("APB") Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock"("APB 18"), based
on our assessment of our relationship with Sona at the time of the investment.
In our initial assessment, we concluded that we had the ability to exercise
significant influence over Sona due to our former President having a seat on the
Sona Board of Directors. Due to the resignation of our former President from
the


86


Sona
Board of Directors on June 12, 2007, using the guidance of APB 18, we
concluded that we no longer had the ability to exercise significant influence
over Sona and that the equity method of accounting was no longer appropriate for
our investment. Since June 12, 2007, we have accounted for our investment
under the cost method of accounting on a prospective basis and as an available
for sale marketable security using the guidance of Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" .





We review our investments for other
than temporary impairment whenever events or changes in business circumstances
indicate that the carrying amount of the investments may not be fully
recoverable. During our third quarter ended July 31, 2008, we analyzed our cost
method investment in Sona and, due to the severity and duration in the decline
in fair value, we recorded a $1,486 impairment write-down, as we determined that
the investment was other than temporarily impaired.  This impairment
write-down represented the difference between our historical book value and fair
market value at July 31, 2008.  Additionally, we sold our investment
in Sona in the fourth quarter of fiscal 2008 and recorded an additional pre-tax
loss of $74 in impairment of investments, net of $65 proceeds received from the
sale, for a total of $1,560, which is reflected in the consolidated statements
of operations for fiscal 2008.  There was no such impairment loss
recorded during fiscal 2007. During fiscal 2006 we recognized pre-tax impairment
charges of $1,655 related to our investment in Sona.





Inventories.  Inventories
are stated at the lower of cost, determined on a first-in-first-out basis, or
market.  Cost elements included in work-in-process and finished goods
include raw materials, direct labor and manufacturing overhead. We regularly
review inventory quantities and update estimates for the net realizable value of
inventories due to the subjectivity involved in projecting sales volumes, used
game sales values, refurbishment costs, and product demand. This process
includes examining the carrying values of new and used gaming devices, parts and
ancillary equipment in comparison to the current fair market values for such
equipment (less costs to sell or dispose). Some of the factors involved in this
analysis include the overall levels of our inventories, the current and
projected sales levels for such products, the projected markets for such
products, the costs required to sell the products, including refurbishment costs
and importation costs for international shipments, and the overall projected
demand for products once the next generation of products are scheduled for
release.





As a result of our ongoing analysis of
inventory, we recognized inventory write-downs of $72, $1,415 and $345 for
fiscal years 2008, 2007 and 2006, respectively.  There was no such
inventory write-down for fiscal 2008.  Additional valuation charges
could occur in the future as a result of changes in the factors listed
above.





Products leased
and held for lease. Our products are primarily leased to customers
pursuant to operating leases. Products leased and held for lease are stated at
cost, net of depreciation. Depreciation on leased products is calculated using
the straight-line method over the estimated useful life of three to five years.
We provide maintenance of our products on lease as part of our normal lease
agreements.





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





We also review these assets for
impairment in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"), whenever events or
changes in circumstances indicate that we may not be able to recover the asset's
carrying amount.





Goodwill andotherintangible
assets. We account for goodwill and other intangibles under the
guidance of SFAS No. 141, "Accounting for Business
Combinations "("SFAS 141") and SFAS No. 142, "Accounting for Goodwill and Other
Intangible Assets" ("SFAS 142").





We review our goodwill for impairment
annually in October or when circumstances indicate that the carrying amount
of an asset may not be fully recoverable.  The review is performed at
the reporting unit level, which we have determined is the equivalent to our
reportable segments. The goodwill impairment test is a two-part
test.  In the first step, we selected a discounted cash flows model of
the income approach and the Guideline Public Company Model of the market
approach to be used to assess the fair value of our reporting
unit.  These two methodologies were equally weighted in determining a
fair value.  The fair value of the reporting unit is then compared to
the book value of the reporting unit, including its goodwill. If the fair value
is less than the book value, then we would perform a second step to
compare the implied fair value of the reporting unit's goodwill to its book
value. The implied fair value of the goodwill is determined based on the
estimated fair value of the reporting unit less the fair value of the reporting
unit's identifiable assets and


87


liabilities.
We would record an impairment charge to the extent that the book value of the
reporting unit's goodwill exceeds its fair value.





In October 2008, we performed our
annual goodwill impairment analysis and determined the book value of our ETS
segment’s goodwill exceeded its fair value as of October 31, 2008, using the
two-part test discussed above, which is discussed in detail in Note
6.  As a result of our determination of the implied value of goodwill,
we recorded an impairment charge of $22,137 on our consolidated statements of
operations for fiscal 2008.  For fiscal 2007 and 2006, no goodwill
impairments were recorded.





Intangible assets include intellectual
property for games, patents, trademarks, tradenames, copyrights, licenses,
developed technology, customer relationships, backlog and non-compete agreements
that were purchased separately or acquired in connection with a business
combination. Except for the tradenames related to the Stargames and Casinos
Austria Research & Development GmbH & Co KG ("CARD")
acquisitions, which are not subject to amortization, all of our significant
intangible assets are definite lived and, accordingly, amortized over their
expected useful lives which range from 1 to 15 years. We amortize
substantially all of our intangible assets proportionate to the related
projected revenue from the utilization of the intangible asset. We believe this
method reflects the pattern in which the economic benefits of the intangible
asset are consumed or otherwise used up. For certain other intangibles, such as
covenant not to compete, we amortize on a straight-line basis over their useful
lives, using the straight-line amortization method.





We review our indefinite lived
intangible assets for impairment annually in October or when circumstances
indicate that the carrying amount of an asset may not be fully recoverable from
discounted estimated future cash flows using the income approach.  We would
record an impairment loss if the carrying amount of the indefinite lived
intangible asset is not recoverable and the carrying amount exceeds its
estimated fair value.





In October 2008, we performed our
annual indefinite lived intangible asset impairment analysis for Stargames and
CARD tradenames, which is discussed in Note 6, and determined no impairment was
indicated.  No impairments were recorded in fiscal 2007 or
2006.





Impairment of
long-lived assets.We
estimate the useful lives of our long-lived assets, excluding goodwill and
indefinite lived intangible assets, based on historical experience, estimates of
products' commercial lives, the likelihood of technological obsolescence and
estimates of the duration of commercial viability for patents, licenses and
games.





We review our long-lived assets,
excluding goodwill and indefinite lived intangible assets, for impairment
whenever events or circumstances indicate the carrying value may not be
recoverable or warrant a revision to the estimated remaining useful life, in
accordance with SFAS 144 and SFAS 142.  We would record an impairment loss
if the carrying amount of the asset or asset group is not recoverable (as
determined by undiscounted cash flows) and the carrying amount exceeds its
estimated fair value.  For fiscal 2008, 2007 and 2006 we did not have
any such impairment loss.





Business
combinations. We account for business combinations in accordance
with SFAS 141.  SFAS 141 requires that we record the net assets of
acquired businesses at fair value, and we must make estimates and assumptions to
determine the fair value of acquired assets and assumed
liabilities.





During fiscal 2007 and 2006, we
acquired Progressive Gaming International Corporation’s (“PGIC”) Table Game
Division ("TGD") and Stargames, respectively. As a part of the valuation
process, we applied significant judgment and utilized a variety of assumptions
in determining the fair value of acquired assets and liabilities assumed, and
in-process research and development, including market data, estimated future
cash flows, growth rates, current replacement cost for similar capacity for
certain fixed assets, market rate assumptions for contractual obligations and
settlement plans for contingencies and liabilities.





Revenue
recognition. We recognize revenue when the following criteria are
met:





·
            persuasive
      evidence of an arrangement between us and our customer
    exists;





·
            shipment
      has occurred or services have been
rendered;





·
            the
      price is fixed or determinable; and





·
            collectibility
      is reasonably assured and/or
probable.


88


We earn our revenue in a variety of
ways. We offer our products for lease or sale as well as sell service and
warranty contracts for our sold equipment.





Product lease and royalty
revenue—Lease and royalty revenue is earned from the leasing of our
tangible products and the licensing of our intangible products, such as our
proprietary table games. We recognize revenue monthly, generally based on a
monthly fixed fee, generally through indefinite term operating leases. Lease and
royalty revenue commences upon the completed installation of the product. Lease
terms are generally cancellable with 30 days notice.





Product sales and service
revenue—We generate sales revenue through the sale of equipment in each
product segment, including sales revenue from sales-type leases and the sale of
lifetime licenses for our proprietary table games. Financing for intangible
property and sales-type leases for tangible property have payment terms ranging
generally from 30 to 60 months and are interest-bearing at market interest
rates. Revenue from the sale of equipment is recorded in accordance with the
contractual shipping terms. If a customer purchases existing leased equipment,
revenue is recorded on the effective date of the purchase agreement. Revenue on
service and warranty contracts is recognized as the services are provided over
the term of the contracts, which are generally one year. Revenue from the sale
of lifetime licenses, under which we have no continuing obligation, is recorded
on the effective date of the license agreement.





Certain of our products contain
software, and as such we have considered the guidance contained in Statement of
Position ("SOP") 97-2, "Software Revenue Recognition
" (“SOP 97-2”), as modified by SOP No. 98-9, "Software Revenue Recognition, With
Respect to Certain Transactions. "  Under this guidance
when leasing or selling software we consider whether the software component is
incidental to the product as a whole based on the following
criteria:





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





·
            Whether
      post-contract customer support or PCS (PCS includes the right to receive
      services or unspecified upgrades/enhancements, or both, offered to users
      or resellers) is provided.





·
            Whether
      the development and production costs of the software as a component of the
      cost of the product is incidental as defined in SFAS No. 86, "Accounting for the Costs of
      Computer Software to Be Sold, Leased, or Otherwise Marketed
      ".





·
            Whether
      an agreement includes service elements (other than PCS related services),
      such as training or installation, and whether such services are essential
      to the functionality of the software or whether such software is
      considered "off-the-shelf" (off-the-shelf software is software that is
      marketed as a stock item that can be used by customers with little or no
      customization). Conversely, "core software" requires significant
      customization of the software in order for the software to be used by the
      end customer.





Some of our revenue arrangements
contain multiple deliverables, such as a product sale combined with a service
element or the delivery of a future product. If an arrangement requires the
delivery or performance of multiple elements, we apply the guidance from
SOP 97-2, as amended, Emerging Issues Task Force ("EITF") No. 03-05, "Applicability of AICPASOP97-2 to Non-Software Deliverables
in an Arrangement Containing More-Than-Incidental Software " and EITF
No. 00-21, "Revenue
Arrangements with Multiple Deliverables." Deliverables are divided into
separate units of accounting if:





·
            The
      delivered items have value to the customer on a stand alone
      basis;





·
            we
      have objective and reliable evidence of the fair value of the undelivered
      items; and





·
            delivery
      of any undelivered item is considered probable and substantially in our
      control.





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





The subjective and complex judgments
for revenue recognition typically involve whether collectability is probable,
whether fees under an arrangement are fixed or determinable and the
identification of specific deliverables under multiple element arrangements. In
addition, multiple elements arrangements must be analyzed to determine the
relative fair value of each element, the amount of revenue to be recognized and
the period and conditions under which deferred revenue should be recognized. The
ability to establish vendor specific objective evidence of fair value for our
products and services also requires judgment by management.


89





Incometaxes. We
account for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes"
("SFAS 109"). SFAS 109 requires the recognition of deferred tax
assets, net of applicable reserves, related to net operating loss carryforwards
and certain temporary differences. The standard requires recognition of a future
tax benefit to the extent that realization of such benefit is more likely than
not. Otherwise, a valuation allowance is applied. Except for certain foreign net
operating losses, we believe that it is more likely than not that our deferred
tax assets are fully realizable because of the future reversal of existing
taxable temporary differences and future projected taxable income.





In November 2007, we adopted Financial
Interpretation (“FIN”) 48, “Accounting for Uncertainty in Income
Taxes, an Interpretation of SFAS 109”(“FIN 48”), which creates a single
model to address uncertainty in income tax positions and prescribes the minimum
recognition threshold a tax position is required to meet before being recognized
in the financial statements. It also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting in interim
periods, disclosure and transition.  See Note 13 for additional
information.





Share based
compensation.  We
account for stock-based compensation in accordance with SFAS No. 123
(revised 2004), "Share-Based
Payment" ("SFAS 123R"),
and Staff Accounting Bulletin (“SAB”) No. 107, "Share-Based
Payment" ("SAB 107"), requiring the measurement and recognition
of all share-based compensation under the fair value method. 
SFAS 123R requires that all stock-based compensation, including shares and
share-based awards to employees, be valued at fair value. We measure the fair
value of share-based awards using the Black-Scholes model.





Under the provisions of SFAS 123R,
compensation is attributed to the periods of associated service and such expense
is recognized on a straight-line basis over the vesting period of the awards.
Forfeitures are estimated at the time of grant, with such estimate updated when
actual forfeitures are recognized.





In addition, SFAS 123R requires
the excess tax benefit from stock-option exercises—tax deductions in excess of
compensation cost recognized—to be classified as a financing activity.
Previously, all tax benefits from stock option exercises were classified as
operating activities. We have evaluated the provisions of SFAS 123R-3,
"Transition Election Related
to Accounting for Tax Effects of Share-Based Payment
Awards" and have elected the alternative method for establishing the APIC
pool.





Contingencies. We
assess our exposures to loss contingencies including legal and income tax
matters and provide for an exposure if it is judged to be probable and
reasonably estimable. If the actual loss from a contingency differs from our
estimate, there could be a material impact on our results of operations or
financial position. Operating expenses, including legal fees, associated with
contingencies are expensed when incurred.





Advertising
costs. We expense advertising and promotional costs as incurred,
which totaled approximately $2,769, $2,353 and $2,069, for the fiscal years
ended October 31, 2008, 2007 and 2006, respectively.





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





Foreign currency
translation. Our foreign subsidiaries' asset and liability accounts
are translated into U.S. dollar amounts at the exchange rate in effect at the
balance sheet date. Foreign exchange translation adjustments are recorded as a
separate component of shareholders' equity. Revenue and expense accounts are
translated at the average exchange rates. Pursuant to SFAS No. 52,
“Foreign Currency
Translation,” inter-company trade balances, which we anticipate to settle
in the foreseeable future, result in foreign currency gains and losses included
in other expenses in our consolidated statements of
operations.  Transaction gains and losses are included in other
expense in our consolidated statements of operations.





Earnings per
common share. Basic earnings per share is calculated by dividing net
income by the weighted average number of common shares outstanding and issuable
during the year. Diluted earnings per share is similar to basic, except that the
weighted average number of shares outstanding is increased by the potentially
dilutive effect of outstanding stock options, restricted stock and contingent
convertible notes, if applicable, during the year, using the treasury stock
method.


90





Recently issued
or adopted accounting standards.  In
June 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
Position (“FSP”) EITF No. 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities”(“EITF 03-6-1”).  EITF 03-6-1
mandates that unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents be considered participating
securities and be included in the computation of earnings per share (“EPS”)
pursuant to the two-class method. This change will become effective for our
fiscal year beginning November 2009, and requires retrospective application for
all periods presented. We are currently evaluating the effect, if any, that EITF
03-6-1 will have on our consolidated financial statements.





In June 2008, the FASB ratified EITF
Issue No. 07-5, “Determining
Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock”(“EITF 07-5”). EITF 07-5 mandates a two-step process for evaluating
whether an equity-linked financial instrument or embedded feature is indexed to
the entity’s own stock. It is effective for our fiscal year beginning November
2009.  We are currently evaluating the effect, if any, that EITF 07-5
will have on our consolidated financial statements.





In May 2008, the FASB issued FSP APB
No. 14-1,“Accounting For Convertible Debt
Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash
Settlement)”(“APB 14-1”).  APB 14-1 requires that convertible debt
instruments that may be settled in cash upon conversion be separated into a debt
and equity component. The debt component will be equal to the fair value of a
similar liability and reflect the entity's borrowing rate for nonconvertible
instruments. The equity component will be the residual difference between the
proceeds and the value of the debt component. The rule is effective for fiscal
years beginning after December 15, 2008 and interim periods within those fiscal
years and requires retrospective restatement of all periods presented.
This will be effective for our fiscal year beginning in November
2009.  We are currently evaluating the effect, if any, that APB 14-1
will have on our consolidated financial statements.





In April 2008, the FASB issued FSP No.
142-3,“Determination of the Useful Life of
Intangible Assets”(“FSP 142-3”), which amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS 142.  The guidance
contained in this FSP for determining the useful life of a recognized intangible
asset shall be applied prospectively to intangible assets acquired after the
effective date. However, the disclosure requirements of FSP 142-3 must be
applied prospectively to all intangible assets recognized in the Company’s
financial statements as of the effective date.  FSP 142-3 is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. FSP 142-3 will be effective for
us beginning November 2009 and must be applied prospectively to our intangible
assets.





In March 2008, the FASB issued SFAS No.
161, “Disclosures about
Derivative Instruments and Hedging Activities – an amendment of SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities”(“SFAS 161”). This
statement requires disclosures about derivatives and hedging activities
including enhanced disclosure about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under SFAS 133, and (c) how derivative instruments and related
hedged items affect financial position, financial performance, and cash flows.
This statement is effective for periods beginning after November 15,
2008.  This will be effective for our fiscal year beginning in
November 2009.   We are currently evaluating the effect, if any,
that SFAS 161 will have on our consolidated financial
statements.





