10-Q 1 a2186273z10-q.htm FORM 10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2008
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission file number: 0-20820

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

Minnesota (State or Other Jurisdiction of Incorporation or Organization)		41-1448495 (IRS Employer Identification No.)
1106 Palms Airport Drive, Las Vegas (Address of Principal Executive Offices)	NV (State)		89119 (Zip Code)
Registrant's Telephone Number, Including Area Code: (702) 897-7150

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 ý No o

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

Large accelerated filer ý

Accelerated filer o

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 Exchange Act). Yes o No ý

As of June 2, 2008, there were 35,256,255 shares of our $.01 par value common stock outstanding.

SHUFFLE MASTER, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED APRIL 30, 2008

TABLE OF CONTENTS

			Page
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited):
		Condensed Consolidated Statements of Income for the Three and Six Months ended April 30, 2008 and 2007	1
		Condensed Consolidated Balance Sheets as of April 30, 2008 and as of October 31, 2007	2
		Condensed Consolidated Statements of Cash Flows for the Six months ended April 30, 2008 and 2007	3
		Notes to Condensed Consolidated Financial Statements	4
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		57
Item 4.	Controls and Procedures		57
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings		58
Item 1A.	Risk Factors		58
Item 6.	Exhibits		60
Signatures			61

PART I

ITEM 1. FINANCIAL STATEMENTS

SHUFFLE MASTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited, in thousands, except per share amounts)

			Three Months Ended April 30,						Six Months Ended April 30,
			2008			2007			2008			2007
Revenue:
	Product leases and royalties		$	17,384		$	13,066		$	34,403		$	26,064
	Product sales and service			31,600			31,521			52,434			55,830
	Other			19			57			63			91

		Total revenue		49,003			44,644			86,900			81,985

Costs and expenses:
	Cost of leases and royalties			5,130			3,904			10,599			7,567
	Cost of sales and service			14,683			14,065			25,265			24,570

		Gross profit		29,190			26,675			51,036			49,848

	Selling, general and administrative			16,637			14,308			35,012			28,878
	Research and development			4,570			4,503			9,159			8,400

		Total costs and expenses		41,020			36,780			80,035			69,415

Income from operations				7,983			7,864			6,865			12,570
Other expense				(2,921	)		(2,757	)		(4,557	)		(4,748	)
Equity method investment loss				—			(120	)		—			(261	)
Impairment of investment				(433	)		—			(433	)		—

Income from continuing operations before tax				4,629			4,987			1,875			7,561
Income tax provision				1,580			1,560			629			2,183

Income from continuing operations				3,049			3,427			1,246			5,378
Discontinued operations, net of tax				(1	)		13			(1	)		87

Net income			$	3,048		$	3,440		$	1,245		$	5,465

Basic earnings per share:
	Continuing operations		$	0.09		$	0.10		$	0.04		$	0.16
	Discontinued operations			—			—			—			—

	Net income		$	0.09		$	0.10		$	0.04		$	0.16

Diluted earnings per share:
	Continuing operations		$	0.09		$	0.10		$	0.04		$	0.15
	Discontinued operations			—			—			—			—

	Net income		$	0.09		$	0.10		$	0.04		$	0.15

Weighted average shares outstanding:
	Basic			34,726			34,696			34,722			34,663
	Diluted			34,771			35,336			34,824			35,465

See notes to unaudited condensed consolidated financial statements

SHUFFLE MASTER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands except share amounts)

			April 30, 2008		October 31, 2007
ASSETS
Current assets:
	Cash and cash equivalents		$	9,351	$	4,392
	Accounts receivable, net of allowance for bad debts of $232 and $476			31,015		35,045
	Investment in sales-type leases and notes receivable, net			7,432		9,092
	Inventories			28,484		34,081
	Prepaid income taxes			6,898		4,110
	Deferred income taxes			4,778		7,959
	Other current assets			5,117		5,286

		Total current assets		93,075		99,965
Investment in sales-type leases and notes receivable, net of current portion				3,405		6,124
Products leased and held for lease, net				19,681		15,886
Property and equipment, net				10,616		11,242
Intangible assets, net				86,549		91,343
Goodwill				108,692		105,354
Deferred income taxes				14,022		14,476
Other assets				14,157		15,377

Total assets			$	350,197	$	359,767

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
	Accounts payable		$	9,529	$	11,548
	Accrued liabilities			12,384		15,015
	Customer deposits			2,122		2,213
	Deferred revenue			3,934		5,489
	Current portion of long-term debt and other current liabilities			151,025		3,932

		Total current liabilities		178,994		38,197
Long-term debt				70,895		231,339
Other long-term liabilities				2,893		1,359
Deferred income taxes				604		1,238

		Total liabilities		253,386		272,133

Commitments and contingencies
Shareholders' equity:
	Preferred stock, no par value; 507 shares authorized; none outstanding
	Common stock, $0.01 par value; 151,875 shares authorized; 35,256 and 35,198 shares issued and outstanding			353		352
	Additional paid-in capital			8,736		6,492
	Retained earnings			38,877		38,770
	Accumulated other comprehensive income			48,845		42,020

		Total shareholders' equity		96,811		87,634

Total liabilities and shareholders' equity			$	350,197	$	359,767

See notes to unaudited condensed consolidated financial statements

SHUFFLE MASTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

				Six Months Ended April 30,
				2008			2007
Cash flows from operating activities:
	Net income			$	1,245		$	5,465
	Adjustments to reconcile net income to cash provided by operating activities:
		Depreciation and amortization			11,536			9,165
		Amortization of debt issuance costs			652			673
		Share-based compensation			2,346			2,729
		Equity method investment loss			—			261
		Impairment of investment			433			—
		Provision (recovery) for bad debts			(416	)		61
		Write-down for inventory obsolescence			309			596
		Gain on sale of assets			(738	)		—
		Gain on sale of leased assets			(960	)		—
		Excess tax benefit from stock option exercises			—			(1,458	)
		Tax benefit from stock option exercises			—			290
	Changes in operating assets and liabilities:
		Accounts receivable			4,789			2,080
		Investment in sales-type leases and notes receivable			4,322			2,308
		Inventories			6,279			(7,442	)
		Accounts payable and accrued liabilities			(3,436	)		(127	)
		Customer deposits and deferred revenue			(1,731	)		2,545
		Income taxes payable			5			1,759
		Deferred income taxes			3,332			(849	)
		Prepaid income taxes			(2,779	)		(2,046	)
		Other			172			(598	)

			Net cash provided by operating activities		25,360			15,412

Cash flows from investing activities:
	Proceeds from sale of assets				1,384			—
	Proceeds from sale of leased assets				1,515			818
	Payments for products leased and held for lease				(7,366	)		(3,745	)
	Purchases of property and equipment				(1,194	)		(1,582	)
	Purchases of intangible assets				(810	)		(1,618	)
	Acquisition of businesses, net of cash acquired				(792	)		(1,750	)

			Net cash used by investing activities		(7,263	)		(7,877	)

Cash flows from financing activities:
	Debt repayments				(26,002	)		(83,880	)
	Debt proceeds				12,548			74,365
	Debt issuance costs				—			(1,722	)
	Repurchases of common stock				—			(1,933	)
	Proceeds from issuances of common stock, net				1			2,493
	Excess tax benefit from stock option exercises				—			1,458

			Net cash used by financing activities		(13,453	)		(9,219	)

Effect of exchange rate changes on cash					315			(87	)

Net increase (decrease) in cash and cash equivalents					4,959			(1,771	)
Cash and cash equivalents, beginning of period					4,392			8,906

Cash and cash equivalents, end of period				$	9,351		$	7,135

Cash paid for:
	Income taxes, net of refunds				19			2,719
	Interest				4,275			2,262

See notes to unaudited condensed consolidated financial statements

SHUFFLE MASTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except unit/seat and per share amounts)

1. DESCRIPTION OF BUSINESS AND INTERIM BASIS OF PRESENTATION

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").

Our Utility segment includes a full line of automatic card shufflers for use with the vast majority of card table games as well as chip sorting machines for use on roulette tables. We also have acquired and/or are developing other products that automatically gather data to enable casinos to track table game play, such as Table iD™, part of our Intelligent Table Systems ("ITS") product offerings, currently in development with International Game Technology ("IGT") and Progressive Gaming International Corporation ("PGIC"). We also developed the iShoe™, which holds up to eight decks of cards and can be trained to read any card type using interfaces with an LCD monitor that displays game history and trends.