In December 2007, the FASB issued SFAS
No. 141 (revised 2007), "Business Combinations"
("SFAS 141R"), which replaces SFAS 141.  SFAS 141R establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
any resulting goodwill, and any non-controlling interest in the acquiree.
 SFAS 141R also provides for disclosures to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination.  SFAS 141R will be effective for us beginning in
November 2009 and must be applied prospectively to business combinations
completed on or after that date.





In December 2007, the FASB issued SFAS
No. 160, "Non-controlling
Interests in Consolidated Financial Statements—an amendment of Accounting
Research Bulletin No. 51 " ("SFAS 160"), which establishes
accounting and reporting standards for non-controlling interests ("minority
interests") in subsidiaries. SFAS 160 clarifies that a non-controlling
interest in a subsidiary should be accounted for as a component of equity
separate from the parent's equity. SFAS 160 will be effective for us
beginning in November 2009 and must be applied prospectively, except for the
presentation and disclosure requirements, which will apply retrospectively. We
are currently evaluating the effect, if any, that SFAS 160 will have on our
consolidated financial statements.





In February 2007, the FASB issued SFAS
No. 159 "The Fair Value
Option for Financial Assets and Financial Liabilities" ("SFAS 159").
 SFAS 159 expands the use of fair value measurement by permitting
entities to choose to measure


91


many
financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. This statement is effective for
us beginning in November 2008.  We do not believe SFAS 157 will have a
material impact on our consolidated financial statements pursuant to the
adoption in fiscal 2009.





In September 2006, the FASB issued SFAS
No. 157, "Fair Value
Measurements" ("SFAS 157"), which defines fair value, establishes a
framework for measuring fair value in GAAP, and expands disclosures about fair
value measurements. SFAS 157 does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing a
fair value hierarchy used to classify the source of the information. In February
2008, the FASB issued a FSP FAS 157-2, an amendment to SFAS 157,
delaying the effective date of SFAS 157, for non-financial assets and
non-financial liabilities, except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least
annually). SFAS 157 for financial assets and liabilities is effective for us
beginning November 2008 and FSP FAS 157-2 for non-financial assets and
liabilities is effective for us beginning November 2009.  We do not
believe SFAS 157 will have a material impact on our consolidated financial
statements pursuant to the adoption in fiscal 2009.  Additionally, we
are currently evaluating the effect, if any, that FSP FAS 157-2 will have
on our consolidated financial statements.





2.
ACQUISITIONS AND OTHER SIGNIFICANT TRANSACTIONS





Contingent
convertible senior notes refinancing.  In summer 2008, we
engaged in a multi-step refinancing (the “Refinancing”) of our 1.25% contingent
convertible senior notes (the “Notes”). We engaged in the Refinancing because
holders of the Notes have the option to require us to repurchase all or a
portion of such Notes on April 15, 2009 at 100% of the principal amount of the
Notes, plus accrued and unpaid interest. We currently expect, and expected at
the time of the Refinancing, that all holders of the Notes that have not
otherwise been retired will exercise this repurchase option on April 15,
2009.





The Refinancing consisted of three
principal parts: (i) a tender offer for all the Notes, (ii) an amendment to our
Senior Secured Credit Facility and entry into a new term loan facility in
connection therewith and a (iii) primary share issuance.





The Tender
Offer.  On July 14, 2008,
we commenced a cash tender offer for our Notes (the “Tender
Offer”).  Pursuant to the Tender Offer, we purchased $89,350 in
aggregate principal amount of our outstanding Notes at 97.25% of the principal
amount thereof plus accrued and unpaid interest.  On September 29,
2008, we repurchased an additional $20,384 of our Notes in a separate
transaction on the open market.  As a result of the repurchases of our
Notes, we recognized a total gain of $1,773, net of external fees and direct
costs associated with the Tender Offer, for fiscal 2008.





New Term Loan and
amendment to credit facility.   On July 14,
2008, we entered into a second amendment (the “Second Amendment”), to our Senior
Secured Credit Facility.  Among other things, the Second Amendment
provided for a new $65,000 term loan facility (the “Term Loan”), which was
funded in full on August 25, 2008, resulting in net proceeds of $63,438. The
amendment left in place our $100,000 revolving credit facility (the “Revolver”),
under which, as of October 31, 2008, we had drawn $16,000 and had availability
of $84,000.  In addition to the Term Loan and Revolver, our amended
Senior Secured Credit Facility provides a $35,000 incremental facility pursuant
to which we may request (but no lender is committed to provide) additional loans
under the facility, subject to customary conditions.





For a more detailed summary of our
Senior Secured Credit Facility, see “Senior Secured Credit Facility” included in
Note 7.





Securities
offering. On July
25, 2008, we sold 17,647 shares of our common stock in a public offering at
$4.25 per share (the “Offering”), resulting in net proceeds of
$69,974.  In conjunction with the Offering, we granted the
Underwriters an over-allotment option to purchase up to 2,647 shares of our
common stock at $4.25 per share.  On August 1, 2008, the Underwriters
exercised their over-allotment option in full and purchased 2,647 shares,
resulting in net proceeds of $10,479.  As part of the Offering, we
incurred certain fees directly related to the transaction, including, but not
limited to, an underwriting fee, legal fees, independent registered public
accountant fees and printing fees. Total aggregate net proceeds from the
Offering and the exercise of the over-allotment option were $80,453 on 20,294
total shares.





Remaining
outstanding Notes.A portion of the net proceeds from the Term Loan, the
Offering and the exercise of the Underwriters’ over-allotment option were used
to repurchase a portion of the outstanding Notes as described above. The
remaining net proceeds were applied to pay down our Revolver.  As
mentioned above, we purchased an additional $20,385 of our Notes on September
29, 2008. In addition, on December 10, 2008 (subsequent to the end of fiscal
2008), we settled an additional $10,000 of our Notes in a separate open market
transaction.  Accordingly, we currently have $30,258 of Notes
outstanding. We expect that the remaining noteholders will exercise their
repurchase option on April 15, 2009; as such we


92


classified
the remaining $40,258 in aggregate principal amount of the Notes as current debt
as of October 31, 2008.  We intend to draw on the Revolver and/or use
cash on hand to redeem the remaining outstanding Notes. As discussed under
“Liquidity and Capital Resources” below and Note 7 in “Item 8. Financial
Statements and Supplementary Data”, included in this Form 10-K, our Senior
Secured Credit Agreement places certain restrictive covenants on us. We are
currently in compliance with our Senior Secured Credit Agreement’s covenants and
expect to continue to be in compliance when the noteholders exercise their
repurchase option. However, if we are not in compliance at such time, we might
not be able to borrow under our Revolver. In such case, we would need to satisfy
the redemption obligation through a combination of cash on hand and additional
fundraising. Current economic conditions could make it difficult to raise such
capital, and accordingly in such circumstance there is a possibility that we
could default in our obligation to redeem such Notes. Such default could, if not
rectified, lead to cross acceleration under our Senior Secured Credit
Facility.





Progressive
Gaming International Corporation (“PGIC”) Table Games Division
(“TGD”).  On September 28, 2007, we entered into a
purchase agreement for the acquisition of PGIC’s TGD business (the “Purchase
Agreement”), including certain worldwide rights and lease contracts for all of
PGIC’s table game titles including Caribbean Stud® and
Texas Hold’ Em Bonus®, as well
as a software distribution license agreement (the “Software Distribution License
Agreement”). We also entered into an amended and restated license agreement with
PGIC amending the license agreement, dated September 29, 2006, which
granted us certain expanded rights.  See subsequent events in Note 16
in regards to the amended and restated last license agreement.





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





Under the terms of the Purchase
Agreement, we paid PGIC an upfront payment of approximately $19,800. The
Purchase Agreement also provided for future earn-out payments, where permitted,
beginning in calendar 2008, including $3,500 in total non-interest bearing
guaranteed minimum payments over a 4-year period, as follows: for each of 2008
and 2009, the guaranteed minimum amounts are $1,000 each year, paid quarterly;
and for 2010 and 2011, $750 each year, also paid quarterly. The future earn-out
payments are based on the growth of the acquired TGD business in excess of
annual baseline revenue of approximately $4,800. For 2008 and 2009, the earn-out
will be 23% of revenue above the baseline amount; for 2010 and 2011, the
earn-out will be 19% of revenue above the baseline; and for 2012 to 2016, 10.75%
of revenue above the baseline. Actual earn-out payments are applied against the
annual guaranteed minimum amounts. Future earn-out payments in excess of the
minimum guaranteed payments will be added to the purchase price in accounting
for the business combination. The lease and service revenue for the twelve
months ended June 30, 2007 of the acquired TGD business totaled
approximately $4,800. The acquired installed lease base totaled approximately
600 tables.





Under the Software Distribution License
Agreement, we acquired PGIC’s Game ManagerTM software and related table hardware
(collectively, the “GMS”). The Software Distribution License Agreement provides
a framework for us to further utilize the GMS, as well as use PGIC’s
Casinolink® Jackpot
SystemTM for installations where the GMS cannot handle the total number of tables
and/or properties being managed.  As such, we have started integrating
the GMS with certain versions of our proprietary table games in numerous
jurisdictions. We paid PGIC a $3,000 advance of royalties due under the Software
Distribution License Agreement within 10 days of signing the Purchase
Agreement. Once the $3,000 advance is recouped, PGIC will receive recurring
quarterly royalty payments for the placement of PGIC’s progressive technology on
our proprietary table games, subject to our further recoupment of $1,750 related
to an earlier licensing transaction with PGIC. The royalty rate for our
proprietary games is 15% of the net incremental revenue attributable to adding
the progressive element.





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




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


93





In accordance with SFAS 141, the
transaction was accounted for as a business combination and, accordingly, the
purchase price was allocated to the underlying assets acquired based upon their
estimated fair values at the date of the acquisition.  The allocation
of the purchase price is final, however, the current purchase price is subject
to change based on the future earn-out payments, as defined in the Purchase
Agreement.  No liabilities were assumed in this transaction. The
following table sets forth the allocation of the purchase price:





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





The acquisition of the PGIC TGD
enhances the product offering in our PTG segment by providing us with new table
titles, expanded customer relationships and valuable additional casino floor
space. These factors result in the recognition of certain intangible assets and
goodwill. Backlog and covenant not to compete are being amortized on a
straight-line basis over their useful lives. PGIC TGD amortization expenses for
backlog and covenant not to compete were $145 and $13 for fiscal 2008 and 2007,
respectively.  Customer relationships and tradenames, trademarks,
patents and copyrights are being amortized based on their projected revenue
streams. PGIC TGD amortization expenses related to customer relationships and
tradenames, trademarks, patents, and copyrights were $1,465 and $148 for fiscal
2008 and 2007, respectively.  Backlog and tradenames, trademarks,
patents, and copyrights are charged to cost of leases and royalties, a component
of gross margin. Customer relationships and covenant not to compete are
reflected in selling, general and administrative expenses in the consolidated
statements of operations.


94


3.
FINANCIAL INSTRUMENTS





Cash and cash
equivalents. Cash and cash equivalents include short-term
investments with maturities of three months or less from their date of purchase.
We maintain cash balances that exceed federally insured limits; however, we have
incurred no losses on such accounts.





Fair value
disclosures of financial instruments.  The fair values of
accounts receivable, the current portion of investment in sales-type leases and
notes receivable, accounts payable and short term borrowings approximate their
carrying values due to the relatively short-term nature of the instruments. It
is impracticable to estimate the fair value of the long-term portion of our
investment in sales-type leases and notes receivable as it is comprised of many
individually insignificant balances.





We estimate that the fair value of our
$40,258 Notes as of October 31, 2008, was $39,050 based on quoted market
prices.





4.
RECEIVABLES AND INVESTMENTS IN SALES-TYPE LEASES








October
      31,2008
            
            2007(In
      thousands)Accounts
      receivable, net:Trade
      receivables
            $29,499
            
            $35,521Less:
      allowance for bad debts
            (584)
            
            (476)Total
            $28,915
            
            $35,045








October
      31,2008
            
            2007(In
      thousands)Investment
      in sales-type leases and notes receivable, net:Minimum
      sales-type lease payments
            $
      5,476
            
            $10,715Notes
      receivable - table game licenses
            3,800
            
            7,798Sub-total
      sales-type leases and notes receivable
            9,276
            
            18,513Less:
      interest sales-type leases
            (626)
            
            (1,085)Less:
      deferred service revenue
            (832)
            
            (1,976)Less:
      allowance for bad debts
            (202)
            
            (236)Investment
      in sales-type leases and notes receivable, net
            7,616
            
            15,216Less:
      current portion sales-type leases
            (2,995)
            
            (4,266)Less:
      current portion notes receivable - table game licenses
            (2,660)
            
            (4,826)Long-term
      portion investment in sales-type leases and notes
    receivable
            $
      1,961
            
            $ 
      6,124





We maintain provisions for bad debts
for estimated credit losses that result from the inability of our customers to
make required payments. The provisions for bad debts are estimated based on
historical experience and specific customer collection issues.





Sales-type leases are interest-bearing
at fixed market interest rates, require monthly installment payments over
periods ranging generally from 30 to 60 months and contain bargain purchase
options. Notes receivable include financing arrangements for sales of our
intellectual property products. Amounts are interest-bearing at fixed market
interest rates and require monthly installments ranging generally from 30 to
60 months.




95





Future minimum lease payments
(principal, deferred revenue and interest) to be received for both sales-type
leases and notes receivable are as follows:








October
      31,
            2009
            
            2010
            
            2011
            
            Total(In
      thousands)Investment
      in sales-type leasesand
      notes receivable, net:Future
      sales-type lease payments
            $4,085
            
            $1,123
            
            $268
            
            $5,476Notes
      receivable - table game licenses
            2,851
            
            847
            
            102
            
            3,800Sub-total
      sales-type leases and notes receivable
            6,936
            
            1,970
            
            370
            
            9,276Less:
      interest sales-type leases
            (470)
            
            (143)
            
            (13)
            
            (626)Less:
      deferred service revenue
            (660)
            
            (142)
            
            (30)
            
            (832)Less:
      allowance for bad debts
            (151)
            
            (43)
            
            (8)
            
            (202)Investment
      in sales-type leasesInvestment
      in sales-type leases and notes receivable, net
            $5,655
            
            $1,642
            
            $319
            
            $7,616








5.
OTHER BALANCE SHEET DATA





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










October
      31,2008
            
            2007(In
      thousands)Inventories:Raw
      materials and component parts
            $16,649
            
            $18,975Work-in-process
            710
            
            2,141Finished
      goods
            5,394
            
            12,965Total
            $22,753
            
            $34,081





96







October
      31,2008
            
            2007(In
      thousands)Products
      leased and held for lease:Utility
            $ 
      30,014
            
            $  
      29,678Less:
      accumulated depreciation
            (21,456)
            
            (22,802)Utility,
      net
            8,558
            
            6,876Proprietary
      Table Games
            2,658
            
            1,783Less:
      accumulated depreciation
            (1,117)
            
            (703)Proprietary
      Table Games, net
            1,541
            
            1,080Electronic
      Table Systems
            16,420
            
            12,076Less:
      accumulated depreciation
            (5,465)
            
            (4,146)Electronic
      Table Systems, net
            10,955
            
            7,930Electronic
      Gaming Machines
            222
            
            222Less:
      accumulated depreciation
            (222)
            
            (222)Electronic
      Gaming Machines, net
            —
            
            —Total,
      net
            $ 
      21,054
            
            $  
      15,886








October
      31,2008
            
            2007(In
      thousands)Property
      and equipment:Office
      furniture and computer equipment
            $   
      7,612
            
            $    
      8,143Less:
      accumulated depreciation
            (5,051)
            
            (5,273)Property
      and equipment, net
            2,561
            
            2,870Leasehold
      improvements:
            5,878
            
            5,302Less:
      accumulated depreciation
            (3,308)
            
            (3,144)Leasehold
      Improvements, net
            2,570
            
            2,158Production
      equipment and other:
            8,230
            
            11,669Less:
      accumulated depreciation
            (4,218)
            
            (5,455)Production
      equipment and other, net
            4,012
            
            6,214Total,
      net
            $   
      9,143
            
            $  
      11,242





October
      31,2008
            
            2007(In
      thousands)Other
      current assets:Prepaid
      legal fees
            $   
      1,358
            
            $   
            —Deferred
      cost of goods sold
            1,248
            
            1,962Other
      prepaid expenses
            1,552
            
            540Other
      receivables
            670
            
            1,442Other
            
            97
            
            1,342Total
            $   
      4,925
            
            $  
        5,286









As of October 31, 2008, other
receivables consisted primarily of tax receivables.  Tax receivables
of $533 related to the reimbursable portion of our value added taxes as well as
reimbursements from state income tax returns.  As of October 31, 2007,
other receivables primarily consisted of a $955 insurance receivable related to
legal fees reimbursable under our Directors and Officers (“D&O”) insurance
policy as well as tax receivables of $380.  The insurance receivable
related to various class action and derivative lawsuits that were brought
against us in fiscal 2007.  These receivables had been recognized as
we determined that their recovery under our D&O policy was
probable.  Tax receivables related to the reimbursable portion of our
value added taxes as well as reimbursements from state income tax
returns.








October
      31,2008
            
            2007(In
      thousands)Other
      long-term assets:PGIC
      TGD prepaid royalty
            $   
      4,709
            
            $    
      4,750Deposits
            3,628
            
            3,872Debt
      issuance costs, net
            3,319
            
            2,833Other
            
            638
            
            2,173Investment
      in Sona
            —
            
            1,749Total
            $ 
      12,294
            
            $  
      15,377





Total debt issuance costs incurred with
the issuance of long-term debt are capitalized and amortized as interest expense
using the effective interest method. Amortization of debt issuance costs were
$1,339, $1,327 and $1,511 in fiscal 2008, 2007 and 2006,
respectively.  The unamortized portion of the debt issuance costs are
expected to be recognized over a weighted-average period of 3.0
years.  As of October 31, 2008, debt issuance costs related to the
refinancing of our Notes, our Revolver and our Term Loan.  As of
October 31, 2007, debt issuance costs related to our Notes and our
Revolver.





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





Other long term assets of $638 and
$2,173 as of October 31, 2008 and 2007, principally includes, $532 and
$512, respectively, of restricted cash related to the Kings Gaming Inc.
contingent consideration in connection with the purchase of the Play Four PokerTM
patent and trademark. See Note 7 for more information related to Kings
Gaming contingent consideration.  Additionally, other long term assets
include $42 and $1,659, respectively, of prepaid licensing costs.  As
of October 31, 2008, we wrote-off prepaid licensing costs of $1,124 associated
with the abandonment of a project.





As of October 31, 2008, we sold our
investment in Sona.  See Note 1 for discussion relating to our
investment in Sona.





See Note 2 for discussion related
to the $4,709 PGIC TGD prepaid royalty.





6.
INTANGIBLE ASSETS AND GOODWILL





Amortizable
intangible assets.  All of our recorded intangible assets,
excluding goodwill and the Stargames and CARD tradenames, are subject to
amortization. We amortize substantially all of our intangible assets
proportionate to the related projected revenue from the utilization of the
intangible asset. We believe this method reflects the pattern in which the
economic benefits of the intangible asset are consumed or otherwise used up. For
certain other intangibles, such as covenant not to compete, we amortize on a
straight-line basis over their useful lives, using the straight-line
amortization method.


Amortization
expense was $14,731, $11,322 and $9,045 for fiscal 2008, 2007 and 2006,
respectively.




97





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





Weighted
      Average
            
            October
      31,Useful
      Life
            
            2008
            
            2007(In
      thousands)Amortizable
      intangible assets:Patents,
      games and products
            10
      years
            
            $  
      60,478
            
            $  
      62,465Less:
      accumulated amortization
            
            
            (30,839)
            
            (23,945)29,639
            
            38,520Customer
      relationships
            10
      years
            
            19,497
            
            23,537Less:
      accumulated amortization
            
            
            (3,592)
            
            (2,251)15,905
            
            21,286Licenses
      and other
            6
      years
            
            4,392
            
            5,136Less:
      accumulated amortization
            
            
            (2,189)
            
            (1,813)2,203
            
            3,323Developed
      technology
            4
      years
            
            7,318
            
            10,254Less:
      accumulated amortization
            
            
            (5,031)
            
            (4,486)2,287
            
            5,768PGIC
      Backlog
            1
      year
            
            126
            
            126Less:
      accumulated amortization
            
            
            (126)
            
            (11)—
            
            115Total
            
            
            $  
      50,034
            
            $  
      69,012





Changes in gross balances relate
primarily to foreign currency translation adjustments.





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












Year ending October 31,
            
            (In
      thousands)2009
            
            $12,4032010
            
            9,5672011
            
            7,4442012
            
            4,8612013
            
            3,913Thereafter
            
            11,846$50,034









Tradenames.  Intangibles
with an indefinite life, consisting of the Stargames and CARD tradenames, are
not amortized, and were $16,119 and $22,331 as of October 31, 2008 and
2007, respectively.  The Stargames and CARD tradenames are however
subject to an annual impairment analysis under SFAS 142.





In October 2008 and in accordance with
SFAS 142, we performed our annual impairment analysis of our indefinite lived
Stargames and CARD tradenames.  We utilized the income approach
valuation technique to estimate the fair values of the Stargames and CARD
tradenames and compared those estimates to related carrying values. The fair
values of the tradenames were derived based upon discounted future cash flows
dependent on a number of critical management assumptions including estimates of
revenue growth, expected economic asset life and hypothetical royalty and
discount rates. As of October 31, 2008, based upon the results of the analysis,
we determined that the implied fair values of the Stargames and CARD tradenames
exceeded their carrying values and were not impaired.





98





Goodwill.  Changes
in the carrying amount of goodwill as of October 31, 2008, are as
follows:








Proprietary
            
            Electronic
            
            ElectronicUtility
            
            Table
      Games
            
            Table
      Systems
            
            Gaming
      Machines
            
            Total(In
      thousands)Balance
      at October 31, 2007
            $43,456
            
            $7,373
            
            $42,965
            
            $11,560
            
            $105,354Impairment
      write-down
            —
            
            —
            
            (22,137)
            
            —
            
            (22,137)Foreign
      currency translation adjustment
            (6,262)
            
            —
            
            (12,300)
            
            (3,310)
            
            (21,872)Income
      taxes
            —
            
            —
            
            (328)
            
            (88)
            
            (416)Balance
      at October 31, 2008
            $37,194
            
            $7,373
            
            $8,200
            
            $8,162
            
            $60,929





All of our goodwill originated from the
acquisitions of foreign subsidiaries and the PGIC TGD.  Goodwill has
been assigned to our Utility, PTG, ETS and EGM reporting segments, as defined
under SFAS 142.





For fiscal 2008, a $44,425 decrease to
goodwill was recognized as a result of an impairment write-down in our ETS
segment, discussed in detail below, foreign currency fluctuations of the Euro
and Australian dollar and income taxes.





In accordance with SFAS 142, we
performed our annual goodwill impairment analysis in October
2008.  For purposes of testing goodwill, we performed step one of the
SFAS 142 goodwill impairment test by estimating the fair value of each of our
segments to which all goodwill is allocated.  We selected a discounted
cash flows model of the income approach and the Guideline Public Company Model
of the market approach to assess the fair value of our
segments.  These two methodologies were equally weighted in
determining the fair values. The market approach is a valuation technique in
which fair value is estimated based on observed prices in actual transactions
and on asking prices for similar assets. The valuation process is essentially
that of comparison and correlation between the subject asset and other similar
assets. The income approach is a technique in which fair value is estimated
based on the discounted cash flows that an asset could be expected to generate
over its useful life, including residual value cash flows. These cash flows are
discounted to their present value equivalents using a rate of return that
accounts for the relative risk of not realizing the estimated annual cash flows
and for the time value of money.





Impairment assessment inherently
involves judgment as to assumptions about expected future cash flows and the
impact of market conditions on those assumptions. Future events and changing
market conditions may impact our assumptions as to prices, costs, growth rates
or other factors that may result in changes in our estimates of future cash
flows.  Although we believe the assumptions used in testing for
impairment are reasonable, significant changes in any one of our assumptions
could produce a significantly different result. Taking into consideration both
market and income approach estimates, the indicated fair value of our ETS
segment was less than its net carrying value, and therefore, we were required to
perform step two of the SFAS 142 goodwill impairment test for our ETS
segment.





In step two of the impairment test, we
determined the implied fair value of goodwill for our ETS segment by allocating
the fair value of the ETS segment to all of the assets and liabilities,
including both recognized and unrecognized intangible assets, to the extent the
ETS segment had been acquired in a business combination. As a result of the step
two testing, we determined that the goodwill assigned to the ETS segment was
impaired as of October 31, 2008.  As such, we recorded an impairment
charge of $22,137 to write-down the carrying value of our
goodwill.  This estimate was recorded in our consolidated statements
of operations for fiscal 2008.


99





7.
DEBT





Debt consisted of the
following:









October
      31,2008
            
            2007(In
      thousands)Term
      Loan
            $  
      65,000
            
            $        
      —Contingent
      convertible senior notes (the "Notes"),fixed
      rate interest at 1.25%, due 2024
            40,258
            
            150,000Senior
      secured revolving credit facility (the "Revolver")
            16,000
            
            75,680PGIC
      TGD minimum consideration, non-interest bearing,due
      in installments through 2011
            2,444
            
            2,922BTI
      acquisition contingent consideration
            527
            
            2,434Kings
      Gaming Inc. contingent consideration
            508
            
            512Bet
      the Set "21" contingent consideration
            412
            
            478ENPAT
      note payable, non-interest bearing,ENPAT
      note payable, non-interest bearing,paid in 2007
            —
            
            2,985Total
      debt
            125,149
            
            235,011Less:
      current portion
            (41,753)
            
            (3,672)Total
      long-term debt
            $  
      83,396
            
            $231,339









Contingent
convertible senior notes (the “Notes”) refinancing. In April 2004, we
issued $150,000 in contingent convertible senior notes (the “Notes”) due 2024
through a private placement under Rule 144A of the Securities Act of 1933.
The Notes are unsecured and bear interest at a fixed rate of 1.25% per annum.
Interest is payable semi-annually in arrears on April 15 and
October 15 of each year, beginning October 15, 2004.





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





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





·
            during
      any fiscal quarter commencing after the date of original issuance of the
      Notes, if the closing sale price of our common stock over a specified
      number of trading days during the previous quarter is more than 120% of
      the conversion price of the Notes on the last trading day of the previous
      quarter;





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





·
            during
      the five trading day period immediately after any five consecutive trading
      day period in which the trading price of the Notes per $1,000 principal
      amount for each day of such period was less than 95% of the product of the
      closing sale price of our common stock on such day multiplied by the
      number of shares of our common stock issuable upon conversion of $1,000 in
      principal amount of the Notes, provided that, if on the date of any
      conversion pursuant to this trading price condition, our common stock
      price on such date is greater than the conversion price but less than 120%
      of the conversion price, then the holder will be entitled to receive
      Conversion Value (as defined in the indenture covering these Notes) equal
      to the principal amount of the Notes, plus accrued and unpaid interest
      including liquidated damages, if any;
or





·
            upon
      the occurrence of specified corporate
  transactions.


100


We may call some or all of the Notes at
any time on or after April 21, 2009, at a redemption price, payable in
cash, of 100% of the principal amount of the Notes, plus accrued and unpaid
interest and including liquidated damages, if any, up to but not including the
date of redemption. In addition, the holders may require us to repurchase all or
a portion of their Notes on April 15, 2009, 2014 and 2019, at 100% of the
principal amount of the Notes, plus accrued and unpaid interest and including
liquidated damages, if any, up to but not including the date of repurchase,
payable in cash. Upon a change in control, as defined in the indenture governing
the Notes, holders may require us to repurchase all or a portion of their Notes,
payable in cash equal to 100% of the principal amount of the Notes plus accrued
and unpaid interest and liquidated damages, if any, up to but not including the
date of repurchase.





In anticipation of our Notes being put
by the holders on April 15, 2009, we executed a refinancing plan that involved a
second amendment to our Revolver, a public offering of our common stock and a
cash tender offer for our Notes.





On July 14, 2008, we announced the
commencement of an initial cash tender offer for our Notes (the “Tender
Offer”).  Pursuant to the Tender Offer, we offered to purchase all of
the outstanding Notes at 96.5% of the principal amount thereof plus accrued and
unpaid interest.  The Tender Offer was set to expire on August 8,
2008.  On August 11, 2008, we amended the terms of the Tender Offer to
purchase all of the outstanding Notes at 97.25% of the principal amount thereof
plus accrued and unpaid interest.  The amended Tender Offer expired on
August 22, 2008, resulting in $89,358 of the Notes being tendered (“the Tendered
Notes”) and repurchased.  On September 29, 2008, we repurchased an
additional $20,384 of our Notes in a separate transaction on the open
market.  As a result of the repurchases of our Tendered Notes, we
recognized a total gain of $1,773, net of external fees and direct costs
associated with the Tender Offer, for fiscal
2008.





As indicated above, the remaining Notes
may be converted to cash on April 15, 2009. We expect that holders of the
Notes will exercise this option on April 15, 2009. Accordingly, we have
classified the remaining $40,258 of Notes in current portion of long-term
debt.





Senior
Secured Credit Facility





Revolver.
On November 30, 2006, we entered into a senior secured credit facility (the
“Senior Secured Credit Facility”) with Deutsche Bank Trust Company Americas, as
a Lender and as the Administrative Agent, Deutsche Bank Securities Inc. and
Wells Fargo Bank, N.A., as Joint Lead Arrangers and Book Managers, and Wells
Fargo Bank, N.A. as Syndication Agent. The Senior Secured Credit Facility
consisted of a $100,000 revolving credit facility (the “Revolver”), from which
we initially drew $71,180 in order to repay in its entirety a bridge loan
originally entered into on January 25, 2006 (the “Old Credit Agreement”).
Loans under the Revolver bear interest at a margin over LIBOR or Base Rate, as
elected by us. The applicable margins fluctuate based on our total leverage
ratio from time to time. Our effective interest rates as of October 31,
2008 and 2007 were 6.5% and 7.5%, respectively. Borrowings under the Revolver
may be used to repurchase the remaining outstanding Notes, for working capital,
capital expenditures and general corporate purposes (including share
repurchases).





The amount drawn under the Revolver was
$16,000 and $75,680 as of October 31, 2008 and 2007,
respectively.  As of October 31, 2008, we had approximately
$84,000 of available remaining credit under the Revolver. The Revolver matures
on November 30, 2011.





Second Amendment
and Term Loan.On July 14, 2008, we
entered into a second amendment (the “Second Amendment”), to our Senior Secured
Credit Facility.  Among other things, the Second Amendment provided
for a new $65,000 term loan facility (the “Term Loan”), which was funded in full
on August 25, 2008, resulting in net proceeds of $63,438. The amendment left in
place our $100,000 Revolver discussed above.  In addition to the Term
Loan and Revolver, our amended Senior Secured Credit Facility provides a $35,000
incremental facility (the “Incremental Facility”) pursuant to which we may
request (but no lender is committed to provide) additional loans under the
facility, subject to customary conditions.





The Term Loan bears interest at 2.75%
over the Base Rate or 3.75% over LIBOR, as elected by us.  The Term Loan
has scheduled amortization payments of 0.25% of the principal every quarter
starting with the quarter ending on January 31, 2009.  The mandatory
prepayment provisions also requires us to prepay the Term Loan (i) up to
75% of our domestic excess cash flow (as defined) or up to 50% of our worldwide
excess cash flow (as defined), whichever is less (with step-downs based on total
leverage); (ii) 100% of the proceeds of certain issuances of debt; and
(iii) the proceeds of asset sales or recovery events in excess of $1,500,
to the extent not reinvested.  The Term Loan matures on November 30,
2011.





Covenants.
Our Senior Secured Credit Facility contains two financial maintenance covenants
requiring us to maintain a Total Leverage Ratio, as defined therein, of not more
than 4.25 to 1.0 and an Interest Coverage Ratio, as defined


101


therein,
of at least 3.0 to 1.0.  The Total Leverage Ratio threshold steps down
to 4.00 to 1.0 starting with the quarter ending July 31, 2009 and 3.75 to 1 in
the quarter ending July 31, 2010.  Our Total Leverage Ratio as of
October 31, 2008 and 2007 was 2.3 to 1.0 and 3.8 to 1.0, respectively, and
our Interest Coverage Ratio as of October 31, 2008 and 2007 was 8.3 to 1.0
and 8.4 to 1.0, respectively.





The Senior Secured Credit Facility also
contains customary affirmative and negative covenants for transactions of this
nature, including but not limited to restrictions and limitations on the
following:





·
            Acquisitions;





·
            Incurrence
      of indebtedness;





·
            Granting
      or incurrence of liens;





·
            Dividends
      and other distributions in respect of our equity
    securities;





·
            Investments;





·
            Sales
      of assets;





·
            Transactions
      with affiliates;





·
            Mergers;
      and





·
            Agreements
      to restrict dividends and other payments from
  subsidiaries.







Guarantors and
collateral. The
Revolver and Term Loan obligations under our Senior Secured Credit Facility are
guaranteed by each existing and future wholly-owned domestic subsidiary of ours
that is not an immaterial subsidiary and are secured by a first priority lien on
substantially all of our and our guarantors’ assets.  If loans are
ever made pursuant to our Incremental Facility, such loans would share such
collateral equally and ratably with our Term Loan and Revolver.