Our PTG segment includes our portfolio of live table games including poker, blackjack, baccarat, and pai gow poker-based table games, as well as progressive table games with bonusing options and side bets. To maximize the reach of our broad intellectual property portfolio, we have licensed several of our popular table game titles to a variety of other companies including Delta Rangers, Inc., a company whose Malta-based subsidiary, Guardian Gaming, owns and operates Shuffle Master Live!, a play for fun and play for real legalized internet gaming site that offers several Shuffle Master proprietary titles as well as a wide range of public domain content. Shuffle Master Live! was launched in November 2007.

Our ETS segment includes our e-Table gaming platforms including Table Master™, Vegas Star®, Rapid Table Games™ and wireless Casino On Demand™.

Our EGM segment includes our PC-based video slot machines with an extensive selection of video slot titles which include a range of bonus round options. The EGMs are developed for select markets including Australasia and Latin America.

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.

Basis of presentation. The unaudited interim condensed balance sheet as of April 30, 2008, and the unaudited interim condensed statements of income for the three and six month periods ended April 30, 2008 and 2007, have been prepared by us under the rules and regulations of the Securities

SHUFFLE MASTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited, in thousands, except unit/seat and per share amounts)

1. DESCRIPTION OF BUSINESS AND INTERIM BASIS OF PRESENTATION (Continued)

and Exchange Commission (the "SEC"). Certain information and note disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to make the information not misleading. The financial information for the three and six month periods ended April 30, 2008 and 2007, reflects all adjustments and accruals, which are of a normal recurring nature, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods.

The consolidated balance sheet as of October 31, 2007, which has been derived from our audited consolidated financial statements and notes for the fiscal year ended October 31, 2007, is included in Item 8 in our latest shareholders' Annual Report (Form 10-K). It is suggested that these condensed financial statements, included in this Form 10-Q, be read in conjunction with the financial statements and the notes thereto included in our latest Form 10-K.

The results of operations for the six months ended April 30, 2008, are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending October 31, 2008.

Investment in Sona and other investments. Our investment in and the operating results of Sona Mobile Holdings Corp. ("Sona") which is not required to be consolidated in our condensed consolidated financial statements, was previously accounted for in accordance with Accounting Principles Board ("APB") Opinion No. 18 ("APB 18"), "The Equity Method of Accounting for Investments in Common Stock", 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 President having a seat on the Sona Board of Directors. Due to the resignation of our President from the Sona Board of Directors on June 12, 2007, using the guidance of APB 18, we concluded that we no longer have the ability to exercise significant influence over Sona and that the equity method of accounting is no longer appropriate for our investment. As of June 12, 2007, we account 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. As of April 30, 2008, we analyzed our cost method investment using the methodology described above and determined that such investment was impaired. Accordingly, we recorded a $433 impairment write-down, which represents the difference between our historical book value and fair market value as of April 30, 2008. Such impairment charge is reflected in impairment of investment in the condensed consolidated statement of income for the three and six month periods ended April 30, 2008. As of June 5, 2008, the fair market value of our cost method investment has further declined such that we could have a potential write-down in future periods.

Liquidity and management's plans. As of April 30, 2008, our current liabilities exceeded our current assets (also known as negative working capital) by $85,919. This occurred primarily because our $150,000 contingent convertible senior notes ("Notes") are callable within 12 months (see Note 5). We currently do not have financing alternatives in place, however we are exploring various financing alternatives. Our ability to refinance the Notes would be subject to prevailing market conditions at the

SHUFFLE MASTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited, in thousands, except unit/seat and per share amounts)

1. DESCRIPTION OF BUSINESS AND INTERIM BASIS OF PRESENTATION (Continued)

time and could lead to a higher cost of capital or dilute our equity, depending on which strategy or combination of strategies we select. There are no assurances that such financing will be available to us on terms that we consider favorable to us.

Recently issued accounting standards. In May 2008, the Financial Accounting Standards Board ("FASB") issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles," ("SFAS 162"). This new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. This statement is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With GAAP." We are currently evaluating the effect, if any, that SFAS 162 will have on our consolidated financial statements, relating to our accounting principles.

In August 2007, the FASB proposed FASB Staff Position ("FSP") Accounting Principles Board ("APB") 14-a, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), ("FSP APB 14-a"). If approved, FSP APB 14-a will require us to separately account for the liability and equity components of our Notes and recognize additional interest expense at our nonconvertible debt borrowing rate. If the FSP is issued as drafted, it will be effective for our fiscal year beginning in November 2009 and will require retrospective application. We are currently evaluating the effect, if any, that FSP APB 14-a 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 No. 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 141 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. We are currently evaluating the effect, if any, that SFAS 141R will have on our consolidated financial statements.

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 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

SHUFFLE MASTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited, in thousands, except unit/seat and per share amounts)

1. DESCRIPTION OF BUSINESS AND INTERIM BASIS OF PRESENTATION (Continued)

November 2008. We are currently evaluating the effect, if any, that SFAS 159 will have on our consolidated financial statements.

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). In accordance with the amendment, this statement is partially effective for us beginning in November 2008 and effective for us beginning in November 2009. We are currently evaluating the effect, if any, that SFAS 157 will have on our consolidated financial statements.

2. ACQUISITIONS AND OTHER SIGNIFICANT TRANSACTIONS

PGIC Table Games Division. On September 26, 2007, we entered into a purchase agreement for the acquisition of PGIC's Table Games Division ("TGD") business ("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 ("Software Distribution License Agreement"). Further, we also entered into an amended and restated license agreement with PGIC amending the current license agreement originally entered into on September 29, 2006, which granted us certain expanded rights.

The acquisition grants 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 to PGIC an upfront payment of approximately $19,800. The Purchase Agreement also provides 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, 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, 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 recurring 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.

SHUFFLE MASTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited, in thousands, except unit/seat and per share amounts)

2. ACQUISITIONS AND OTHER SIGNIFICANT TRANSACTIONS (Continued)

Under the Software Distribution License Agreement, we acquired PGIC's Game Manager™ 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 System™ for installations where the GMS cannot handle the total number of tables and/or properties being managed. 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. As of January 31, 2008, we have started integrating the GMS with certain versions of our proprietary table games in numerous jurisdictions.

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

Cash	$	19,755
Minimum future consideration, non-interest bearing		2,922
Direct acquisition costs		1,233

Total purchase price	$	23,910

In accordance with SFAS 141, the transaction was accounted for as a business combination and, accordingly, the preliminary purchase price was allocated to the underlying assets acquired based upon their estimated fair values at the date of the acquisition. The current purchase price allocation is preliminary and may be adjusted for up to one year after the acquisition. The purchase price may change subject to certain working capital adjustments, as defined in the Purchase Agreement, that have yet to be finalized. No liabilities were assumed in this transaction. The following table sets forth the preliminary allocation of the purchase price:

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

	$	23,910

The acquisition of the PGIC TGD enhances the product offering in our PTG segment. 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 $36 and $0 for the three months ended April 30, 2008 and 2007, respectively, and $72 and $0 for the six months ended April 30, 2008 and 2007, respectively. Customer relationships and tradenames, trademarks, patents, and copyrights are

SHUFFLE MASTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited, in thousands, except unit/seat and per share amounts)

2. ACQUISITIONS AND OTHER SIGNIFICANT TRANSACTIONS (Continued)

being amortized based on their projected revenue streams. PGIC TGD amortization expenses related to customer relationships and tradenames, trademarks, patents, and copyrights were $1,330 and $0 for the three months ended April 30, 2008 and 2007, respectively and $2,313 and $0 for the six months ended April 30, 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 condensed consolidated statements of income.

3. CURRENT AND LONG-TERM ASSETS

		April 30, 2008			October 31, 2007
Accounts receivable, net:
Trade receivables		$	31,247		$	35,521
Less: allowance for bad debts			(232	)		(476	)

	Total	$	31,015		$	35,045

		April 30, 2008			October 31, 2007
Investment in sales-type leases and notes receivable, net:
Minimum sales-type lease payments		$	7,369		$	10,715
Notes receivable—table game licenses			5,780			7,798

	Sub-total sales-type leases and notes receivable		13,149			18,513
Less: interest sales-type leases			(816	)		(1,085	)
Less: deferred service revenue			(1,239	)		(1,976	)
Less: allowance for bad debts			(257	)		(236	)

Investment in sales-type leases and notes receivable, net			10,837			15,216
Less: current portion sales-type leases			(3,948	)		(4,266	)
Less: current portion notes receivable—table game licenses			(3,484	)		(4,826	)

Long-term portion investment in sales-type leases and notes receivable		$	3,405		$	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 includes 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.