PGIC TGD minimum
consideration.  In connection with our acquisition of PGIC’s
worldwide TGD on September 26, 2007, we recorded minimum consideration of
$3,500 due in non-interest bearing quarterly installments through December 2011.
The minimum consideration consists of quarterly payments for each calendar year
beginning in 2008 through 2011. The annual minimum consideration amount to be
paid in 2009 is $1,000 and the annual minimum consideration amounts to be paid
in 2010 and 2011 are $750 each year. The balance as of October 31, 2008 and
2007 of $2,444 and $2,922 , respectively, represents the discounted present
value of the future payments, excluding imputed interest of approximately $306
and $578 , respectively, using an effective interest rate
of 7.25%.





Bet Technology
Inc. (“BTI”) liabilities.  In connection with our acquisition
of certain assets from Bet Technology, Inc. (“BTI”) in February 2004, we
recorded an initial estimated liability of $7,616 for contingent installment
payments computed as the excess fair value of the acquired assets over the fixed
installments and other direct costs. Beginning November 2004, we pay monthly
note installments based on a percentage of certain revenue from BTI games for a
period of up to ten years, not to exceed $12,000. The balance of this liability
as of October 31, 2008 and 2007 was $527 and $2,434,
respectively.





Kings
Gaming Inc. contingent consideration.  In April 2007, we
purchased the Play Four Poker patent and trademark from Kings Gaming Inc.
for a total purchase price of $1,140. Of the total $1,140 purchase price, $500
was deposited into an interest bearing escrow account for Kings Gaming Inc,
which shall remain in escrow until September 1, 2012 (“Maturity Date”);
consequently the $500 is classified as a restricted asset on our balance sheet
in other long term assets. Upon expiration of the escrow period, Kings
Gaming Inc. will be entitled to the $500 escrowed amount and interest
earned thereon contingent upon no claims being made against the purchased patent
and trademark, as outlined in the Intellectual Property Purchase Agreement,
dated April 17, 2007 (“Effective Date”). On each anniversary of the
Effective Date until the Maturity Date, Kings Gaming, Inc. shall only be
entitled to interest accrued in the interest bearing escrow account. The balance
of this liability as of October 31, 2008 and 2007 was $508 and $512. With
an effective interest rate of 3.5% and 5.8%, we paid $22 and $0 of interest
for fiscal 2008 and 2007, respectively.




102


Bet the Set “21”
contingent consideration.  In connection with our acquisition
of Bet the Set “21” in June 2005, we recorded contingent consideration of $560.
The contingent consideration is non-interest bearing and consists of quarterly
payments of 22.5% of “adjusted gross revenues,” as defined, attributed to the
Bet the Set “21”® side bet
table game up to a maximum of $560. The balance of this liability as of October
31, 2008 and 2007 was $412 and $478, respectively.







ENPAT note
payable.  In December 2004, we purchased two RFID technology
patents from ENPAT for $12,500. The purchase price was comprised of an initial
payment of $2,400 followed by a $1,100 payment in January 2005 and non-interest
bearing annual installments through December 2007. The remaining principal and
interest payment of $3,000 was paid in December 2007 and therefore no
outstanding balance existed as of October 31, 2008.  The balance as of
October 31, 2007 was $2,985, which represented the discounted present value
of the future payments, including imputed interest of approximately
$146.





Maturities of long-term debt for the
five fiscal years ending subsequent to October 31, 2008, are as
follows:








October 31,
            
            (In
      thousands)2009
            
            $ 
      41,7532010
            
            7122011
            
            81,5622012
            
            1842013
            
            —Thereafter
            
            938$125,149








8.
SHARE-BASED COMPENSATION





Share-based award
plans.  In February 2004, our board of directors adopted and,
in March 2004, our shareholders approved the Shuffle Master, Inc. 2004
Equity Incentive Plan (the “2004 Plan”) and the Shuffle Master, Inc. 2004
Equity Incentive Plan for Non-Employee Directors (the “2004 Directors’ Plan”).
These approved plans replaced our prior plans and no further options may be
granted from the prior plans. Both the 2004 Plan and the 2004 Directors’ Plan
provide for the grant of stock options, stock appreciation rights (none issued),
and restricted stock and restricted stock units, individually or in any
combination (collectively referred to as “Awards”). Stock options may not be
granted at an exercise price less than the market value of our common stock on
the date of grant and may not be subsequently repriced. Equity granted under the
2004 Plan generally vests in equal increments over four years and expires in ten
years. Equity granted under the 2004 Directors’ Plan generally vests immediately
and expires in ten years, although initial equity grants to directors upon
joining the Board can partially vest either immediately and/or partially over
one or two years.





The 2004 Plan provides for the grants
of Awards to our officers, other employees and contractors. The maximum number
of Awards which may be granted is 2,700 of which no more than 1,890 may be
granted as restricted stock. The 2004 Directors’ Plan provides for the grants of
Awards to our non-employee directors. The maximum number of Awards which may be
granted is 1,125 of which no more than 788 may be granted as restricted
stock.





As of October 31, 2008, 548 and 728
shares are available for grant under the 2004 Plan and 2004 Directors’ Plan,
respectively.




103





A summary of activity under our
shared-based payment plans for fiscal 2008 is presented below:











WeightedWeighted
            
            AverageAverage
            
            Remaining
            
            AggregateExercise
            
            Contractual
            
            IntrinsicShares
            
            Price
            
            Term
            
            Value(In
      thousands, except per share amount)Outstanding
      at October 31, 2006
            3,131
            
            $19.16Granted
            142
            
            27.23Exercised
            (229)
            
            11.12Forfeited
      or expired
            (138)
            
            29.96Outstanding
      at October 31, 2007
            2,906
            
            19.68Granted
            655
            
            9.37Exercised
            —
            
            —Forfeited
      or expired
            (165)
            
            17.39Outstanding
      at October 31, 2008
            3,396
            
            17.80
            
            6.1
            
            $  
      4Exercisable
      at October 31, 2008
            2,366
            
            17.87
            
            5.2
            
            4Vested
      and expected to vest at October 31, 2008
            3,117
            
            $17.80
            
            6.1
            
            $  
      4









In fiscal 2008, there were no stock
options exercised and therefore no related income tax benefit.  In
fiscal 2007, the total intrinsic value of stock options exercised was $4,158 and
the total relating income tax benefit from stock option exercises was
$1,133.  As of October 31, 2008, there was a total of $3,746 of
unamortized compensation related to stock options, which expense is expected to
be recognized over a weighted-average period of 1.8 years.





During the fiscal years ended 2008,
2007, and 2006, we granted 655, 142, and 142 stock options, respectively, with a
grant date fair value of $2,485, $1,467, and $1,773,
respectively.


104





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









WeightedAverageGrant-DateShares
            
            Fair Value(In
      thousands, except per share amount)Nonvested
      at October 31, 2006
            
            340
            
            $26.01Granted
            
            227
            
            25.42Vested
            
            (30)
            
            33.02Forfeited
            
            (51)
            
            25.94Nonvested
      at October 31, 2007
            
            486
            
            26.19Granted
            
            59
            
            11.66Vested
            
            (25)
            
            20.87Forfeited
            
            (16)
            
            18.25Nonvested
      at October 31, 2008
            
            504
            
            $24.15









During the fiscal years ended 2008,
2007 and 2006 we issued 59, 227, and 64 shares of restricted stock,
respectively, with an aggregate fair value of $686, $5,773 and $2,113,
respectively. The total value of each restricted stock grant, based on the fair
market value of the stock on the date of grant, is amortized to compensation
expense over the related vesting period. Net income, as reported, for the fiscal
years ended 2008 and 2007, reflects $1,944 and $2,149 respectively, of
amortization of restricted stock compensation.





As of October 31, 2008, there was
$5,102 of unamortized compensation expense related to restricted stock, which is
expected to be recognized over a weighted-average period of 1.7
years.





Recognition of
compensation expense.  The following table shows information
about compensation costs recognized for the years ended October 31:








Year
      Ended October 31,2008
            
            2007
            
            2006(In
      thousands)Compensation
      costs:Stock
      options
            
            $ 
      1,577
            
            $ 
      1,881
            
            $ 
      3,515Restricted
      stock
            
            2,612
            
            2,931
            
            1,997Total
      compensation cost
            
            $  4,189
            
            $ 
      4,812
            
            $  5,512Related
      tax benefit
            
            $(1,131)
            
            $(1,313)
            
            $(1,720)








105





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








Year
      Ended October 31,2008
            
            2007
            
            2006(In
      thousands)Cost
      of sales
            
            $    
      25
            
            $    
      43
            
            $ 
      102Selling,
      general and administrative
            
            3,770
            
            4,391
            
            5,108Research
      and development
            
            394
            
            378
            
            302Total
      share-based compensation
            
            $4,189
            
            $4,812
            
            $5,512








Option valuation models require the
input of highly subjective assumptions, and changes in assumptions used can
materially affect the fair value estimate. Expected volatility and dividends are
based on historical factors related to our common stock. Expected term
represents the estimated weighted-average time between grant and employee
exercise. Risk free interest rate is based on U.S. Treasury rates appropriate
for the expected term.





We estimate the fair value of each
stock option award on the grant date using the Black-Scholes valuation model
incorporating the weighted-average assumptions noted in the following
table:






Year
      ended October 31,2008
            
            2007
            
            2006Option
      valuation assumptions:Expected
      dividend yield
            
            None
            
            None
            
            NoneExpected
      volatility
            
            47.1%
            
            39.6%
            
            37.1%Risk-free
      interest rate
            
            3.0%
            
            4.6%
            
            4.7%Expected
      term
            
            4.2
      years
            
            4.2
      years
            
            4.4
      years









9.
EARNINGS PER SHARE





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







Year
      Ended October 31,2008
            
            2007
            
            2006(In
      thousands, except per share amount)Income
      (Loss) from continuing operations
            $(10,802)
            
            $
      16,301
            
            $ 
      5,339Basic:Weighted
      average shares
            40,006
            
            34,680
            
            34,585Diluted:Weighted
      average shares, basic
            40,006
            
            34,680
            
            34,585Dilutive
      effect of options and restricted stock
            —
            
            593
            
            1,176Dilutive
      effect of contingent convertible notes
            —
            
            3
            
            291Weighted
      average shares, diluted
            40,006
            
            35,276
            
            36,052Basic
      earnings (loss) per share
            $   
      (0.27)
            
            $   
      0.47
            
            $   
      0.15Diluted
      earnings (loss) per share
            $   
      (0.27)
            
            $   
      0.46
            
            $   
      0.15Weighted
      average anti-dilutive shares excluded
            16,292
            
            6,739
            
            993from
      diluted EPS







106




We account for our contingent
convertible notes in accordance with FASB EITF No. 04-8, “The Effect of Contingently
Convertible Debt on Diluted Earnings Per Share” (“EITF 04-8”), which
requires us to include the dilutive effect of our outstanding Notes in our
diluted earnings per share calculation, regardless of whether the market price
trigger or other contingent conversion feature has been met. Because the Notes
include a mandatory cash settlement feature for the principal payment, we apply
the treasury stock method. This method results in incremental dilutive shares
when the average fair value of our common stock for a reporting period exceeds
the initial conversion price per share of $28.07. For certain quarters during
the fiscal years ended 2007 and 2006, the average fair value of our common stock
exceeded $28.07, and accordingly, the dilutive effect is included in our diluted
shares calculation.  During fiscal 2008, the average fair value of our
common stock did not exceed $28.07, therefore no dilutive effect of our
outstanding Notes is included in our diluted earnings per share
calculation.  For fiscal 2008, the dilution of 75 shares related to
our options, restricted stock and contingent convertible notes have not been
included in the diluted loss per share computation as their inclusion would be
anti-dilutive.





10.
SHAREHOLDERS’ EQUITY





Offering of
common stock.On July 25, 2008, we sold 17,647 shares of our
common stock in a public offering at $4.25 per share (the “Offering”), resulting
in net proceeds of $69,974.  In conjunction with the Offering, we
granted the Underwriters an over-allotment option to purchase up to 2,647 shares
of our common stock at $4.25 per share.  On August 1, 2008, the
Underwriters exercised their over-allotment option in full and purchased 2,647
shares, resulting in net proceeds of $10,479.  As part of the
Offering, we incurred certain fees directly related to the transaction,
including, but not limited to, an underwriting fee, legal fees, independent
registered public accountant fees and printing fees. Total aggregate net
proceeds from the Offering and the exercise of the over-allotment option were
$80,453 on 20,294 total shares.





Net proceeds from the Offering and the
over-allotment were used to repurchase a portion of the Notes tendered and
accepted as a result of the tender offer as well as to pay down our
Revolver.  We intend to draw on the Revolver and/or use cash on hand
to satisfy the remaining outstanding Notes.





Common stock
repurchases.  Our board of directors periodically authorizes us
to repurchase shares of our common stock, however we generally prioritize bank
debt reduction over share repurchases. Under our existing board authorization,
during fiscal 2008, we repurchased 2,000 shares of our common stock for a total
of $7,125 at an average price of $3.56.  As of October 31, 2008,
$21,078 remained outstanding under our board authorization.  Under our
board authorization, for fiscal 2007 and 2006, we repurchased 77 and 317 shares
of our common stock at total costs of $1,963 and $8,665,
respectively.  We cancel shares that we repurchase.





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





Tax effect from
stock option exercises.  For fiscal 2008, there was no income
tax benefit from stock option exercises.  For fiscal 2007 and 2006, we
recorded income tax benefits of $1,133 and $3,908, respectively, related to
employee stock option exercises. The tax effect/benefit from stock option
exercises affected our deferred tax asset or income tax payable as well as our
additional paid-in capital by an equal amount and had no effect on our provision
for income taxes.





Preferred stock
purchase rights. In February 2005 and June 2008, we amended our
Shareholder Rights Agreement, dated June 26, 1998 (the "Rights Agreement").
As more fully described therein, and subject to the terms thereof, the Rights
Agreement, as amended, generally gives holders of our common stock rights to
acquire shares of our preferred stock upon the occurrence of specified events.
The amendment (a) eliminated all requirements in the Rights Agreement that
actions, approvals and determinations to be taken or made by our board of
directors be taken or made by a majority of the "Continuing Directors," and
(b) reflects the change of the name of our stock transfer agent to Wells
Fargo Bank, N.A.





The Shareholder Rights Agreement was
implemented by distributing one preferred share purchase right (a "Right") for
each outstanding share of our common stock held of record as of July 10,
1998. Additionally, we further authorized and directed the issuance of one Right
with respect to each share of our common stock that shall become outstanding
thereafter until the Rights become exercisable or they expire as described
below. Each Right initially entitles holders of our common stock to buy one
one-hundredth of a share of our Preferred Stock at a price of $3.56 (as
currently adjusted), subject to adjustment. The Rights will generally become
exercisable after a person or group acquires beneficial ownership of 20% or more
of our common stock or announces a tender offer upon consummation of which such
person or group would own 20% or more of our common stock.


107


If any person or group becomes the
owner of 20% or more of our common stock, then, in lieu of the right to purchase
any Preferred Stock, each Right will therefore entitle its holder (other than an
acquiring person or member of an acquiring group) to purchase shares of our
common stock in an amount equal to the exercise price ($3.56, as currently
adjusted) of one one-hundredth share of the preferred stock divided by 50% of
the then-current market price of one share of common stock.





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





The Rights expired in
September 2008 and in November 2008 we voluntarily removed the Rights of
the Preferred Stock from our listing and registration on the NASDAQ national
market.





11.
EMPLOYEE BENEFIT PLANS





U.S.defined
contribution plan.  We sponsor a defined contribution plan,
which qualifies under Section 401(k) of the Internal Revenue Code and covers
United States employees who meet certain age and service requirements. We may
make matching contributions to the plan based on a percentage of employee
compensation and actual contributions. For fiscal 2008, 2007 and 2006, we
elected to make matching contributions of 50% of employee contributions up to 4%
of compensation, totaling $430, $335 and $248, respectively.





Austrian pension
commitments. In April and May 2004, we formalized our defined
contribution pension agreements with certain Austrian employees. We pay
contributions to an external pension fund administered by ÖPAG Pensionskassen
AG. Aggregate pension expense relating to our Austrian agreements for fiscal
2008, 2007 and 2006 were $98, $102 and $53, respectively.





12.
OTHER EXPENSE AND GAIN ON EARLY EXTINGUISHMENT OF DEBT









Year
      Ended October 31,2008
            
            2007
            
            2006(In
      thousands)Other
      expense:Interest
      income
            $ 
      1,759
            
            $ 
       1,644
            
            $ 
       1,998Interest
      expense
            (6,630)
            
            (7,487)
            
            (6,863)Other,
      net
            1,261
            
            (4,131)
            
            (1,834)Total
      other expense
            $(3,610)
            
            $(9,974)
            
            $(6,699)Gain
      on early extinguishment of debt
            $ 
      1,773
            
            $      
      —
            
            $     
        —









Interest income relates primarily to
our investment in sales-type leases, notes receivable portfolio and cash on
hand.


Interest
expense for fiscal 2008 primarily relates to interest on our Revolver, Term Loan
and Notes.  Interest expense for fiscal 2007 primarily related to interest
on our Revolver and Notes.  Interest expense for fiscal 2006 primarily
related to interest on the our Old Credit Agreement and our Notes.