SHUFFLE MASTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited, in thousands, except unit/seat and per share amounts)

3. CURRENT AND LONG-TERM ASSETS (Continued)

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

As of April 30,		2009			2010			2011			Total
Investment in sales-type leases and notes receivable, net:
Future sales-type lease payments		$	5,456		$	1,689		$	223		$	7,368
Notes receivable—table game licenses			3,769			1,682			330			5,781

	Sub-total sales-type leases and notes receivable		9,225			3,371			553			13,149
Less: interest sales-type leases			(604	)		(184	)		(28	)		(816	)
Less: deferred service revenue			(932	)		(279	)		(28	)		(1,239	)
Less: allowance for bad debts			(257	)		—			—			(257	)

Investment in sales-type leases and notes receivable, net		$	7,432		$	2,908		$	497		$	10,837

		April 30, 2008		October 31, 2007
Inventories:
Raw materials and component parts		$	17,702	$	18,975
Work-in-process			2,803		2,141
Finished goods			7,979		12,965

	Total	$	28,484	$	34,081

		April 30, 2008		October 31, 2007
Other current assets:
Prepaid expenses		$	4,210	$	2,502
Other receivables			763		1,442
Other			144		1,342

	Total	$	5,117	$	5,286

Prepaid expenses consist primarily of prepaid legal fees, prepaid insurance, prepaid rent and computer related maintenance and service fees. As of April 30, 2008 and October 31, 2007, prepaid legal fees were $1,130 and $0, respectively.

Other receivables consist primarily of an insurance receivable related to legal fees reimbursable under our Directors and Officers ("D&O") insurance policy and were $440 and $955 as of April 30, 2008 and October 31, 2007, respectively. These fees are related to the various class action and derivative lawsuits that have been brought against us. These receivables have been recognized as we have determined that their recovery under our D&O insurance policy is probable. During the three months ended April 30, 2008, we received $1,165 for legal fees submitted under our D&O insurance

SHUFFLE MASTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited, in thousands, except unit/seat and per share amounts)

3. CURRENT AND LONG-TERM ASSETS (Continued)

policy. These legal fees were previously recorded as other receivables at October 31, 2007 and January 31, 2008. See Note 12 for more information related to these lawsuits.

		April 30, 2008			October 31, 2007
Products leased and held for lease:
Utility		$	28,210		$	29,678
Less: accumulated depreciation			(19,730	)		(22,802	)

	Utility, net		8,480			6,876

Proprietary Table Games			2,307			1,783
Less: accumulated depreciation			(880	)		(703	)

	Proprietary Table Games, net		1,427			1,080

Electronic Table Systems			13,613			12,076
Less: accumulated depreciation			(3,839	)		(4,146	)

	Electronic Table Systems, net		9,774			7,930

Electronic Gaming Machines			222			222
Less: accumulated depreciation			(222	)		(222	)

	Electronic Gaming Machines, net		—			—

	Total, net	$	19,681		$	15,886

		April 30, 2008		October 31, 2007
Other long-term assets:
Debt issuance costs, net		$	2,181	$	2,833
Deposits			4,141		3,872
Investment in Sona			1,192		1,749
PGIC TGD prepaid royalty			4,750		4,750
Other			1,893		2,173

	Total	$	14,157	$	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 $325 for both the three months ended April 30, 2008 and 2007, respectively, and $652 and $673 for the six months ended April 30, 2008 and 2007, respectively. The unamortized portion of the debt issuance costs are expected to be recognized over a weighted-average period of 2.7 years.

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 12 for more information related to the Elixir Gaming Technologies, Inc. (formerly "VendingData") litigation.

SHUFFLE MASTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited, in thousands, except unit/seat and per share amounts)

3. CURRENT AND LONG-TERM ASSETS (Continued)

Other long term assets of $1,893 and $2,173 as of April 30, 2008 and October 31, 2007, principally include $1,372 and $1,659, respectively, of prepaid licensing costs and $523 and $512, respectively, of restricted cash related to the Kings Gaming Inc. contingent consideration in connection with the purchase of the Play Four Poker™ patent and trademark. See Note 5 for more information related to Kings Gaming contingent consideration.

We classify our investment in Sona as available-for-sale. Our investment is recorded at fair market value, which, as of April 30, 2008 and October 31, 2007, was $1,192 and $1,749, respectively. See Note 1 for discussion relating to our investment in Sona and the related impairment write-down recognized in the condensed consolidated statements of income for the three and six month periods ended April 30, 2008.

See Note 2 for discussion related to the $4,750 PGIC TGD prepaid royalty.

4. INTANGIBLE ASSETS AND GOODWILL

Amortizable intangible assets. All of our recorded intangible assets, excluding goodwill and the Stargames and CARD trademarks, are subject to amortization. Amortization expense was $3,709 and $2,693 for the three months ended April 30, 2008 and 2007, respectively, and $7,329 and $5,357 for the six months ended April 30, 2008 and 2007, respectively.

Amortizable intangible assets are comprised of the following as of April 30, 2008 and October 31, 2007:

			Weighted Avg Useful Life	April 30, 2008			October 31, 2007
Amortizable intangible assets:
	Patents, games and products		10 years	$	65,257		$	62,465
	Less: accumulated amortization				(30,091	)		(23,945	)

					35,166			38,520

	Customer relationships		10 years		23,712			23,537
	Less: accumulated amortization				(3,322	)		(2,251	)

					20,390			21,286

	Licenses and other		6 years		5,913			5,136
	Less: accumulated amortization				(2,117	)		(1,813	)

					3,796			3,323

	Developed technology		4 years		10,349			10,254
	Less: accumulated amortization				(5,821	)		(4,486	)

					4,528			5,768

	PGIC Backlog		1 Year		126			126
	Less: accumulated amortization				(68	)		(11	)

					58			115

		Total		$	63,938		$	69,012

SHUFFLE MASTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited, in thousands, except unit/seat and per share amounts)

4. INTANGIBLE ASSETS AND GOODWILL (Continued)

Trademark. Intangibles with an indefinite life consisting of the Stargames and CARD trademarks are not amortized and were $22,611 and $22,331 as of April 30, 2008 and October 31, 2007, respectively.

Goodwill. Changes in the carrying amount of goodwill for the six months ended April 30, 2008, are as follows:

		Utility		Proprietary Table Games		Electronic Table Systems		Electronic Gaming Machines		Total
Balance at October 31, 2007		$	43,456	$	7,373	$	42,965	$	11,560	$	105,354
	Foreign currency translation adjustment		2,830		—		400		108		3,338

Balance at April 30, 2008		$	46,286	$	7,373	$	43,365	$	11,668	$	108,692

All of our goodwill originated from the acquisitions of foreign subsidiaries and the PGIC TGD. For both domestic and foreign income tax purposes only, goodwill is amortized using the straight-line method and deducted over its statutory fifteen year life. Goodwill has been assigned to our Utility, PTG, ETS and EGM reporting units, as defined under SFAS No. 142, "Accounting for Goodwill and Other Intangible Assets" ("SFAS 142").

5. DEBT

Debt consisted of the following:

	April 30, 2008			October 31, 2007
Contingent convertible senior notes (Notes), fixed rate interest at 1.25%, due 2024	$	150,000		$	150,000
Senior secured revolving credit facility (Revolver)		66,180			75,680
PGIC TGD minimum consideration, non-interest bearing, due in installments through 2011		3,066			2,922
BTI acquisition contingent consideration		1,480			2,434
Kings Gaming Inc. contingent consideration		501			512
Bet the Set "21" contingent consideration		444			478
ENPAT note payable, non-interest bearing, due in installments through 2007		—			2,985

Total debt		221,671			235,011

Less: current portion		(150,776	)		(3,672	)

Total long-term debt	$	70,895		$	231,339

Contingent convertible senior notes. In April 2004, we issued $150,000 of contingent convertible senior notes due 2024 (the "Notes") 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.

SHUFFLE MASTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited, in thousands, except unit/seat and per share amounts)

5. DEBT (Continued)

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.

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.

As indicated above, the Notes may be converted to cash on April 15, 2009. The Company expects that the Note holders will exercise this option on April 15, 2009, accordingly, we have classified the entire $150,000 Notes in current portion of debt. Due to the classification of the Notes as of April 30, 2008, we have a working capital deficit of $85,919. Prior to or at the time of such mandatory repurchase, we would have to refinance the Notes or otherwise obtain the capital to repurchase the Notes. We currently do not have financing alternatives in place, however we are exploring various financing alternatives. Our ability to refinance the Notes would be subject to prevailing market

SHUFFLE MASTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited, in thousands, except unit/seat and per share amounts)

5. DEBT (Continued)

conditions at the time and could lead to a higher cost of capital or dilute our equity, depending on which strategy or combination of strategies we select.

$100,000 senior secured revolving credit facility. On November 30, 2006, we entered into a $100,000 senior secured revolving credit facility (the "Revolver") 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. We initially drew $71,180 on the facility, which was used to repay in its entirety a bridge loan originally entered into on January 25, 2006 (the "Old Credit Agreement"). The outstanding balance of the Revolver was $66,180 at April 30, 2008. Our effective interest rate as of April 30, 2008 was 6.91%. Any remaining amount available under the Revolver will be used for working capital, capital expenditures and general corporate purposes, including share repurchases. The Revolver will mature on November 30, 2011.

The interest rate under the Revolver is based on the sum of the relevant Base Rate or Eurodollar Rate plus the Applicable Margin, as defined, each as in effect from time to time. The obligations under the Revolver are guaranteed by each wholly-owned domestic subsidiary of ours that is not an immaterial subsidiary and each wholly-owned domestic subsidiary that is not an immaterial subsidiary of the Company established, created or acquired after November 30, 2006, if any. The Revolver contains customary affirmative and negative covenants for transactions of this nature, including but not limited to restrictions and limitations on the following:

•: Permitted acquisitions;
•: Incurrence of indebtedness;
•: Granting or incurrence of liens;
•: Pay dividends and make other distributions in respect of our equity securities;
•: Acquire assets and make investments;
•: Sales of assets;
•: Transactions with affiliates;
•: Mergers;
•: Total Leverage Ratio;
•: Interest Expense Coverage ratio; and
•: Agreements to restrict dividends and other payments from subsidiaries.

As of April 30, 2008, we had approximately $33,820 of available remaining credit under the Revolver. We have two financial maintenance covenants under our Credit Facility: a Total Leverage Ratio and an Interest Expense Coverage ratio. Our Credit Agreement prohibits us from exceeding a Total Leverage Ratio, as defined therein, of 4.5:1. Our Total Leverage Ratio as of October 31, 2007 was 3.8 to 1.0; our ratio as of April 30, 2008 was 3.9 to 1.0. Our Credit Agreement requires us 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, 2007 was 8.4 to 1.0; our ratio as of April 30, 2008 was 7.6 to 1.0.

SHUFFLE MASTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited, in thousands, except unit/seat and per share amounts)

5. DEBT (Continued)

PGIC Table Games Division 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 amounts to be paid in 2008 and 2009 are $1,000 each year and the annual minimum consideration amounts to be paid in 2010 and 2011 are $750 each year. The balance as of April 30, 2008 of $3,066 represents the discounted present value of the future payments, excluding imputed interest of approximately $434 using an effective interest rate of 7.25%

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 April 30, 2008, was $1,480.

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 April 30, 2008 was $501. We paid $22 of interest on the first anniversary date of the Effective Date, April 17, 2008. Our effective interest rate as of April 30, 2008 was 4.16%.

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 games up to a maximum of $560. The balance of this liability as of April 30, 2008, was $444.

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 balance as of April 30, 2008 and October 31, 2007 was $0 and $2,985, respectively, which represented the discounted present value of the future payments, including imputed interest of approximately $146. The remaining principal and interest payment of $3,000 was paid in December 2007.

SHUFFLE MASTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited, in thousands, except unit/seat and per share amounts)

6. SHAREHOLDERS' EQUITY

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. As such, for the three months ended April 30, 2008 and 2007, no shares of our common stock were repurchased. For the six month periods ended April 30, 2008 and 2007, we repurchased 0 and 75 shares of our common stock at an average price of $0 and $25.77, for a total cost of $0 and $1,993. As of April 30, 2008, $28,203 remained outstanding under our board authorizations. 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 benefit from stock option exercises. During the six months ended April 30, 2008 and 2007, we realized income tax benefits of $0 and $1,748, respectively, related to deductions for employee stock option exercises. These tax benefits, which reduced income taxes payable and increased additional paid-in capital by an equal amount, had no affect on our provision for income taxes.

Other comprehensive income. Other comprehensive income consists of foreign currency translation adjustments and adjustments to our investment in Sona, in accordance with SFAS 115, for the three and six months periods ended April 30, 2008. Other comprehensive income consists of foreign currency translation adjustments for the three and six months periods ended April 30, 2007. The following table provides information related to comprehensive income for the three and six months periods ended April 30, 2008 and 2007:

		Three Months Ended April 30,				Six Months Ended April 30,
		2008		2007		2008			2007
Net income		$	3,048	$	3,440	$	1,245		$	5,465
Currency translation adjustments			11,541		10,781		6,825			12,069
Unrealized loss on investment in Sona			632		—		(123	)		—

	Total comprehensive income	$	15,221	$	14,221	$	7,947		$	17,534

7. 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

SHUFFLE MASTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited, in thousands, except unit/seat and per share amounts)

7. SHARE-BASED COMPENSATION (Continued)

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 April 30, 2008, 539 and 668 shares are available for grant under the 2004 Plan and 2004 Directors' Plan, respectively. A summary of activity under our shared-based payment plans for the period ended April 30, 2008 is presented below:

	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at October 31, 2007	2,906		$	19.68	6.4	$	2,757
Granted	607			9.71	—		—
Exercised	—			—	—		—
Forfeited or expired	(52	)		24.57	—		—

Outstanding at April 30, 2008	3,461			17.86	6.6		9

Exercisable at April 30, 2008	2,339			17.81	5.6		9
Vested and expected to vest at April 30, 2008	3,269			17.86	6.6		9

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. For the three months ended April 30, 2007, no stock option awards were granted.

		Three Months Ended April 30,			Six Months Ended April 30,
		2008		2007	2008		2007
Option valuation assumptions:
	Expected dividend yield	—		—	—		—
	Expected volatility	50.0	%	—	46.5	%	39.2	%
	Risk-free interest rate	2.4	%	—	3.0	%	4.5	%
	Expected term	4.22 years		—	4.22 years		4.19 years

The total income tax benefits from stock option exercises during the six months ended April 30, 2008 and 2007 were $0 and $1,748, respectively. As of April 30, 2008, there was a total of $5,283 of

SHUFFLE MASTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited, in thousands, except unit/seat and per share amounts)

7. SHARE-BASED COMPENSATION (Continued)

unamortized compensation expense related to stock options, which is expected to be recognized over a weighted-average period of 1.9 years.

During the six months ended April 30, 2008 and 2007, we issued 59 and 205 shares of restricted stock, respectively, with an aggregate fair value of $697 and $5,409, 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.

A summary of activity related to restricted stock as of April 30, 2008 is presented below:

	Shares		Weighted Average Grant-Date Fair Value
Nonvested at October 31, 2007	486		$	26.19
Granted	59			11.64
Exercised	(22	)		19.85
Forfeited	(1	)		9.09

Nonvested at April 30, 2008	522			23.92

As of April 30, 2008, there was $6,638 of unamortized compensation expense related to restricted stock, which is expected to be recognized over a weighted-average period of 1.9 years.

Recognition of compensation expense. The following table shows information about compensation costs recognized:

				Three Months Ended April 30,						Six Months Ended April 30,
				2008			2007			2008			2007
Compensation costs:
	Stock options			$	329		$	526		$	884		$	1,140
	Restricted stock				625			762			1,462			1,589

			Total compensation cost		954			1,288			2,346			2,729
		Related tax benefit		$	(226	)	$	(368	)	$	(573	)	$	(793	)

Reported share-based compensation expense was classified as follows:

		Three Months Ended April 30,				Six Months Ended April 30,
		2008		2007		2008		2007
Cost of sales		$	6	$	16	$	12	$	21
Selling, general and administrative			846		1,185		2,143		2,557
Research and development			102		87		191		151

	Total share-based compensation	$	954	$	1,288	$	2,346	$	2,729

SHUFFLE MASTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited, in thousands, except unit/seat and per share amounts)

8. INCOME TAXES

Our effective income tax rate for continuing operations for the three months ended April 30, 2008 and 2007 was 34.1% and 31.3%, respectively. Our effective income tax rate for continuing operations for the six months ended April 30, 2008 and 2007, was 33.5% and 28.9%, respectively. The difference between the federal statutory rate and our effective income tax rate is primarily due to the relative size of certain significant permanent items (e.g. interest expense and research & development tax benefits) to book income. Looking forward, 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.