Other expense primarily relates to
fluctuations of the U.S. dollar, the Euro, the Australian dollar, the Pataca and
the Rand. A net foreign currency gain of $2,655 was recognized for fiscal 2008
and net foreign currency losses of $3,109 and $414 were recognized for fiscal
2007 and 2006, respectively.  Our foreign subsidiaries engage in
activities with us and certain customers in U.S. dollar and other foreign
denominated contracts. As of our third quarter of fiscal 2008, we began net
settling all inter-company trade balances, which has resulted in the recognition
of additional foreign currency fluctuations pursuant to SFAS No. 52, “Foreign Currency
Translation”.  Other expense also relates to amortization of
debt issue costs.  For fiscal 2008, amortization of debt issue costs
of $1,339 related to our Revolver, our Term Loan and our Notes.  For
fiscal 2007, amortization of debt issue costs of $1,327 related to our Revolver
and our Notes.  For fiscal 2006, amortization of debt issue costs of $1,511
related primarily to our Notes.




108


Gain on early extinguishment of debt
for fiscal 2008 related to the gain realized from the early extinguishment of
our Notes, pursuant to the Tender Offer discussed in Note 2, net of external
fees and direct costs associated with the Tender Offer.  We did not
extinguish any portion of our Notes for fiscal 2007 and 2006.







13.
INCOME TAXES





We record deferred income taxes to
reflect the income tax consequences in future years between the financial
reporting and income tax bases of assets and liabilities, and future tax
benefits such as net operating loss carryforwards and other tax credits.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which the differences are
expected to reverse. We provide valuation allowances to reduce deferred tax
assets to an amount that is more likely than not to be realized. The provision
for income taxes is the sum of the tax currently payable and the change in
deferred taxes during the year.





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








2008
            
            2007
            
            2006(In
      thousands)Continuing
      operations
            $6,346
            
            $(1,999)
            
            $13,373Discontinued
      operations
            —
            
            46
            
            (90)Total
            
            $6,346
            
            $(1,953)
            
            $13,283








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








Year
      Ended October 31,2008
            
            2007
            
            2006(In
      thousands)Current:Federal
            $ 
      5,982
            
            $ 
      6,345
            
            $13,647State
            726
            
            747
            
            658Foreign
            473
            
            64
            
            1,2907,181
            
            7,156
            
            15,595Deferred:Federal
            (1,547)
            
            (1,586)
            
            (1,343)State
            (85)
            
            (82)
            
            (60)Foreign
            797
            
            (7,487)
            
            (819)(835)
            
            (9,155)
            
            (2,222)Total
            $ 
      6,346
            
            $(1,999)
            
            $13,373





109





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








Year
      Ended October 31,2008
            
            2007
            
            2006(In
      thousands)Deferred
      tax assets:Inventories
            $ 
      2,969
            
            $
      5,458
            
            $4,429Accounts
      receivable
            202
            
            236
            
            684Employee
      benefits
            1,063
            
            1,157
            
            768Deferred
      revenue
            517
            
            277
            
            835Investment
      impairment write-downs
            —
            
            1,236
            
            1,033Other
      reserves
            310
            
            977
            
            317Stock
      awards
            3,642
            
            2,758
            
            2,081Fixed
      assets
            —
            
            659
            
            391Foreign
      net operating loss carryforward
            6,026
            
            3,666
            
            1,410Contingent
      consideration on patent purchase
            353
            
            1,095
            
            1,926Foreign
      tax credits / receivables
            566
            
            248
            
            331Intangible
      assets
            5,712
            
            6,640
            
            —Other
            1,734
            
            1,032
            
            304Total
      gross deferred tax assets
            23,094
            
            25,439
            
            14,509Less:
      valuation allowance
            (1,557)
            
            (1,505)
            
            (880)Deferred
      tax assets
            21,537
            
            23,934
            
            13,629Deferred
      tax liabilities:Goodwill
            3,171
            
            2,478
            
            1,608Inventories
            1,139
            
            —
            
            —Depreciation
            762
            
            —
            
            —Translation
      Gains/Losses
            870
            
            —
            
            —Intangible
      assets
            —
            
            —
            
            5,959Other
            1,427
            
            259
            
            597Total
      gross deferred tax liabilities
            7,369
            
            2,737
            
            8,164Net
      deferred tax assets
            $14,168
            
            $21,197
            
            $5,465








We have income tax net operating loss
carryforwards related to our international operations of approximately $21,730
which have an indefinite life.  We have recorded a deferred tax asset
of $6,026 related to these operating losses.  We believe that it is more
likely than not that the benefit from certain international operating loss
carryforwards will not be realized.  In recognition of this risk, we
have provided a valuation allowance of $1,386 on the deferred tax assets
relating to certain of these international net operating loss
carryforwards.  If our assumptions change and we determine we will be
able to realize these net operating losses, the tax benefits relating to any
reversal of the valuation allowance on deferred tax assets at October 31, 2008
will be recognized as a reduction of income tax expense.





We have capital loss carryforwards
related to our international operations of $171 which have an indefinite
life.  We believe that it is more likely than not that the benefit
from this carryforward will not be realized, accordingly, we have provided a
valuation allowance of $171 on this deferred tax asset.





We have foreign tax credits of $389 and
$177 in the United States and Australia, respectively.  The United
States foreign tax credit carryforward will expire in 2017.  The
Australian foreign tax credit carryforward has an indefinite life.  We
believe that it is more likely than not that the benefit from these foreign tax
credit carryforward will be recognized within the carryforward
period.





We have not provided U.S. Federal
income tax on $14,421 of undistributed earnings of our foreign
subsidiaries.   We intend to permanently reinvest such earnings
outside the United States.  Upon distribution of these earnings in the form
of dividends or capital gains, we would be subject to U.S. income tax net of
applicable foreign tax credits. Determination of


110


the
amount of unrecognized deferred U.S. income tax liability is not practicable
because of the complexities associated with its hypothetical
calculation.





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








Year
      Ended October 31,2008
            
            2007
            
            2006Federal
      income tax at the statutory rate
            (35.0%)
            
            35.0%
            
            35.0%Permanent
      Goodwill Impairment
            149.0%
            
            0.0%
            
            0.0%Stargames
      PC4 software technology
            0.0%
            
            (46.9%)
            
            0.0%Acquired
      in-process research and development
            0.0%
            
            0.0%
            
            35.8%Interest
      expense
            (21.7%)
            
            (5.7%)
            
            (3.8%)Research
      & development benefits
            (12.2%)
            
            (7.4%)
            
            (2.3%)Manufacturing
      deduction
            (9.1%)
            
            (0.6%)
            
            0.0%Foreign
      dividend inclusion
            10.1%
            
            0.0%
            
            9.9%Stock
      compensation
            8.0%
            
            1.8%
            
            0.0%Valuation
      allowances
            13.5%
            
            1.1%
            
            0.3%Unrecognized
      tax benefits
            4.5%
            
            0.0%
            
            0.0%State
      income taxes, net of federal benefit
            7.4%
            
            2.1%
            
            2.5%Withholding
      taxes
            10.1%
            
            2.9%
            
            2.2%Foreign
      tax credits
            (11.1%)
            
            (2.9%)
            
            (8.2%)Foreign
      Rate Differencial
            27.5%
            
            2.6%
            
            (0.7%)Other
            
            1.4%
            
            4.0%
            
            0.8%Effective
      tax rate
            142.4%
            
            (14.0%)
            
            71.5%








Our income tax returns are subject to
examination by the Internal Revenue Service (“IRS”) and other tax authorities in
the locations where we operate.  We assess potentially unfavorable outcomes
of such examinations based on the criteria of FIN 48, which we adopted on
November 1, 2007.  FIN 48 prescribes a minimum recognition threshold a tax
position is required to meet before being recognized in the financial
statements. As a result, our income tax recognition policy related to uncertain
income tax positions is no longer covered by SFAS No. 5, “Accounting for Contingencies”(“SFAS 5”).  FIN 48 applies to all tax positions related to income
taxes subject to SFAS 109.  FIN 48 utilizes a two-step approach for
evaluating tax positions.  Recognition (Step I) occurs when we conclude
that a tax position, based on its technical merits, is more likely than not to
be sustained upon examination.  Measurement (Step II) is only addressed if
the position is deemed to be more likely than not to be sustained.  Under
Step II, the tax benefit is measured as the largest amount of benefit that is
more likely than not to be realized upon settlement. FIN 48’s use of the
term “more likely than not” is consistent with how that term is used in SFAS 109
(i.e., the likelihood of occurrence is greater than 50%).





Tax positions failing to qualify for
initial recognition will be recognized in the first subsequent interim period
that meet the “more likely than not” standard. If it is subsequently determined
that a previously recognized tax position no longer meets the “more likely than
not” standard, it is required that the tax position be derecognized. FIN 48
specifically prohibits the use of a valuation allowance as a substitute for
derecognition of a tax position.





Upon adoption of FIN 48, we recorded a
net reduction of $1,144, of which $101 relates to penalties and interest, to the
November 1, 2007 retained earnings balance as a cumulative effect
adjustment.   The total amount of unrecognized tax benefits as of
October 31, 2008 was $1,484, of which $1,484 would affect the
effective tax rate if recognized.





We recognized interest and penalties
related to unrecognized tax benefits within the income tax expense line in the
accompanying consolidated statement of operations.  Accrued interest
and penalties are included within the related tax liability line in the
consolidated balance sheet. As of October 31, 2008, accrued interest and
penalties totaled $255.





We filed numerous consolidated and
separate income tax returns in the United States federal jurisdiction and in
many state and foreign jurisdictions.  With few exceptions, we are no
longer subject to United States federal income tax examinations for years before
2004, and are no longer subject to state and local, or foreign income tax
examinations for years before 2002 and 2003 respectively.


111


We believe that it is reasonably
possible that approximately $258 of unrecognized tax benefits will decrease
within 12 months due to the anticipated conclusion of an outstanding state
audit.





A reconciliation of the beginning and
ending amount of unrecognized tax benefits is as follows:








Year
      Ended October 31, 2008(In
      thousands)Balance
      at adoption
            $1,334Increases
      related to prior year tax positions
            24Decreases
      related to prior year tax positionsIncreases
      related to current year tax positions
            126Decreases
      related to current year tax positions
            —Reductions
      for settlements with taxing authorities
            —Reductions
      due to lapse of statutes of limitations
            —Balance
      at year end
            $1,484








14.
OPERATING SEGMENTS


In accordance with SFAS No. 131,
“Disclosures about Segments of
an Enterprise and Related Information”, we report segment information
based on the “management approach”. The management approach designates the
internal reporting used by management for making decisions and assessing
performance as the source of our reportable segments.




We develop, manufacture and market
technology and entertainment-based products for the gaming industry for
placement on the casino floor. Our products primarily relate to our casino
customers’ table game activities and focus on either increasing their
profitability, productivity and security or expanding their gaming entertainment
offerings. Our business is segregated into the following four operating
segments: Utility, Proprietary Table Games (“PTG”), Electronic Table Systems
(“ETS”), and Electronic Gaming Machines (“EGM”).




See Note 1 for a detailed discussion of
our four segments.





Each segment’s activities include the
design, development, acquisition, manufacture, marketing, distribution,
installation and servicing of its product lines.




We evaluate the performance of our
operating segments based on net revenues, gross margin and operating
income.





Segment revenues include leasing,
licensing, or selling of products within each reportable segment. Segment
operating income includes net revenues attributable to third parties and
expenses directly and indirectly associated with the product lines included in
each segment. Our direct expenses primarily include cost of products sold,
depreciation of leased assets, amortization of product-related intangible
assets, service, manufacturing overhead, shipping and
installation.  Indirect expenses include other costs directly
identified with each segment, such as research and development, product approval
costs, product-related litigation expenses, amortization of patents and other
product-related intellectual property, sales commissions and other
directly-allocable sales expenses.  Capital expenditures include
amounts reported in our consolidated statements of cash flows for purchases of
leased products, property and equipment, and intangible assets plus the financed
or non-cash portion of these purchases which is excluded from cash
flows





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





112





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








Year
      Ended October31,2008
            
            2007
            
            2006(In
      thousands)Revenue:Utility
            $  
      80,893
            
            $
      78,457
            
            $  
      86,792Proprietary
      Table Games
            38,594
            
            33,125
            
            38,316Electronic
      Table Systems
            27,461
            
            27,890
            
            16,555Electronic
      Gaming Machines
            42,898
            
            39,269
            
            21,090Unallocated
      Corporate
            160
            
            110
            
            238$
      190,006
            
            $178,851
            
            $
      162,991Gross
      profit (loss):Utility
            $  
      46,097
            
            $ 
      48,086
            
            $  
      55,707Proprietary
      Table Games
            31,983
            
            28,154
            
            33,742Electronic
      Table Systems
            13,068
            
            13,891
            
            9,936Electronic
      Gaming Machines
            19,662
            
            14,027
            
            7,225Unallocated
      Corporate
            92
            
            (292)
            
            (340)$
      110,902
            
            $103,866
            
            $
      106,270Operating
      income (loss):Utility
            $  
      36,078
            
            $ 
      33,783
            
            $ 
      42,445Proprietary
      Table Games
            28,957
            
            23,465
            
            30,451Electronic
      Table Systems
            (16,105)
            
            6,600
            
            (16,638)Electronic
      Gaming Machines
            11,693
            
            7,390
            
            3,528Unallocated
      Corporate
            (61,682)
            
            (46,656)
            
            (32,304)$ 
      (1,059)
            
            $ 
      24,582
            
            $ 
      27,482Depreciation
      and amortization:Utility
            $    
      9,497
            
            $ 
        8,634
            
            $   
      8,535Proprietary
      Table Games
            4,310
            
            2,661
            
            2,214Electronic
      Table Systems
            6,335
            
            5,305
            
            2,513Electronic
      Gaming Machines
            1,422
            
            586
            
            384Unallocated
      Corporate
            3,215
            
            3,562
            
            4,527$  
      24,779
            
            $ 
      20,748
            
            $ 
      18,173Capital
      expenditures:Utility
            $    
      6,699
            
            $   
      3,352
            
            $   
      6,139Proprietary
      Table Games
            1,338
            
            1,969
            
            577Electronic
      Table Systems
            6,860
            
            8,004
            
            5,730Electronic
      Gaming Machines
            691
            
            103
            
            500Unallocated
      Corporate
            1,838
            
            1,828
            
            2,730$  
      17,426
            
            $ 
      15,256
            
            $ 
      15,676Assets,
      end of year:Utility
            $
      105,472
            
            $121,822
            
            $109,689Proprietary
      Table Games
            47,281
            
            53,635
            
            41,956Electronic
      Table Systems
            48,752
            
            89,259
            
            80,838Electronic
      Gaming Machines
            26,170
            
            37,495
            
            28,842Unallocated
      Corporate
            34,271
            
            57,556
            
            43,882$
      261,946
            
            $359,767
            
            $305,207





113





REVENUE
BY GEOGRAPHIC AREA





Revenues by geographic area are
determined based on the location of our customers. For fiscal 2008, 2007 and
2006, sales to customers outside the United States accounted for 53%, 55% and
44% of consolidated revenue, respectively. No individual customer accounted for
more than 10% of consolidated revenue.





The following provides financial
information concerning our operations by geographic area for the years ended
October 31:









Year
      Ended October 31,2008
            
            2007
            
            2006(In
      thousands)Revenue:United
      States
            $ 
      90,292
            
            47.5%
            
            $ 
      80,331
            
            44.9%
            
            $ 
      90,569
            
            55.6%Canada
            7,298
            
            3.8%
            
            7,314
            
            4.1%
            
            7,103
            
            4.4%Other
      North America
            2,235
            
            1.2%
            
            1,828
            
            1.0%
            
            2,747
            
            1.7%Europe
            14,631
            
            7.7%
            
            9,702
            
            5.4%
            
            9,920
            
            6.1%Australia
            57,692
            
            30.4%
            
            52,417
            
            29.3%
            
            27,149
            
            16.7%Asia
            11,761
            
            6.2%
            
            21,809
            
            12.2%
            
            24,003
            
            14.7%Other
            6,097
            
            3.2%
            
            5,450
            
            3.1%
            
            1,500
            
            0.8%$190,006
            
            100.0%
            
            $178,851
            
            100.0%
            
            $162,991
            
            100.0%Long-lived
      assets, end of year:United
      States
            $75,578
            
            41.6%
            
            $ 
      95,193
            
            36.6%
            
            $ 
      61,152
            
            28.3%Austria
            46,012
            
            25.3%
            
            56,618
            
            21.8%
            
            53,667
            
            24.9%Australia
            52,652
            
            29.0%
            
            107,691
            
            41.5%
            
            100,364
            
            46.5%Other
            7,305
            
            4.1%
            
            300
            
            0.1%
            
            628
            
            0.3%$181,547
            
            100.0%
            
            $259,802
            
            100.0%
            
            $215,811
            
            100.0%









15.
COMMITMENTS AND CONTINGENCIES





Operating
leases.We lease office, production, warehouse and service
facilities, office equipment and service vans under operating leases. The
facility leases are for periods ranging from one to ten years, include renewal
options, and include an allocation of real estate taxes and other operating
expenses. Total rent expense under operating leases was approximately $2,389,
$1,934 and $1,560 for fiscal 2008, 2007, and 2006, respectively.