In July 2006, the FASB issued FIN 48, "Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109", 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. FIN 48 was effective for fiscal years beginning after December 15, 2006, and accordingly, the Company adopted FIN 48 on November 1, 2007.

As a result of the implementation of FIN 48, the Company recorded $1,334 of liabilities for unrecognized tax benefits of which $1,334, if recognized, would impact the effective rate. In addition, $1,043 of this amount was accounted for as a decrease to the retained earnings balance on November 1, 2007.

Interest and penalties related to income taxes are classified as income tax expense in the Company's financial statements. As a result of the application of FIN 48, the Company accrued approximately $146 and $18 of interest and penalties, respectively.

The Company files numerous consolidated and separate income tax returns in the United States federal jurisdiction and in many state and foreign jurisdictions. With few exceptions, the Company is no longer subject to United States federal income tax examinations for years before 2003 and is no longer subject to state and local, or foreign income tax examinations for years before 2002 and 2003, respectively.

The Company does not anticipate that total unrecognized tax benefits will significantly change in the next 12 months.

SHUFFLE MASTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited, in thousands, except unit/seat and per share amounts)

9. EARNINGS PER SHARE

Shares used to compute basic and diluted earnings per share from continuing operations are as follows:

		Three Months Ended April 30,				Six Months Ended April 30,
		2008		2007		2008		2007
Income from continuing operations		$	3,049	$	3,427	$	1,246	$	5,378

Basic:
	Weighted average shares		34,726		34,696		34,722		34,663

Diluted:
	Weighted average shares, basic		34,726		34,696		34,722		34,663
	Dilutive effect of options and restricted stock		45		640		102		797
	Dilutive effect of contingent convertible notes		—		—		—		5

	Weighted average shares, diluted		34,771		35,336		34,824		35,465

Basic earnings per share		$	0.09	$	0.10	$	0.04	$	0.16
Diluted earnings per share		$	0.09	$	0.10	$	0.04	$	0.15
	Weighted average anti-dilutive shares excluded from diluted EPS		20,187		3,370		15,472		2,017

We account for our contingent convertible notes in accordance with FASB Emerging Issues Task Force Issue No. 04-8 ("EITF 04-8"), "The Effect of Contingently Convertible Debt on Diluted Earnings Per Share" which requires us to include the dilutive effect of our outstanding Notes shares in our diluted earnings per share calculation, regardless of whether the market price trigger or other contingent conversion feature has been met. Because our 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. During the six months ended April 30, 2008, the average fair value of our common stock did not exceed $28.07. During the six months ended April 30, 2007, the average fair value of our common stock did exceed $28.07, resulting in 5 additional dilutive shares.

SHUFFLE MASTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited, in thousands, except unit/seat and per share amounts)

10. OTHER EXPENSE

Other expense is comprised of the following:

	Three Months Ended April 30,						Six Months Ended April 30,
	2008			2007			2008			2007
Interest income	$	579		$	392		$	941		$	784
Interest expense		(1,968	)		(1,831	)		(3,992	)		(3,722	)
Amortization of debt issue costs		(325	)		(325	)		(652	)		(673	)
Foreign currency gain (loss)—net		(1,196	)		(990	)		(870	)		(1,130	)
Other		(11	)		(3	)		16			(7	)

Total Other expense	$	(2,921	)	$	(2,757	)	$	(4,557	)	$	(4,748	)

Interest income relates primarily to our investment in sales-type leases, notes receivable portfolio and cash on hand.

Interest expense for the three and six months ended April 30, 2008 and 2007, primarily relates to interest on our Notes and Revolver.

Amortization of debt issue costs for the three and six months ended April 30, 2008 and 2007, relate to our Notes and Revolver.

Foreign currency loss relates to fluctuations of the U.S. dollar, the Euro, the Australian dollar and the Pataca. Our foreign subsidiaries engage in activities with us and certain customers in U.S. dollar and other foreign denominated contracts. Additionally, we are settling certain inter-company balances, which have resulted in the recognition of additional foreign currency fluctuations pursuant to SFAS No. 52, "Foreign Currency Translation".

11. 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.

During fiscal 2007, we instituted some organizational changes at our global headquarters in Las Vegas, Nevada to support the implementation of our five point strategy. Specifically, our Las Vegas-based operations were divided into two distinct divisions: a corporate headquarters group and a new profit center called Shuffle Master-Americas. The organizational changes also included the formation of the Corporate Product Group ("CPG"). The CPG is responsible for overseeing the creation and development of our existing and future product lines. In addition to including key corporate executives responsible for product content and product strategy, the CPG will also oversee our global product research and development.

As part of our reorganization and the continued implementation of our five point strategy, we reanalyzed our historical reportable segments, the Utility Products and Entertainment Products segments, and determined that it was appropriate to expand our reportable segments to include Utility, Proprietary Table Games, Electronic Table Systems and Electronic Gaming Machines as we manage our

SHUFFLE MASTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited, in thousands, except unit/seat and per share amounts)

11. OPERATING SEGMENTS (Continued)

business primarily on a product division basis. Prior periods have been reclassified to conform to this presentation. Our reportable segments are our operating segments.

Our ETS segment includes our e-Table gaming platforms including Table Master™, Vegas Star®, Rapid Table Games™ and wireless Casino On Demand™.

Each segment's activities include the design, development, acquisition, manufacture, marketing, distribution, installation and servicing of its product lines. All periods presented have been reclassified to conform to our current reportable segments.

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. Direct expenses primarily include depreciation of leased assets, amortization of intangible assets, cost of products sold, shipping, installation, commissions, product approval costs, research and development and product related litigation. Indirect expenses include an activity-based allocation of other general product-related costs, the most significant of which are service and selling expenses, including stock-based compensation expense, and manufacturing overhead. Capital expenditures include amounts reported in our condensed 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.

SHUFFLE MASTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited, in thousands, except unit/seat and per share amounts)

11. OPERATING SEGMENTS (Continued)

The following provides financial information concerning our reportable segments of our continuing operations:

		Three Months Ended April 30,						Six Months Ended April 30,
		2008			2007			2008			2007
Revenue:
	Utility	$	21,853		$	22,100		$	39,370		$	39,885
	Proprietary Table Games		9,776			7,488			18,933			15,903
	Electronic Table Systems		6,672			5,116			12,210			10,583
	Electronic Gaming Machines		10,683			9,883			16,324			15,523
	Unallocated Corporate		19			57			63			91

		$	49,003		$	44,644		$	86,900		$	81,985

Gross profit:
	Utility	$	12,303		$	14,177		$	22,909		$	25,562
	Proprietary Table Games		8,585			6,244			15,753			13,460
	Electronic Table Systems		3,407			2,609			5,697			5,332
	Electronic Gaming Machines		5,186			3,670			7,067			5,560
	Unallocated Corporate		(291	)		(25	)		(390	)		(66	)

		$	29,190		$	26,675		$	51,036		$	49,848

Operating income (loss):
	Utility	$	9,588		$	10,602		$	17,545		$	18,847
	Proprietary Table Games		7,609			5,337			14,105			11,169
	Electronic Table Systems		1,811			969			2,100			1,392
	Electronic Gaming Machines		3,051			1,992			3,190			2,369
	Unallocated Corporate		(14,076	)		(11,036	)		(30,075	)		(21,207	)

		$	7,983		$	7,864		$	6,865		$	12,570

Depreciation and amortization:
	Utility	$	2,293		$	2,157		$	4,656		$	4,764
	Proprietary Table Games		967			638			2,002			1,254
	Electronic Table Systems		1,594			896			2,942			1,206
	Electronic Gaming Machines		310			173			682			372
	Unallocated Corporate		1,008			1,054			1,906			2,242

		$	6,172		$	4,918		$	12,188		$	9,838

Capital expenditures:
	Utility	$	1,893		$	2,112		$	3,423		$	2,836
	Proprietary Table Games		452			—			877			—
	Electronic Table Systems		1,669			510			4,065			2,736
	Electronic Gaming Machines		163			17			233			210
	Unallocated Corporate		420			927			772			1,163

		$	4,597		$	3,566		$	9,370		$	6,945

SHUFFLE MASTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited, in thousands, except unit/seat and per share amounts)

11. OPERATING SEGMENTS (Continued)

REVENUE BY GEOGRAPHIC AREA

The following provides financial information concerning our revenues by geographic area for the three and six months ended April 30, 2008 and 2007:

		Three Months Ended April 30,								Six Months Ended April 30,
		2008				2007				2008				2007
Revenue:
	United States	$	21,323	43.5	%	$	17,687	39.6	%	$	41,422	47.7	%	$	39,744	48.4	%
	Canada		2,508	5.1	%		2,351	5.3	%		3,751	4.3	%		4,020	4.9	%
	Other North America		524	1.1	%		443	1.0	%		1,054	1.2	%		957	1.2	%
	Europe		4,233	8.7	%		2,386	5.3	%		7,478	8.6	%		4,166	5.1	%
	Australia		13,869	28.3	%		9,215	20.6	%		23,586	27.1	%		18,499	22.6	%
	Asia		4,864	9.9	%		11,598	26.0	%		6,564	7.6	%		13,031	15.9	%
	Other		1,682	3.4	%		964	2.2	%		3,045	3.5	%		1,568	1.9	%

		$	49,003	100.0	%	$	44,644	100.0	%	$	86,900	100.0	%	$	81,985	100.0	%

Revenues by geographic area are determined based on the location of our customers. For the three and six months ended April 30, 2008, sales to customers outside the United States accounted for 56.5% and 52.3%, respectively, of consolidated revenue, compared to 60.4% and 51.6%, respectively, for the same prior year period.

12. COMMITMENTS AND CONTINGENCIES

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 April 30, 2008, our significant inventory purchase commitments totaled $12,432 which are primarily related to our one2six® shufflers, Easy Chipper C™, Table Master™, Vegas Star®, Rapid Table Games™ and our EGMs. These purchase commitments represent short-term open purchase orders with our vendors as of April 30, 2008.

Minimum royalty payments. In June 2007, we entered into a License Agreement with DEQ Systems Corporation ("DEQ") related to the licensing of intellectual property for use in our business which contains annual minimum royalty payments. The aggregate annual minimum royalty payments are approximately $20,081 through 2019. The annual minimum royalty payments under this agreement

SHUFFLE MASTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited, in thousands, except unit/seat and per share amounts)

12. COMMITMENTS AND CONTINGENCIES (Continued)

are only required in order for us to preserve our exclusivity rights. The following table assumes that we will preserve our exclusivity rights.

As of April 30,
2008	$	200
2009		750
2010		1,550
2011		1,705
2012		1,876
Thereafter		14,000

Total	$	20,081

If we are not an exclusive distributor, the annual minimum royalty would be $0.

Employment agreements. We have entered into employment contracts with our corporate officers and certain other key employees with durations ranging typically 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 April 30, 2008, minimum aggregate severance benefits totaled $5,775 for employment agreements expiring through 2009.

Legal Proceedings. 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, "Accounting for Contingencies," 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. See Note 15, "Commitments and Contingencies" to our Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended October 31, 2007 and Note 12, "Commitments and Contingencies" to our Consolidated Financial Statements in our Quarterly Report on Form 10-Q for the quarter ended January 31, 2008 for further discussion of certain of our legal proceedings and other matters. 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.

Certain recent developments concerning our legal proceedings and other matters are discussed below:

1. VendingData II—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

SHUFFLE MASTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited, in thousands, except unit/seat and per share amounts)

12. COMMITMENTS AND CONTINGENCIES (Continued)

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 the appeal of Shuffle Master's Cross Motion for Summary Judgment. The appeal process will likely not be concluded until some time in calendar year 2009. We believe the likelihood of some unfavorable outcome in this matter is reasonably possible. We cannot, however, at this time, reasonably estimate an expected loss, if any. Further, subject to judicial risks beyond our control, we do not believe that the loss, if any, would be material.

2. GEI—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. At this time, we do not believe that we will suffer any loss. See also subsequent events.

3. MP Games I—On March 21, 2008, the Court entered an order on the summary judgment motions filed by us and the defendants. The result of the ruling is that the only pending claims in the case are a claim by the defendants of patent infringement related to two patents. Losses to us from these remaining claims are a remote possibility. At this time, we do not believe that we will suffer any loss as a result of the Court's summary judgment ruling, 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. Class Action Lawsuit—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. 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 risks beyond our control, we do not believe that the loss, if any, would be material. See also subsequent events.

5. Shareholder Derivative Suits—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. 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 risks beyond our control, we do not believe that the loss, if any, would be material.

6. Data Financial—On March 31, 2008, we filed a lawsuit for declaratory relief against Data Financial Business Services, Inc. ("Data Financial") in the Eighth Judicial District Court, Clark County, Nevada. The lawsuit revolves around the termination of a sales representative agreement wherein Data Financial was our sales representative in several States including: Wisconsin, South Dakota, North Dakota, parts of Minnesota and parts of Michigan. On April 25, 2008, Data Financial removed the case to the United States District Court for the District of Nevada. On

SHUFFLE MASTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited, in thousands, except unit/seat and per share amounts)

12. COMMITMENTS AND CONTINGENCIES (Continued)

April 30, 2008, we were served with an Amended Complaint filed by Data Financial in the Circuit Court, Milwaukee County, State of Wisconsin. This complaint also seeks declaratory relief.

In certain papers filed in one of the pending actions, Data Financial claims that Data Financial will be entitled to in excess of $2,500 as a result of an alleged violation by us of the Wisconsin Fair Dealership Law in our termination of the sales representative agreement. 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 risks beyond our control, we do not believe that the loss, if any, would be material. See also subsequent events.

7. Awada I

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 Note 13 for any subsequent events relating to the above legal proceedings.

13. SUBSEQUENT EVENTS

Legal Proceedings update. (The numbered items correspond to the numbered items of the Legal Proceedings set forth in Note 12):

2. GEI—On May 20, 2008, the Court set a hearing for June 9, 2008 on our Motion for a Default Judgment.

4. Class Action Lawsuit—On May 2, 2008, lead plaintiffs filed an opposition to the defendant's Motion to Dismiss. On May 30, 2008, the defendants filed a reply brief in support of the motion. No hearing date has been set by the Court.

6. Data Financial—On May 9, 2008, we signed a stipulation with Data Financial to stay certain actions in pending litigation matters until July 1, 2008 due to the parties' agreement to participate in mediation. On May 14, 2008, we filed a Motion to Remand the Nevada case from the United States District Court for the District of Nevada to the Eighth Judicial District Court. A mediation is now scheduled for June 24, 2008.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

There are statements herein which are forward-looking statements that are based on management's beliefs, as well as on assumptions made by and information available to management. We consider such statements to be made under the safe harbor created by the federal securities laws to which we are subject, and, other than as required by law, we assume no obligation to update or supplement such statements. These statements can be identified by the fact that they do not relate strictly to historical or current facts, and are based on management's current beliefs and expectations about future events, as well as on assumptions made by and information currently available to management. These forward-looking statements include statements that reflect management's beliefs, plans, objectives, goals, expectations, anticipations, and intentions with respect to our financial condition, results of operations, future performance and business, including statements relating to our business strategy and our current and future development plans. When used in this report, words such as "anticipate," "believe," "estimate," "expect," "intend," "project," "plan," "predict," "might," "may," "could", and similar expressions or the negative thereof, as they relate to us or our management, identify forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part II, Item 1A, "Risk Factors." The following discussion should be read in conjunction with the our 2007 Annual Report on Form 10-K (the "2007 Form 10-K") filed with the U.S. Securities and Exchange Commission ("SEC") and the Condensed Consolidated Financial Statements and notes thereto included elsewhere in this Form 10-Q. All information presented herein is based on our fiscal calendar. Unless otherwise stated, references in this report to particular years or quarters refer to our fiscal years ended in October and the associated quarters of those fiscal years. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.

BUSINESS OVERVIEW
(In thousands, except units/seats and per share amounts)

The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with our condensed consolidated financial statements included under Part 1, Item 1, Financial Statements (unaudited), of this Quarterly Report on Form 10-Q, our audited consolidated financial statements for the year ended October 31, 2007 included in Item 8 in our Annual Report on Form 10-K, and MD&A which is included in our Annual Report on Form 10-K for the year ended October 31, 2007.

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 product segments: Utility, Proprietary Table Games ("PTG"), Electronic Table Systems ("ETS") and Electronic Gaming Machines ("EGM").