Estimated future minimum lease payments
under operating leases subsequent to October 31, 2008, are as
follows:








October 31,
            
            (In
      thousands)2009
            
            $2,0802010
            
            1,7562011
            
            1,5122012
            
            1,4292013
            
            1,145Thereafter
            
            359$8,281








Purchase
commitments. From time to time, we enter into commitments
with our vendors to purchase inventory at fixed prices or in guaranteed
quantities. As of October 31, 2008, our significant inventory purchase
commitments totaled $10,805 which is primarily related to parts for our various
shufflers, our progressive table games, Table Master, our EGMs, our e-Table
products and Easy Chipper C products. As of October 31, 2007, our significant
inventory purchase commitments totaled $14,794 which were primarily related to
our one2six shufflers, Easy Chipper C, Table Master, Vegas Star, Rapid Table
Games and our EGMs.  These purchase commitments represented short-term
open purchase orders with our vendors.





114


Minimum royalty
payments.We have entered into an agreement related to the
licensing of intellectual property for use in our business which contain annual
minimum royalty payments.  The aggregate annual minimum royalty
payments are approximately $19,881 through 2019.The
annual minimum royalty payments under this agreement vary from $750 to $2,000
annually and are only required in order for us to preserve our exclusivity
rights.





Employment
agreements.We have entered into employment contracts with our
Corporate Officers and certain other key employees with durations ranging from
one to three years. Significant contract provisions include minimum annual base
salaries, healthcare benefits, bonus compensation if performance measures are
achieved and non-compete provisions. These contracts are primarily “at will”
employment agreements, under which the employee or we may terminate employment.
If we terminate any of these employees without cause, we are obligated to pay
the employee severance benefits as specified in their individual contract. As of
October 31, 2008 and 2007, minimum aggregate severance benefits totaled $5,939
and $5,747, respectively.





Legalproceedings.  In
the ordinary course of business, we are involved in various legal proceedings
and other matters that are complex in nature and have outcomes that are
difficult to predict. In accordance with SFAS 5, we record accruals for
such contingencies to the extent that we conclude that it is probable that a
liability will be incurred and the amount of the related loss can be reasonably
estimated. Our assessment of each matter may change based on future unexpected
events. An unexpected adverse judgment in any pending litigation could cause a
material impact on our business operations, intellectual property, results of
operations or financial position. Unless otherwise expressly stated, we believe
costs associated with litigation will not have a material impact on our
financial position or liquidity, but may be material to the results of
operations in any given period. We assume no obligation to update the status of
pending litigation, except as may be required by applicable law, statute or
regulation.





1.           VendingData II—In October
2004, we filed a second patent infringement lawsuit ("VendingData II") against
VendingData Corporation ("VendingData") now known as Elixir Gaming Technologies.
We settled our first patent infringement lawsuit against VendingData on
July 12, 2005 ("VendingData I"). This second suit alleges that the use,
importation and offering for sale of VendingData's PokerOneTM shuffler infringes
another patent owned by us (a different patent than the patents that were the
subject of the VendingData I case). VendingData II was filed in the U.S.
District Court for the District of Nevada (the "Court") in Las Vegas, Nevada.
The complaint seeks an unspecified amount of damages against VendingData and a
preliminary and permanent injunction against VendingData's infringing conduct.
VendingData has denied infringement and has also filed a counterclaim for a
declaratory judgment of non-infringement.





On November 29, 2004, the Court
granted our motion for a preliminary injunction (the "Injunction"). The
Injunction became effective upon our posting of a $3,000 cash security with the
Court on November 30, 2004. This security deposit, plus interest earned
thereon, is included in other non-current assets on our consolidated balance
sheet, and is available to VendingData to the extent, if any, that VendingData
proves and is otherwise legally entitled to any actual damages, if any, which
the Injunction caused VendingData if, in fact, it is found that the Injunction
was wrongfully issued. On December 17, 2004, the Court denied VendingData's
two emergency motions to modify the Injunction.





In March 2005, the Court of Appeals for
the Federal Circuit (the "Federal Circuit"), by a two to one vote, stayed the
Injunction based on a technical defect in the Court's process in granting the
Injunction, and not on its merits. On December 27, 2005, the Federal
Circuit, by the same two to one vote, vacated the Injunction and ordered the
Court to perform a more complete claim construction analysis in order to deal
with any future motions on whether or not to reinstate the Injunction. Two of
the three judges on the Federal Circuit panel stated that under VendingData's
claim construction the PokerOne likely did not literally infringe. The
dissenting judge stated that infringement was likely under either our claim
construction or VendingData's. We continue to believe that infringement exists
under either our claim construction or VendingData's claim construction. The
Federal Circuit did not rule on which claim construction is the proper
one.





In May 2005, the Court held a Markman
hearing for construction of the claims. On September 26, 2005, U.S.
Magistrate Lawrence R. Leavitt for the District of Nevada issued his Claim
Construction Report and Recommendation in the Markman hearing concerning
VendingData's PokerOneTM shuffler. The Magistrate's findings were limited to his
interpretation of certain words in the patent claim asserted by us, and he
agreed with the interpretation put forth by VendingData. In vacating the
Injunction in December 2005, the Federal Circuit did not mention Magistrate
Leavitt's Claim Construction Report and Recommendation. On February 26,
2007, the Court adopted and accepted, without modification, the Magistrate'sRecommendation. The Magistrate's Recommendation,
as adopted by the Court, is not a determination of whether the PokerOneTM
infringes the asserted patent, nor does it speak to the validity of our claims.
There can be no guarantee that, upon any further appeal of the Court's adoption
of the Magistrate's Recommendation, the Federal Circuit will agree with our
claim construction.


115


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





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





On May 23, 2007, the Court entered
an order granting VendingData's motion for a protective order staying all
further discovery in the case pending resolution of VendingData's motion for
summary judgment, other than further discovery granted Shuffle Master pursuant
to an emergency motion heard on May 10, 2007. On May 31, 2007, Shuffle
Master opposed VendingData's motion for summary judgment of non-infringement,
and brought a cross motion for summary judgment that the PokerOneTM does
infringe.





On February 1, 2008, the Court
granted VendingData's Motion for Summary Judgment and denied Shuffle Master's
Cross Motion for Summary Judgment. We appealed this ruling on February 29,
2008. On February 15, 2008, VendingData filed a Motion for Attorney's Fees
and Costs requesting in excess of approximately $1,800, based on VendingData's
theory that the case was filed by us in bad faith and that the case was a
"vexatious" litigation. On March 17, 2008, we filed an opposition to the
Motion for Attorney's Fees and Costs. On March 25, 2008, the Court stayed
all proceedings in regards to the Motion for Attorney's Fees and Costs until the
resolution of Shuffle Master's appeals on the Summary Judgment
motions.   The appeal process will likely not be concluded until
some time in calendar year 2009.





Amediation concerning
our appeal of the District Court’s unfavorable summary judgment decision, our
request for exoneration and return of our $3,000 cash deposit, VendingData’s
request for $1,800 in attorneys’ fees, and VendingData’s position that it
is entitled to the cash deposit occurred in October 2008 but failed to
resolve any issues in the case.





While we continue to deny any liability
and believe that our $3,000 cash deposit, plus interest earned thereon, should
be returned and Vending Data’s request for $1,800 in attorneys’ fees dismissed,
we believe the likelihood of an unfavorable outcome in this matter is reasonably
possible. We cannot, however, at this time, reasonably estimate an expected
loss, if any. Further, subject to judicial and other risks beyond our control,
we do not believe that the loss, if any, would be material.





See also
subsequent events.





2.           Awada—On April 25 and
April 26, 2005, our rescission trial was held in the District Court in
Clark County, Nevada in the case against us and our CEO, Mark Yoseloff, brought
by plaintiffs Yehia Awada and Gaming Entertainment, Inc ("GEI"). At the
conclusion of the trial, the court granted our rescission motion, ordering that
the subject contract, called the "Game Option Agreement", be rescinded and/or
void. On May 18, 2005, the Court entered Findings of Fact/Conclusions of
Law confirming the Court's rescission ruling. Among the findings, the Court
found that the actions of the plaintiffs Awada and Gaming
Entertainment, Inc. demonstrated that the plaintiffs never had any
intention of conveying to us the exclusive license to the 3-Way Action game, as
they had agreed and were required to do under the Game Option Agreement. The
Court further found that we had established by a preponderance of the evidence
that the plaintiffs had materially failed to perform their obligations under the
Game Option Agreement, that plaintiff's testimony about the Game Option
Agreement was not credible, and that we were entitled to the remedy of
rescission. On May 5, 2005, the Court ruled on the parties' damages
requests in connection with the case and as required under Nevada law.
Plaintiffs were seeking approximately $13,000 in damages. The Court ordered that
the total damages under Nevada law due to the successful rescission of the Game
Option Agreement was $130 including all interest. The damages amount was paid in
June 2006.





Plaintiffs appealed the Court's order
granting the rescission of the "Game Option Agreement" to the Nevada Supreme
Court.





On December 27, 2007, the Nevada
Supreme Court denied the appeal filed by the plaintiffs with regard to the
District Court's rescission judgment and its dismissal of all claims related to
the breach of contract issues, and affirmed the District Court's order granting
the rescission of the "Game Option Agreement". The Supreme Court also remanded
to the District Court, on procedural grounds, the remaining non-contract claims.
We now intend to seek dismissal of these claims. A mediation of this case and
the others involving Awada and GEI on June 27, 2008 resulted in settlement
of all cases with Awada and his companies. However, Awada and his entities have
refused to sign the settlement agreement. The settlement agreement would have
provided, among other things, that (i) Awada will transfer the
3-5-7 PokerTM game to the Company for no cash or other payment by the
Company, (ii) the Company will forbear from collecting on the judgment
absent any breaches by Awada; (iii) all related matters will be dismissed
with prejudice and (iv) a full release by Awada and GEI of
the


116


Company
for any past acts.  As of October 31, 2008, we believed that it was
not probable that a settlement of this matter will occur.  Therefore
we intend to file a motion for summary judgment to resolve the
case.





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





See also subsequent
events.





3.           GEI—In July 2004, we filed a
patent infringement lawsuit against Gaming Entertainment, Inc. and Yehia
Awada ("GEI") in the U.S. District Court for the District of Nevada, in Las
Vegas, Nevada. The lawsuit alleges that GEI's 3-5-7 PokerTM game infringes one of
our Three Card Poker® patents and one of our Let-It-Ride® patents. We were
seeking a permanent injunction and an undetermined amount of damages at that
time against GEI. GEI has answered our complaint, denying infringement, and also
seeking a ruling that the patents are invalid. Fact and expert discovery is
complete. In November 2005, the Court held a Markman hearing for construction of
the claims. On September 28, 2007, the Magistrate ruled in our favor in the
Markman hearing on claim construction. The defendants have appealed. In March
2006, GEI filed and, we opposed, several summary judgment motions challenging
the validity of the Three Card Poker patent involved in this litigation. GEI
filed its reply briefs in April 2006, and the summary judgment motions were
pending but were rendered moot by the default judgment as discussed below. The
case was stayed pending resolution of the summary judgment motions.





On November 16, 2007, the Court
adopted the Magistrate's ruling in our favor on the claims construction and
overruled the defendants' objections to the Magistrate's ruling. The Court
ordered supplemental briefing on the pending summary judgment motions as a
result of this ruling. We filed supplemental briefs and the defendants did
not.





On March 6, 2008, the Court
ordered the Clerk to enter default against GEI. The Clerk entered default
against GEI on March 6, 2008. In accordance with the Court's order of
March 6, 2008, we sought appropriate damages, an injunction and costs to be
included in a default judgment. On June 13, 2008, the Court issued a
Default Judgment against Awada and GEI for $792 and also issued a permanent
injunction against their 3-5-7 game. There is no assurance of
collectibility of this judgment. A mediation of this case and the others
involving Awada and GEI on June 27, 2008 resulted in settlement of all
cases with Awada and his companies.   However, Awada and his
entities have refused to sign the settlement agreement.  The
settlement agreement would have provided, among other things, that
(i) Awada will transfer the 3-5-7 PokerTM game to the Company for no
cash or other payment by the Company, (ii) the Company will forbear from
collecting on the judgment absent any breaches by Awada; (iii) all related
matters will be dismissed with prejudice and (iv) a full release by Awada
and GEI of the Company for any past acts.





On July 8, 2008, the Clerk of the Court
entered the Judgment for $792, plus interest and costs.  Because there
was no definitive settlement contract signed by Awada, we have started the
process for collecting on the Judgment.  In August 2008, we started
certain proceedings to collect the Judgment for $792 entered on July 8, 2008,
including but not limited to, a lawsuit filed in the Eighth Judicial District
Court, Clark County, Nevada related to the fraudulent transfer of certain
intellectual property assets by Awada.  Those proceedings are
ongoing.  The Court entered an order on August 11, 2008 that in
part required GEI to remove all 3-5-7 PokerTM games by August 12, 2008, for
which they complied on a later date to the best of our
knowledge.





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








4.           Awada II—On
September 12, 2005, we filed a new lawsuit against defendants Awada and
Gaming Entertainment, Inc. The lawsuit alleges that our Four Card Poker
game is being infringed and illegally copied by the defendants' Play Four Poker
game. The lawsuit claims that the defendants are violating the federal Lanham
Act by infringing the trademark/trade dress of our Four Card Poker game layout,
and that the defendants are committing acts of unfair competition, interference
with prospective business advantage and conversion. Our action seeks appropriate
injunctive relief against defendants' Play Four Poker game layout, as well as
unspecified monetary damages. On September 15, 2005, the U.S. District
Court for the District of Nevada issued a temporary restraining order
prohibiting the defendants from displaying or advertising the infringing
layout.





On or about December 6, 2005, the
defendants answered our complaint and denied all liability. They also filed
counterclaims for alleged patent misuse, anti-trust violations based on said
patent misuse, patent invalidity, unfair competition, unfair trade practices,
and other related claims. The counterclaims seek an unspecified amount of
damages, disgorgement of our profits as a result of our alleged unfair trade
practices, and preliminary and permanent injunctive relief


117


against
our alleged unfair trade practices. The defendants filed these counterclaims
against both us and our CEO. We completely and uncategorically deny the
defendants' counterclaims, and intend to vigorously oppose them. On
January 9, 2006, we filed a motion to dismiss all of defendants'
counterclaims. On January 24, 2006, the defendants filed an opposition to
our motion to dismiss. On March 27, 2006, the Court granted our motion for
a preliminary injunction and dismissed four of the defendants' seven
counterclaims. On April 19, 2007, the Court granted our summary judgment
motions on trade dress infringement and defendants' counterclaims, and all of
those counterclaims were dismissed with prejudice. All other claims were
dismissed with prejudice, except our trademark infringement claim that was
dismissed without prejudice. A permanent injunction was also
entered.





On May 17, 2007, Awada filed an
appeal to the Ninth Circuit Court of Appeals on all issues. On
September 18, 2007, the Ninth Circuit Court of Appeals dismissed the appeal
of Gaming Entertainment, Inc. for lack of prosecution. The appeal continues
with the appellant Yehia Awada. The appeal is pending.





A
mediation of this case and the others involving Awada and GEI on June 27,
2008 resulted in settlement of all cases with Awada and his
companies.   However, Awada and his entities have refused to sign
the settlement agreement.  The settlement agreement would have
provided, among other things, that (i) Awada will transfer the
3-5-7 PokerTM game to the Company for no cash or other payment by the
Company, (ii) the Company will forbear from collecting on the judgment
absent any breaches by Awada; (iii) all related matters will be dismissed
with prejudice and (iv) a full release by Awada and GEI of the Company for
any past acts.  As of October 31, 2008, we believe that it is not
probable that a settlement of this matter will occur.





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





5.           Class Action
Lawsuit—





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





b. Armistead—On June 12,
2007, a second putative class action complaint for violation of the federal
securities laws against the Company and Dr. Yoseloff and Mr. Baldwin
was filed in the U.S. District Court for the District of Nevada. The case is
entitled Robert Armistead, Jr. vs. Shuffle Master, Inc., Mark L. Yoseloff
and Richard L. Baldwin. The Company, Dr. Yoseloff and Mr. Baldwin were
served with the complaint on June 12, 2007. This lawsuit effectively
mirrors the allegations in the Stocke lawsuit filedagainst these same defendants on June 1,
2007, except that the Armistead complaint was filed on behalf of persons who
purchased our stock between March 20, 2006, and March 12,
2007.





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





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





On November 30, 2007, the Court
appointed the "Shuffle Master Institutional Investor Group," consisting of the
Tulsa Municipal Employees' Retirement Plan and the Oklahoma Firefighters Pension
and Retirement System, as Lead Plaintiff. Grant & Eisenhofer is the
Lead Plaintiff's counsel. The Lead Plaintiff had until mid-January 2008 to file
an amended complaint, which date was further extended until February 5,
2008.


118





A Consolidated Class Action Complaint
("Consolidated Complaint") was filed on February 5, 2008. The Consolidated
Complaint asserts the same causes of action for violation of federal securities
law as the initial lawsuits, and applies to a class period of February 1,
2006 to March 12, 2007. The Consolidated Complaint contains essentially the
same material allegations as in the initial lawsuits, and also contains
allegations arising out of the Company's acquisition of Stargames and
disclosures concerning the Company's internal controls. This Consolidated
Complaint supersedes all previously filed lawsuits covering this class period.
On March 25, 2008, defendants filed a motion to dismiss. On May 2,
2008, Lead Plaintiffs filed an opposition to the defendants' Motion to Dismiss.
On May 30, 2008, the defendants filed a reply brief in support of the
motion. Additional briefs have been filed since May 30, 2008.  No
hearing date has been set by the Court. The Company believes that all of the
above purported class action suits are without merit and intends to vigorously
defend each of these cases. Due to the uncertainty of the ultimate outcome of
these matters, the impact on future financial results is not subject to
reasonable estimates. However, we have tendered these cases to our directors and
officers insurance carriers.   Thus far reimbursement by our
directors and officers insurance carriers for substantially all of the
legal fees incurred for the cases has occurred in the ordinary
course.  While at this time we believe that our directors and officers
insurance carriers will continue to reimburse us for legal fees, there can be no
assurance that such reimbursement will continue in the future.





At this time, we do not believe that we
will suffer any loss, but if we did, such loss, at this time, cannot be
reasonably estimated. Further, subject to judicial and third party risks beyond
our control, we do not believe that the loss, if any, would be
material.





6.           Shareholder Derivative
Suits—





a. Shareholder Derivative Lawsuit
I—On September 7, 2007, Pirelli Armstrong Tire Corporation Retiree Medical
Benefits Trust filed a shareholder derivative complaint in the U.S. District
Court for the District of Nevada against our CEO, Mark Yoseloff, our former
President, Paul Meyer, our former CFO, Richard Baldwin, our General Counsel,
Jerome Smith, and the current members of our Board of Directors. The Company was
also named as a nominal defendant. On September 24, 2007, plaintiffs
voluntarily dismissed Jerome Smith from the case without prejudice. The
complaint, on behalf of the Company, alleges breach of fiduciary duty and
related causes of action against the defendants. The allegations generally
relate to the restatement of the Company's Fiscal 2006 annual results and our
acquisition of Stargames. The complaint seeks an unspecified amount of
damages.





b. Shareholder Derivative Lawsuit
II—On September 17, 2007, Chad Hodgkins filed a shareholder derivative
complaint against our CEO, Mark Yoseloff, our former CFO, Richard Baldwin,
former Board of Directors member Todd Jordan and current Board of Directors
members Mr. Saunders and Mr. Castle. The Company was also named as a
nominal defendant. The complaint was filed in the U.S. District Court for the
District of Nevada. The complaint, on behalf of the Company alleges breach of
fiduciary duty and related causes of action against the defendants. The
allegations generally relate to the restatement of the Company's Fiscal 2006
annual results, and are very similar to the allegations in the three class
actions suits described above. The complaint seeks an unspecified amount of
damages. We have tendered these cases to our directors and officers insurance
carriers.





On October 24, 2007, the Court
approved a stipulation to transfer the Hodgkins case to Judge Dawson, who had
already been assigned the Pirelli case. On November 9, 2007, the Court
ordered the Hodgkins case to be consolidated into the Pirelli case.
Additionally, any future derivative actions alleging similar facts and legal
theories will be consolidated into the Pirelli case. The Law Firm of Coughlin
Stoia Geller Rudman & Robbins LLP has been appointed lead
counsel.





On March 26, 2008, the Court
approved an updated stipulation, which provided that plaintiffs will file a
consolidated amended complaint on or about August 1, 2008. On July 28,
2008, the Court approved an updated stipulation, which provided that plaintiffs
have until on or about December 1, 2008, to file a consolidated amended
complaint.





Due to the uncertainty of the ultimate
outcome of this matter, the impact, if any, on future financial results is not
subject to reasonable estimates. However, we have tendered the case to our
directors and officers insurance carriers.





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





See also subsequent
events.


119


7.           Prime Table Games, et al., vs. Shuffle
Master.  On August 25, 2008, Prime Table Games LLC, Derek Webb,
Hannah O’Donnell, and Prime Table Games UK (collectively, “Prime Table”) filed
suit against the Company in the United States District Court for the Southern
District of Mississippi.  The complaint primarily involves our Three
Card Poker game and alleges that certain alleged conduct of the
Company constitutes a violation of various federal antitrust laws, and also
asserts related claims. Other claims include the following (some of which
are related to Three Card Poker and others related to other games): breach
of contract (including certain equitable claims), breach of the duty of good
faith and fair dealing, patent infringement, patent misuse, and unfair
trade practices.  Prime Table is seeking in excess of
$15,000 in damages, plus various equitable remedies, including without
limitation, rescission or reformation of the non-competition and first right of
refusal provisions of our Three Card Poker purchase agreement with plaintiffs,
and a ruling that the Three Card Poker patents are
unenforceable.





On August 29, 2008 and October 22, 2008
respectively, Prime Table filed amended complaints.  The amended
complaints do not materially modify the allegations made in the complaint
referenced above and filed on August 25, 2008.  We have not yet
responded to the operative complaint.





On October 24, 2008, we filed a Motion
to Transfer Venue pursuant to 28 U.S.C. § 1404(a).  The Motion asks
the Court to transfer venue to the United States District Court for the District
of Nevada, Southern Division.  We expect a ruling on the motion
sometime in 2009.





We believe that the above claims and
litigation are without merit and intend to vigorously defend the
case.  Due to the uncertainty of the ultimate outcome of this matter,
the impact, if any, on future financial results is not subject to reasonable
estimates.





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





See also subsequent
events.


120


16.
SUBSEQUENT EVENTS





Outstanding remaining
Notes.  On December 10, 2008, we settled an additional $10,000
of our Notes, at a discount, in a separate transaction on the open market,
leaving $30,258 of outstanding remaining Notes at that date.  We
borrowed on the Revolver to fund this additional settlement.




Intellectual property license legal
proceeding.On January 8, 2009, we filed a Summons with Notice
in the Supreme Court for the State of New York, County of New York. The action
was filed against Progressive Gaming International Corporation (hereinafter
“PGIC”), Private Equity Management Group, Inc., and Private Equity Management
Group Financial Corporation (hereinafter collectively “PEM”).




The action sought the issuance of a
temporary, preliminary, and permanent injunction prohibiting the alienation,
sale, transfer, or encumbrance of certain patents licensed to SMI. SMI believes
that the sale, on January 15, 2009, of substantially all of the assets of PGIC
will include certain patents licensed to SMI in September 2007 which SMI has the
right to buy for one dollar each.




On January 12, 2009, we asked the
Supreme Court of New York, New York County, the trial court in New York State,
for a temporary restraining order prohibiting PGIC or PEM from selling, during
the pendency of the arbitration, any patents licensed to SMI, and for an order
to show cause why a preliminary injunction should not issue granting the same
relief. On that date, the Court denied our request for a temporary restraining
order. The decision was based on the Court’s belief that our rights had been
secured by contract, and that those rights would survive any planned sale and
would be binding upon any subsequent acquirer of the patents.  In
other words, the Court apparently believed that we will not be irreparably
injured by any sale, given the survivorship of our rights.  Further,
the denial of the temporary restraining order was not a decision on the merits
of our claim of rights to the licensed patents.




We have taken steps to protect our
rights in the known material patents which are part of the September 2007
license agreement, and, if we become aware that any of the patents we have the
right to purchase are, in fact, bought by any bidder, then we will appropriately
consider moving to have the sale rescinded, for the patents to be assigned or
licensed to Shuffle Master with clean title, or for such other appropriate
protections or remedies.




These proceedings do not affect the
following items which were material in regards to the purchase of PGIC’s
worldwide Table Games Division: our rights in the progressive table game
software and hardware; the Caribbean Stud game; Texas Hold’em Bonus game; and
the broad range of intellectual property that complements our existing PTG
business.




However, if the licensed patents are,
in fact, sold to a third party, especially a competitor, we could face disputes
about the scope of our rights, claims of infringement and ongoing possible
infringement, and validity of the non-compete provisions as well as
on-going legal fees in attempting to enforce our rights. Further, while we
believe that our license rights to the licensed patents would survive any sale,
and remain in full force and effect, there is still a risk that a court or
arbitrator would disagree with our legal positions.




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




Legal proceedings
update.





VendingData II
-  On November 26, 2008, we filed a motion to dismiss our
appeal.  We expect the Court of Appeals to dismiss the appeal in early
calendar 2009.  Following the dismissal of our appeal, we believe
the District Court will rule sometime in calendar year 2009 on the
Motion for Attorneys' Fees and Costs and the return of our $3,000 in cash
security.  However in December 2008, Vending Data and we agreed to a
stay of all legal proceedings until January 30, 2009.





Awada -  On
November 26, 2008, the Court held a hearing in this matter and we were informed
that trial of this matter was set for April 20, 2009.  We filed our
Motion for Summary Judgment as to the remaining claims on December 15,
2008.  We expect the Motion for Summary Judgment to be heard on
January 26, 2009.





Shareholder Derivative Suits
-On November 24, 2008, the Court approved an updated
stipulation filed on November 25, 2008, which provided that plaintiffs will file
a consolidated amended complaint on or about March 2, 2009.





Prime Table Games, et al., vs.
Shuffle Master-On November 17, 2008, we filed a motion to dismiss several of Prime
Table’s causes of action pursuant to Federal Rule of Civil Procedure
12(b)(6).  The motion asks the Court to dismiss


121


certain
counts of the Second Amended Complaint, which include most of the antitrust
claims.  We expect a ruling on the motion sometime in
2009.


122


SCHEDULE
II—VALUATION AND QUALIFYING ACCOUNTS







Years
Ended October 31, 2008, 2007 and 2006




Column
      A
            Column
      B
            
            Column
      C
            
            Column
      D
            Column
      EBalance
      at
            
            AdditionsBeginning
                of
      Period
            
            Charged
      to
                Expense(a)
            
            Stargames
                Acquisition
            Deductions/
                Other
            
            Balance
      at
                End
      of Period(In
      thousands)Allowance
      for bad debts (Accounts receivable):2008
            $  
      476
            
            $    
      90
            
            $    
      —
            $(18)
            
            $  
      5842007
            $1,422
            
            $    
      36
            
            $    
      —
            $
      982
            
            $  
      4762006
            $  
      283
            
            $(777)
            
            $1,907
            $ 
      (9)
            
            $1,422Allowance
      for bad debts(Investment
      in sales-type leases and notes receivable):2008
            $  
      236
            
            $2
            
            $  
      —
            $36
            
            $  
      2022007
            $  
      681
            
            $
      (443)
            
            $  
      —
            $2
            
            $  
      2362006
            $  
      631
            
            $240
            
            $  
      —
            $190
            
            $  
      681





(a)
For the year ended October 31, 2006, favorable collections efforts,
primarily at Stargames, resulted in a credit of ($777) in the provision for bad
debts related to accounts receivable.




123


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





None.




ITEM
9A. CONTROLS AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures





Management’s
Assessment of Internal Control over Financial Reporting





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





As
required by Rule 13a-15(b) promulgated under the Exchange Act, our
management, with the participation of our Chief Executive Officer and Acting
Chief Financial Officer, evaluated the design and operating effectiveness as of
October 31, 2008 of our disclosure controls and procedures, as defined in
Rule 13a-15(e) promulgated under the Exchange Act.  Based on
this evaluation our Chief Executive Officer and Acting Chief Financial Officer
concluded that, because of a material weakness in our internal control over
financial reporting described below, as of October 31, 2008 our disclosure
controls and procedures were not effective.





Notwithstanding
management’s assessment that our internal control over financial reporting was
ineffective as of October 31, 2008 due to the material weakness described below
under Management’s Report on Internal Control Over Financial Reporting, we
believe that the consolidated financial statements included in this Annual
Report on Form 10-K correctly present our financial condition, results of
operations and cash flows for the fiscal years covered thereby in all material
respects.





Internal
Control Over Financial Reporting





Management’s
Report on Internal Control Over Financial Reporting





Internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) refers to the process designed by, or under the
supervision of, our Chief Executive Officer and Acting Chief Financial Officer,
and effected by our board of directors, management and other personnel, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.  Management is
responsible for establishing and maintaining adequate internal control over
financial reporting.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, the application of any
evaluation of effectiveness to future periods is subject to the risk that
controls may become inadequate because of changes in conditions, or that
compliance with the policies or procedures may deteriorate.





We have
evaluated the effectiveness of our internal control over financial reporting as
of October 31, 2008.  This evaluation was performed usingthe Internal Control – Evaluation
Framework developed by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”).  Based on such evaluation, management
identified deficiencies that were determined to be a material
weakness.





A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company’s annual or interim financial
statements will not be prevented or detected on a timely
basis.  Because of the material weakness described below, management
concluded that our internal control over financial reporting was not effective
as of October 31, 2008.





The
specific material weakness identified by management as of October 31, 2008 is
described as follows:





Our
process to track raw materials through the manufacturing process was ineffective
resulting in errors in the recorded inventory balance. These errors were not
detected timely due to deficiencies in the design and operation of our
periodic counting procedures. Although these deficiencies did not result in a
material misstatement for the period ended October 31, 2008, the Company’s
compensating monitoring controls were not operating at a sufficient level of
precision, to prevent or timely detect a material misstatement in our inventory
for an interim or annual period.


124





Deloitte
and Touche LLP, has issued an attestation report on the effectiveness of our
internal control over financial reporting for the fiscal year ended October 31,
2008. This report follows this Item 9A.





Remediation
Plan





Subsequent
to October 31, 2008, the Company has, and will continue to identify and adopt
measures to remedy the material weakness described above.  Such
remedial measures include, but are not limited to, the following
actions:





·
            Provide
      additional training to the warehouse staff on inventory policies and
      procedures, including tracking raw materials through the inventory
      process.





·
            Modify
      the period end closing procedures to include physical counts of
      substantially all domestic
inventory.





·
            Re-design
      the cycle count process, including the frequency of such counts, focusing
      on inventory not counted during our period end close
    process.





The
implementation of these initiatives and additional procedures, as deemed
appropriate, is a priority for the Company in fiscal year 2009.





Changes
in Internal Control Over Financial Reporting





There
have been no changes in our internal control over financial reporting that
occurred during our fiscal year ended October 31, 2008, that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.





125





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Shareholders of


Shuffle
Master, Inc.


Las
Vegas, Nevada





We have
audited Shuffle Master, Inc. and subsidiaries’ (the "Company’s") internal
control over financial reporting as of October 31, 2008, based on criteria
established in Internal Control — Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting included in the
accompanying Management’s Report on Internal Control Over Financial Reporting.
Our responsibility is to express an opinion on the Company's internal control
over financial reporting based on our audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects.  Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on that risk, and performing such other procedures as
we considered necessary in the circumstances.  We believe that our
audit provides a reasonable basis for our opinion.





A
company's internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.  A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.





Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis.  Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate. A material weakness is a deficiency, or a
combination of deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement of the
company’s annual or interim financial statements will not be prevented or
detected on a timely basis.  The following material weakness has been
identified and included in management's assessment:




The
process to track raw materials through the manufacturing process was ineffective
resulting in errors in the recorded inventory balance. These errors were not
detected timely due to deficiencies in the design and operation of our periodic
counting procedures. The Company’s compensating monitoring controls were not
operating at a sufficient level of precision, to prevent or timely detect a
material misstatement in our inventory for an interim or annual period.




This
material weakness was considered in determining the nature, timing, and extent
of audit tests applied in our audit of the consolidated financial statements and
financial statement schedule as of and for the year ended October 31, 2008, of
the Company and this report does not affect our report on such consolidated
financial statements and financial statement schedule.





In our
opinion, because of the effect of the material weakness identified above on the
achievement of the objectives of the control criteria, the Company has not
maintained effective internal control over financial reporting as of October 31,
2008, based on the criteria established in Internal Control — Integrated Frameworkissued
by the Committee of Sponsoring Organizations of the Treadway
Commission.





126


We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements and
financial statement schedule as of and for the year ended October 31, 2008 of
the Company and our report dated January 14, 2009 expressed an unqualified
opinion on those financial statements and financial statement schedule and
includes an explanatory paragraph regarding the Company’s adoption of the
provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an
interpretation of FASB Statement No. 109, on November 1,
2007.




/s/
Deloitte & Touche LLP







Las
Vegas, Nevada


January 14,
2009




127


ITEM
9B. OTHER INFORMATION




None.







128


PART
III





ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





·  Information
regarding our directors, including the audit committee financial expert, appears
under the caption “Election of Directors” in our Fiscal 2008 Proxy Statement and
is incorporated herein by reference.





·  Executive
Officers of the Registrant. The information under the caption “Executive
Officers” in our Fiscal 2008 Proxy Statement is incorporated herein by
reference.





·  Compliance
with Section 16(a) of the Exchange Act. The information under the caption
“Section 16(a) Beneficial Ownership Reporting Compliance” in our Fiscal
2008 Proxy Statement is incorporated herein by reference.