Our Utility segment includes a full line of automatic card shufflers for use with the vast majority of card table games as well as chip sorting machines for use on roulette tables. We also have acquired and/or are developing other products that automatically gather data to enable casinos to track table game play, such as Table iD™, part of our ITS product offerings, currently in development with International Game Technology ("IGT") and Progressive Gaming International Corporation ("PGIC"). We also developed the iShoe™, which holds up to eight decks of cards and can be trained to read any card type using interfaces with an LCD monitor that displays game history and trends.

Our ETS segment includes our e-Table gaming platforms including Table Master™, Vegas Star®, Rapid Table Games™ and wireless Casino On Demand™.

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

We have established five key strategic initiatives. These initiatives and our intended execution process are as follows:

Renewed emphasis on leasing versus selling

We intend to execute this strategy primarily in North America although we will implement modest leasing programs in other parts of the world.

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

This includes our card reading shoes and shufflers, shuffler interface with table systems, table game progressive systems and development of new titles for all of our e-table platforms on a worldwide basis.

Increase the return from existing assets already deployed in the field by upgrading or adding new value elements to the existing products

This includes the replacement cycle for our shufflers, shuffler interface with table systems, table game progressive systems, table game bad beat jackpots and other side bets and proprietary add-ons to existing e-Table gaming products.

Value engineering current designs to reduce manufacturing costs across all product lines

Our focus is currently on savings attributable to component parts, product redesign and lower cost manufacturing opportunities.

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

We continue to undertake a careful review of all of our assets with an eye toward utilizing the proceeds from such dispositions, or other forms of monetization such as royalty or license arrangements, to reduce our debt.

Our future expectations are based on our ability to succeed on the above strategic initiatives. More specifically:

Revenue is expected to shift towards the leasing model from the sale model based upon this first initiative. This should provide for a stable and predictable revenue stream. However, our capital expenditures should also continue to grow, but in a proportionate and stable ratio to our revenues and/or mix of revenues, as our leasing model extends into more capital intensive products. Our product pricing strategy also reflects our desire to shift to a lease model from a sales model.

Based upon our second initiative, we expect to continue to expend research and development efforts consistent with prior periods with a view to the development of relevant technology.

Consistent with our third strategy, our newer products, including the i-Deal™ and the progressive versions of our proprietary table games are expected to contribute to growth in the short and long term.

We expect to improve our gross margins through the anticipated success of our fourth initiative of value engineering to reduce manufacturing costs.

Our infrastructure to support our growing global business is expected to remain generally consistent with our existing levels. Operating cash flow and working capital are expected to remain strong as our leasing model strategy develops and our inventory levels reduce as our newer products are rolled-out. Our current intent is to utilize any excess cash to, among other things, reduce outstanding debt.

Our internet address is www.shufflemaster.com. Through the "Investor Relations" page on our internet website, our Annual report on Form 10-K, Proxy Statement, Quarterly Reports on Form 10-Q, 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 are available free of charge, as soon as reasonably practical after such information has been filed or furnished to the Securities and Exchange Commission.

ACQUISITIONS AND OTHER SIGNIFICANT TRANSACTIONS

Progressive Gaming International Corporation Table Games Division. On September 26, 2007, we entered into a purchase agreement for the acquisition of PGIC's Table Game Division ("TGD") business ("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 ("Software Distribution License Agreement"). Further, we also entered into an amended and restated license agreement with PGIC amending the current license agreement originally entered into on September 29, 2006, which granted us certain expanded rights.

The following table presents our various revenues and expenses as a percentage of revenue:

CONSOLIDATED STATEMENTS OF INCOME
(In thousands)

			Three Months Ended April 30,										Six Months Ended April 30,
			2008					2007					2008					2007
Revenue
	Utility products		$	21,853		44.6	%	$	22,100		49.5	%	$	39,370		45.2	%	$	39,885		48.7	%
	Proprietary Table Games			9,776		19.9	%		7,488		16.8	%		18,933		21.8	%		15,903		19.4	%
	Electronic Table Systems			6,672		13.6	%		5,116		11.5	%		12,210		14.1	%		10,583		12.9	%
	Electronic Gaming Machines			10,683		21.8	%		9,883		22.1	%		16,324		18.8	%		15,523		18.9	%
	Other			19		0.1	%		57		0.1	%		63		0.1	%		91		0.1	%

		Total revenue		49,003		100.0	%		44,644		100.0	%		86,900		100.0	%		81,985		100.0	%
Cost of revenue				19,813		40.4	%		17,969		40.2	%		35,864		41.3	%		32,137		39.2	%

Gross profit				29,190		59.6	%		26,675		59.8	%		51,036		58.7	%		49,848		60.8	%
Selling, general and administrative				16,637		34.0	%		14,308		32.0	%		35,012		40.3	%		28,878		35.2	%
Research and development				4,570		9.3	%		4,503		10.1	%		9,159		10.5	%		8,400		10.2	%

Income from operations				7,983		16.3	%		7,864		17.7	%		6,865		7.9	%		12,570		15.4	%
Other expense				(2,921	)	(6.0	)%		(2,757	)	(6.2	)%		(4,557	)	(5.2	)%		(4,748	)	(5.8	)%
Equity method investment loss				—		0.0	%		(120	)	(0.3	)%		—		0.0	%		(261	)	(0.3	)%
Impairment of investment				(433	)	(0.9	)%		—		0.0	%		(433	)	(0.5	)%		—		0.0	%

Income from continuing operations before tax				4,629		9.4	%		4,987		11.2	%		1,875		2.2	%		7,561		9.3	%
Income tax provision				1,580		3.2	%		1,560		3.5	%		629		0.7	%		2,183		2.7	%

Income from continuing operations				3,049		6.2	%		3,427		7.7	%		1,246		1.5	%		5,378		6.6	%
Discontinued operations, net of tax				(1	)	(0.0	)%		13		0.1	%		(1	)	(0.0	)%		87		0.1	%

Net income			$	3,048		6.2	%	$	3,440		7.8	%	$	1,245		1.5	%	$	5,465		6.7	%

Our revenue and results of operations are most affected by unit/seat placements, through lease or sale, of our products. The number and mix of products placed and the average lease or sales price are the most significant factors affecting our gross margins. These factors are, in turn, affected by the gaming industry generally and our customers' assessment of our products. Our current pricing strategy reflects our desire to shift to a lease model from a sales model. It should be noted that our leasing strategy is primarily geographical in that many customers outside the U.S. purchase product rather than lease. The retail sales price of all products has been increased such that the majority of customers should be inclined to lease rather than purchase our products. Also impacting revenues is our introductory pricing, which is used to encourage both sale and lease of new products to customers and entails initially pricing products lower than the expected sales price and/or list price.

Our overall financial results are affected by fluctuations in selling, general and administrative expenses and our continued investment in research and development activities. Our margins are impacted by our renewed emphasis on leasing versus selling, the shift in product mix, timing of installations and related upfront installation charges, as well as increases in non-cash depreciation and amortization expenses attributable to our recent acquisitions. In general, lease gross margin percentages are greater than the sales gross margin percentages of those same products. However, gross margin lease dollars will be lower in total overall impact than those of a sale due to the much higher price of a sale versus a lease. Notwithstanding the factors that can impact our gross margin percentages during

any given period, lease margin percentages are greater than the sales margin percentages for the same product. Accordingly, we anticipate that gross margin percentages will increase under our lease model.

The following table provides information regarding our revenues, gross profit and gross margin by leases and royalties, sales and service and other:

REVENUE AND GROSS MARGIN

			Three Months Ended April 30,								Six Months Ended April 30,
			Three Months Ended April 30,						% Change		Six Months Ended April 30,						% Change
			2008			2007			% Change		2008			2007			% Change
Revenue:
	Leases and royalties		$	17,384		$	13,066		33.0	%	$	34,403		$	26,064		32.0	%
	Sales and service			31,600			31,521		0.3	%		52,434			55,830		(6.1	)%
	Other			19			57		(66.7	)%		63			91		(30.8	)%

		Total	$	49,003		$	44,644		9.8	%	$	86,900		$	81,985		6.0	%

Cost of revenue:
	Leases and royalties		$	5,130		$	3,904		31.4	%	$	10,599		$	7,567		40.1	%
	Sales and service			14,683			14,065		4.4	%		25,265			24,570		2.8	%

		Total	$	19,813		$	17,969		10.3	%	$	35,864		$	32,137		11.6	%

Gross profit:
	Leases and royalties		$	12,254		$	9,162		33.7	%	$	23,804		$	18,497		28.7	%
	Sales and service			16,917			17,456		(3.1	)%		27,169			31,260		(13.1	)%
	Other			19			57		(66.7	)%		63			91		(30.8	)%

		Total	$	29,190		$	26,675		9.4	%	$	51,036		$	49,848		2.4	%

Gross margin:
	Leases and royalties			70.5	%		70.1	%				69.2	%		71.0	%
	Sales and service			53.5	%		55.4	%				51.8	%		56.0	%
		Total		59.6	%		59.8	%				58.7	%		60.8	%

We earn our revenue in several ways, preferably by way of leasing or licensing our products to casino customers, generally under month-to-month fixed fee contracts or participation arrangements. Product lease contracts typically include parts and service. We also offer a majority of our products for sale with an optional parts and service contract. A more detailed discussion of our revenue components and related revenue recognition policies is included under the heading "Critical Accounting Policies."