·  Information
regarding our Code of Conduct appears in our Fiscal 2008 Proxy Statement, under
the caption “Proposal 1—Election of Directors—Corporate Governance—Compliance
Committee,” and is incorporated herein by reference.





·  Our Code
of Conduct is publicly available on our website at www.shufflemaster.com and is
also available in print to any shareholder upon request. Our website address is
intended to be an inactive, textual reference only; none of the material on the
website is part of this report. We may revise these policies from time to time
and will promptly post any revisions on our website. If we grant any waiver from
a provision of the Code of Conduct to our Chief Executive Officer or Acting
Chief Financial Officer, we will disclose the nature of such amendment or waiver
on our website or in a report on Form 8-K.




ITEM
11. EXECUTIVE COMPENSATION





The
information under the captions “Executive Compensation,” “Compensation of
Directors,” and “Report of Compensation Committee on Executive Compensation,” in
our Fiscal 2008 Proxy Statement is incorporated herein by
reference.




ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS





The
information under the captions “Security Ownership of Certain Beneficial Owners
and Management” and “Equity Compensation Plan Information” in our Fiscal 2008
Proxy Statement is incorporated herein by reference.





ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE





The
information under the caption “Certain Relationships and Related Party
Transactions” in our Fiscal 2008 Proxy Statement is incorporated herein by
reference.





ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES





Information
regarding our principal accountant fees and services and the Audit Committee’s
approval policies and procedures appears in our Fiscal 2008 Proxy Statement
under the captions “Independent Auditor” and “Report of the Audit Committee” and
is incorporated herein by reference.




129


PART
IV




ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





(a)
            1.
            Financial
      StatementsSee
      index to consolidated financial statements included as Item 8 to this
      Annual Report on Form 10-K.2.
            Financial
      Statement SchedulesSee
      Item 8 to this Annual Report on Form 10-K for applicable financial
      statement schedules.3.
            Management
      Contracts, Compensatory Plans and ArrangementsManagement
      contracts, compensatory plans and arrangements are listed as
      exhibits 10.1 through 10.32 included in Item 15(b) of this
      Annual Report.(b)
            Exhibits3.1
            Articles
      of Incorporation of Shuffle Master, Inc. as amended July 15,
      1992 (Incorporated by reference to exhibit 3.2 in our Annual Report
      on Form 10-K for the year ended October 31,
    1995).3.2
            Articles
      of Amendment to Articles of Incorporation of Shuffle Master, Inc.,
      effective January 14, 2005 (Incorporated by reference to
      exhibit 3.2 to our Annual Report on Form 10-K, filed
      January 13, 2005).3.3
            Articles
      of Correction of Articles of Amendment of Articles of Incorporation of
      Shuffle Master, Inc., effective March 15, 2005 (Incorporated by
      reference to exhibit 3.1 to our Current Report on Form 8-K,
      filed March 18, 2005).3.4
            Bylaws
      of Shuffle Master, Inc., as amended and restated (Incorporated by
      reference to exhibit 3.2 in our Quarterly Report on Form 10-Q
      for the quarter ended July 31, 2002).3.5
            Amendment
      to Shuffle Master’s Corporate Bylaws, as adopted by our board of directors
      on January 11, 2005 (Incorporated by reference to exhibit 3.4 to
      our Annual Report on Form 10-K, filed January 13,
      2005).3.6
            Amended
      and Restated Bylaws of Shuffle Master, Inc., effective November 11, 2008
      (Incorporated by reference to exhibit 3.4 to our Current Report on
      Form 8-K, filed November 13, 2008).4.1
            Shareholder
      Rights Plan dated June 26, 1998 (Incorporated by reference to our
      Current Report on Form 8-K dated June 26,
  1998).4.2
            Amendment
      No. 1 to Rights Agreement dated January 25, 2005 (Incorporated
      by reference to our Current Report on Form 8-K dated
      February 10, 2005).4.3
            Registration
      Rights Agreement dated May 13, 2004, by and between Casinos Austria
      AG on the one hand and Shuffle Master, Inc. on the other hand
      (Incorporated by reference to exhibit 10.2 in our Quarterly Report on
      Form 10-Q for the quarter ended April 30,
  2004).4.4
            Agreement
      and Guaranty dated May 12, 2004, by and between Casinos
      Austria AG and Cai Casinoinvest Middle East GMBH on the one
      hand and Shuffle Master, Inc. on the other hand (Incorporated by
      reference to exhibit 10.3 in our Quarterly Report on Form 10-Q
      for the quarter ended April 30, 2004).4.5
            Purchase
      Agreement, dated April 15, 2004, among Shuffle Master, Inc. and
      Deutsche Bank Securities, Inc. relating to the 1.25% Contingent
      Convertible Senior Notes due 2024 (Incorporated by reference to
      exhibit 10.4 in our Quarterly Report on Form 10-Q for the
      quarter ended April 30, 2004).4.6
            Registration
      Rights Agreement dated April 21, 2004, among Shuffle
      Master, Inc. and Deutsche Bank Securities, Inc. and Goldman,
      Sachs & Co relating to the 1.25% Contingent Convertible Senior
      Notes due 2024 (Incorporated by reference to exhibit 10.5 in our
      Quarterly Report on Form 10-Q for the quarter ended April 30,
      2004).4.7
            Indenture,
      dated as of April 21, 2004, between Shuffle Master, Inc. and
      Wells Fargo Bank, N. A. relating to the 1.25% Contingent Convertible
      Senior Notes due 2024 (Incorporated by reference to exhibit 10.6 in
      our Quarterly Report on Form 10-Q for the quarter ended
      April 30, 2004).4.8
            Amendment
      to Rights Agreement dated June 26, 2008 (Incorporated by reference to
      exhibit 4.1 to our Current Report on Form 8-K, filed July 2,
      2008).10.1
            Shuffle
      Master, Inc. 2002 Stock Option Plan (Incorporated by reference to
      Exhibit B in our Proxy Statement dated February 11,
      2002).10.2
            Amendment
      to the Shuffle Master, Inc. 2002 Stock Option Plan (Incorporated by
      reference to exhibit 10.33 in our Quarterly Report on Form 10-Q
      for the quarter ended April 30, 2002).10.3
            Shuffle
      Master, Inc. Restated Outside Directors’ Option Plan dated
      January 24, 2002 (Incorporated by reference to exhibit 10.32 in
      our Annual Report on Form 10-K for the year ended October 31,
      2001).


130





10.4
            Shuffle
      Master, Inc. 2004 Equity Incentive Plan (Incorporated by reference to
      our Proxy Statement dated February 23, 2004).10.5
            Shuffle
      Master, Inc. 2004 Equity Incentive Plan for Non-Employee Directors
      (Incorporated by reference to our Proxy Statement dated February 23,
      2004).10.6
            Employment
      Agreement, by and between Shuffle Master, Inc. and
      Mark Yoseloff, dated February 23, 2004 (Incorporated by
      reference to exhibit 10.1 in our Quarterly Report on Form 10-Q
      for the quarter ended January 31, 2004).10.7
            Covenant
      Not to Compete by and between Shuffle Master, Inc. and Mark L.
      Yoseloff, dated February 23, 2004 (Incorporated by reference to
      exhibit 10.2 in our Quarterly Report on Form 10-Q for the
      quarter ended January 31, 2004).10.8
            First
      Amendment to Employment Agreement, by and between Shuffle
      Master, Inc. and Mark L. Yoseloff (Incorporated by reference to
      exhibit 10.1 in our Current Report on Form 8-K, filed
      June 8, 2007).10.9
            Employment
      Agreement, by and between Shuffle Master, Inc. and Brooke Dunn, dated
      January 9, 2006 (Incorporated by reference to exhibit 10.5 in
      our Annual Report on Form 10-K for the year ended October 31,
      2005).10.10
            Employment
      Agreement by and between Shuffle Master, Inc. and Paul Meyer dated
      October 31, 2005 (Incorporated by reference to exhibit 10.1 in
      our Current Report on Form 8-K, filed on November 4,
      2005).10.11
            Patent
      Purchase Agreement by and between International Game Technology and
      Shuffle Master, Inc. dated June 13, 2005 (request for
      confidential treatment filed with SEC) (Incorporated by reference to
      exhibit 10.1 of our Quarterly Report on Form 10-K, filed
      September 9, 2005).10.12
            Product
      Development and Integration Agreement by and among Shuffle
      Master, Inc., Progressive Gaming International Corporation and
      International Game Technology dated June 13, 2005 (request for
      confidential treatment filed with SEC) (Incorporated by reference to
      exhibit 10.2 of our Quarterly Report filed September 6, 2006
      (confidential Treatment requested under 17 C. F. R.
      Section 240.24b-2).10.13
            Distributorship
      Agreement by and between Machines Games Automatics, S.A. and Shuffle
      Master GMBH & CO KG dated May 17, 2005 (request for
      confidential treatment filed with SEC) (filed as exhibit 10.1 to our
      Current Report on Form 8-K, filed September 16,
      2005).10.14
            Call
      Option Deed by and between Shuffle Master, Inc. and CVC Limited
      dated November 15, 2005 (Incorporated by reference to
      exhibit 10.1 of our Current Report on Form 8-K, filed
      November 15, 2005).10.15
            Call
      Option Deed by and between Shuffle Master, Inc. and
      CVC Communication and Technology Pty Ltd. dated
      November 15, 2005 (Incorporated by reference to exhibit 10.2 of
      our Current Report on Form 8-K, filed November 15,
      2005).10.16
            Pre-Bid
      Agreement between Shuffle Master, Inc. and Stargames Corporation
      Pty Limited dated November 15, 2005 (Incorporated by reference
      to exhibit 10.3 of our Current Report on Form 8-K, filed
      November 15, 2005).10.17
            Shuffle
      Master Australasia Pty Ltd’s Bidder Statement, along with Stargames’
      Target Statement, each dated November 15, 2005 (Incorporated by
      reference to exhibit 10.4 of our Current Report on Form 8-K,
      filed November 15, 2005).10.18
            Patent
      Licensing Agreement between Shuffle Master, Inc. and Progressive
      Gaming International Corporation dated September 29, 2006 (Request
      for Confidential Treatment filed with SEC).10.19
            Credit
      Agreement, dated November 30, 2006, among Shuffle Master, Inc.,
      Deutsche Bank Trust Company Americas, Deutsche Bank, Deutsche Bank
      Securities, Inc. and Wells Fargo Bank, N.A. (Incorporated by
      reference to exhibit 10.1 of our Current Report on Form 8-K,
      filed December 6, 2006).10.20
            Amendment
      No. 1, dated April 5, 2007 to the Credit Agreement, dated as of
      November 30, 2006, among Shuffle Master, Inc., Deutsche Bank
      Trust Company Americas, as Administrative Agent and the lenders party
      thereto (Incorporated by reference to exhibit 10.1 in our Current
      Report on Form 8-K, filed April 6, 2007).10.21
            Security
      Agreement, dated November 30, 2006, between Shuffle Master, Inc.
      and the guarantors party thereto in favor of Deutche Bank Trust Company
      Americas (Incorporated by reference to exhibit 10.2 of our Current
      Report on Form 8-K, filed December 6, 2006).10.22
            Purchase
      Agreement by and among Shuffle Master, Inc., on the one hand, and
      Progressive Gaming International and Progressive Games, Inc. on the
      other hand, dated September 26, 2007 (Incorporated by reference to
      exhibit 10.1 (a) in our Current Report on form 8-K, filed
      September 28, 2007).


131





10.23
            Amended
      and Restated License Agreement by and among Shuffle Master, Inc., on
      the one hand, and Progressive Gaming International on the other hand,
      dated September 26, 2007 (Incorporated by reference to
      exhibit 10.1 (b) in our Current Report on Form 8-K, filed
      September 28, 2007).10.24
            Software
      Distribution License Agreement by and among Shuffle Master, Inc. and
      its affiliates, on the one hand, and Progressive Gaming International
      Corporation and its affiliates, on the other hand, dated
      September 26, 2007 (Incorporated by reference to exhibit 10.1 in
      our Current Report on form 8-K, filed October 2,
      2007).10.25
            First
      Amendment to Employment Agreement, by and between Shuffle
      Master, Inc. and Brooke Dunn (Incorporated by reference to
      exhibit 10.1 in our Current Report on Form 8-K, filed
      January 11, 2008).10.26
            Employment
      Agreement, by and between Shuffle Master, Inc. and Coreen Sawdon
      (Incorporated by reference to exhibit 10.1 in our Current Report on
      Form 8-K, filed March 6, 2008).10.27
            Second
      Amendment to Employment Agreement, by and between Shuffle Master, Inc. and
      Mark L. Yoseloff (Incorporated by reference to exhibit 10.1 in our Current
      Report on Form 8-K, filed July 11, 2008).10.28
            Amendment
      No. 2 to Credit Agreement, dated July 14, 2008, among Shuffle Master,
      Inc., Deutsche Bank Trust company Americas, as Deutsche Bank Securities
      Inc. and Wells Fargo Bank, N.A (Incorporated by reference to Exhibit 10.28
      to Amendment No.1 to the Registration Statement on Form S-1 of Shuffle
      Master, Inc., Registration No. 333-12000, filed on July 14,
      2008).10.29
            Second
      Amendment to Employment Agreement, by and between Shuffle
      Master, Inc. and Brooke Dunn (Incorporated by reference to
      exhibit 10.1 in our Current Report on Form 8-K, filed
      November 4, 2008).10.30
            Form
      of Indemnification Agreement (Incorporated by reference to exhibit 10.26
      in our Current Report on Form 8-K, filed November 13,
      2008).10.31
            Employment
      Agreement, by and between Shuffle Master, Inc. and David Lopez
      (Incorporated by reference to exhibit 10.1 in our Current Report on
      Form 8-K, filed November 20, 2008).10.32
            First
      Amendment to Employment Agreement, by and between Shuffle
      Master, Inc. and David Lopez (Incorporated by reference to
      exhibit 10.2 in our Current Report on Form 8-K, filed November
      20, 2008).10.33
            The
      Shuffle Master, Inc. 2004 Equity Incentive Plan (As Amended and Restated
      on December 31, 2008) (Incorporated by reference to exhibit 10.1 in our
      Current Report on Form 8-K, filed January 7, 2009).10.34
            The
      Shuffle Master, Inc. 2004 Equity Incentive Plan For Non-Employee Directors
      (As Amended and Restated on December 31, 2008) (Incorporated by reference
      to exhibit 10.2 in our Current Report on Form 8-K, filed January 7,
      2009).10.35
            Amended
      and Restated Employment Agreement, by and between Shuffle Master, Inc. and
      Mark L. Yoseloff (Incorporated by reference to exhibit 10.3 in our Current
      Report on Form 8-K, filed January 7, 2009).10.36
            Amended
      and Restated Covenant Not To Compete, by and between Shuffle Master, Inc.
      and Mark L. Yoseloff (Incorporated by reference to exhibit 10.4 in our
      Current Report on Form 8-K, filed January 7, 2009).10.37
            Amended
      and Restated Employment Agreement, by and between Shuffle Master, Inc. and
      Coreen Sawdon (Incorporated by reference to exhibit 10.5 in our Current
      Report on Form 8-K, filed January 7, 2009).10.38
            Amended
      and Restated Employment Agreement, by and between Shuffle Master, Inc. and
      David Lopez (Incorporated by reference to exhibit 10.6 in our Current
      Report on Form 8-K, filed January 7, 2009).10.39
            Amended
      and Restated Employment Agreement, by and between Shuffle Master, Inc. and
      Jerry Smith (Incorporated by reference to exhibit 10.1 in our Annual
      Report on Form 10-K for the year ended October 31,
      2008).10.40
            Amended
      and Restated Employment Agreement, by and between Shuffle Master, Inc. and
      Roger Snow (Incorporated by reference to exhibit 10.2 in our Annual
      Report on Form 10-K for the year ended October 31,
      2008).21
            Subsidiaries
      of Registrant23
            Consent
      of Independent Registered Public Accounting Firm31.1
            Certification
      of Chief Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
            Certification
      of Acting Chief Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1*
            Certification
      of Chief Executive Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.32.2*
            Certification
      of Acting Chief Financial Officer Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.




132


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


133


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 14, 2009
            By:
            /s/
      MARK L. YOSELOFF
              Chief
      Executive Officer




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




Signature
            
            Title
            Date/s/
      MARK L. YOSELOFF
            Chief
      Executive Officer(Principal
      Executive Officer)
            January
      14, 2009Mark
      L. Yoseloff/s/
      COREEN SAWDON
            Senior
      Vice President, Chief Accounting Officer and Acting Chief Financial
      Officer(Principal
      Financial and Accounting Officer)
            January
      14, 2009Coreen
      Sawdon/s/
      PHILLIP C. PECKMAN
            Chairman
      of the Board of DirectorsPhillip
      C. Peckman/s/
      LOUIS CASTLE
            Director
            January
      14, 2009Louis
      Castle/s/
      GARRY W. SAUNDERS
            Director
            January
      14, 2009Garry
      W. Saunders/s/
      JOHN R. BAILEY
            Director
            January
      14, 2009John
      R. Bailey/s/
      WILLIAM W. WARNER
            Director
            January
      14, 2009William
      Warner


134







135