Our total revenues were $49,003 and $86,900 for the three and six months ended April 30, 2008, respectively, compared to $44,644 and $81,985 in the same prior year periods. The increase in total revenues for the three and six months ended April 30, 2008, is due to the following factors:

•: Our leases and royalties revenue growth for the three and six months ended April 30, 2008 as compared to the same prior year periods, reflects the renewed emphasis on our leasing model predominantly in North America. Utility, PTG and ETS segment lease and royalty revenues increased from the same prior year periods due to increases in either our monthly average lease price, significant increases in our leased units / seats installed base and the approximate 600 unit installed base that we acquired in connection with the PGIC TGD acquisition that occurred in the fourth quarter of fiscal 2007.
•: Utility lease revenue for the three and six months ended April 30, 2008 was $6,911 and $13,735, respectively, as compared to $5,889 and $11,885, respectively, in the same prior year periods. This 17.4% and 15.6% increase in Utility lease revenue was principally driven by a 721 shuffler

unit increase in our lease installed base as well as increases in our monthly average lease prices period over period.

•: PTG royalty and lease revenue for the three and six months ended April 30, 2008 was $8,150 and $16,235, respectively, as compared to $6,081 and $11,892, respectively, in the same prior year periods. This 34.0% and 36.5% increase in PTG royalty and lease revenue was due to measurable organic revenue growth in our traditional non-PGIC table games as well as the revenues associated with the acquisition of an approximate 600 unit installed base in connection with the PGIC TGD acquisition that occurred in the fourth quarter of fiscal 2007. See Note 2 for a detailed discussion of the PGIC TGD acquisition.
•: ETS royalty and lease revenue for the three and six months ended April 30, 2008 was $2,323 and $4,433, respectively, as compared to $1,080 and $2,259, respectively, in the same prior year periods. This 115.1% and 96.2% increase was primarily driven by an additional 495 seats of Table Master™ and an additional 110 seats of Vegas Star® e-Table seats on lease.

Our sales and service revenue for the three months ended April 30, 2008 was relatively flat as compared to the same prior year period. For the six months ended April 30, 2008, offsetting our increase in lease and royalty revenue was a decrease in our sales and service revenue of $3,396, or 6.1%, which is consistent with our renewed emphasis on leasing versus selling.

•: Utility sales and service revenue for the three and six months ended April 30, 2008 was $14,942 and $25,635, respectively, as compared to $16,211 and $28,000, respectively, in the same prior year periods. This 7.8% and 8.4% decrease was due to reductions in units sold as well as decreases in conversions from leased to sold units. This is consistent with our renewed emphasis on leasing versus selling. Offsetting the decline in units is an increase in our average sales price, which is consistent with our pricing strategy.
•: PTG sales and service revenue for the three and six months ended April 30, 2008 was $1,626 and $2,698, respectively, as compared to $1,407 and $4,011, respectively, in the same prior year periods. The 15.6% increase in PTG sales and service revenue for the three months ended April 30, 2008 as compared to the same prior year period was predominantly due to an 18 unit increase in our PTG sold units. The 32.7% decrease in PTG sales and service revenue for the six months ended April 30, 2008 as compared to the same prior year period was predominantly due to a 38 unit decrease in our PTG sold units combined with a shift in the sold unit product mix for the period.
•: ETS sales and service revenue for the three and six months ended April 30, 2008 was $4,349 and $7,777, respectively, as compared to $4,036 and $8,324, respectively, in the same prior year periods. The 7.8% increase for the three months ended April 30, 2008 as compared to the same prior year period was primarily caused by an increase in our average sales price associated with our Vegas Star e-Table platform. The decrease of 6.6% for the six months ended April 30, 2008 as compared to the same prior year period was primarily caused by a decrease in sold seats offset by a significant increase in our average sales price associated with our Vegas Star and Rapid Table Games e-Table platforms.
•: EGM sales and service revenue for the three and six months ended April 30, 2008 was $10,683 and $16,324, respectively, as compared to $9,866 and $15,506, respectively, in the same prior year periods. These 8.3% and 5.3% increases primarily were due to a significant increase in our average sales price of our EGM's.

Although revenue increased for the three and six months ended April 30, 2008 as compared to the same prior year periods, our gross margin percentage, showed a slight decline for the three months ended April 30, 2008 as compared to the same prior year period and a slightly larger decrease for the six months ended April 30, 2008 as compared to the same prior year period.

The decline in our gross margin for the six months ended April 30, 2008 as compared to the same prior year period was caused principally by the following factors:

•: Consistent with our renewed emphasis on leasing as opposed to selling our products, we had fewer conversion sales in our Utility and PTG segments as compared to the same prior year period. Such sales have historically yielded higher gross margins.
•: Our leases and royalty margins were impacted by the continued shift in product mix, timing of lease installations, as well as introductory pricing on newer products. These margins were negatively impacted by upfront installation charges for newly placed e-Table gaming products that are on either month-to-month operating leases or participation arrangements.

See our detailed discussion of our period-over-period results following this discussion as well as our results of our operating segments under "Segment Operating Results."

OPERATING EXPENSES

		Three Months Ended April 30,								Six Months Ended April 30,
		Three Months Ended April 30,						% Change		Six Months Ended April 30,						% Change
		2008			2007			% Change		2008			2007			% Change
Selling, general and administrative		$	16,637		$	14,308		16.3	%	$	35,012		$	28,878		21.2	%
	Percentage of revenue		34.0	%		32.0	%				40.3	%		35.2	%
Research and development		$	4,570		$	4,503		1.5	%	$	9,159		$	8,400		9.0	%
	Percentage of revenue		9.3	%		10.1	%				10.5	%		10.2	%
Total operating expenses		$	21,207		$	18,811		12.7	%	$	44,171		$	37,278		18.5	%
	Percentage of revenue		43.3	%		42.1	%				50.8	%		45.5	%

Selling, General and Administrative Expenses ("SG&A"). SG&A increased at a higher rate than our revenues during the three and six months ended April 30, 2008. The increase in SG&A expenses primarily reflects the following:

SG&A—Three Months Ended Comparison

•: Personnel cost increased $1,688, or 18.7%, to $10,705 for the three months ended April 30, 2008, as compared to $9,017 over the same prior year period, which related to staffing our newly established corporate division and to bolster the sales and service staff in our Shuffle Master Americas profit center to support the growth of our newer products, including our e-Table product line, and expansion into new territories.
•: Corporate legal expense increased $511, or 56.2%, to $1,420 for the three months ended April 30, 2008, as compared to $909 over the same prior year period. Corporate legal costs principally related to VendingData II, shareholder derivative claims and other general corporate matters (for further information on Legal Proceedings, see Note 12). Total legal expenses were offset by $468 related to legal fees reimbursable under our D&O insurance policy (see Note 3). 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.
•: Costs of $704 associated with the increased facilities and staffing in our Macau operation to enhance our competitive presence in that market.

•: Increases of approximately $999 at our foreign subsidiaries due to the weakening of the U.S. dollar.
•: 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, comprising the agreed-upon sales price of $1,290 plus additional credits of $19.

SG&A—Six Months Ended Comparison

•: Personnel cost increased $3,356, or 18.8%, to $21,250 for the six months ended April 30, 2008, as compared to $17,894 over the same prior year period, which related to staffing our newly established corporate division and to bolster the sales and service staff in our Shuffle Master Americas profit center to support the growth of our newer products, including our e-Table product line, and expansion into new territories.
•: Corporate legal expense increased $957, or 53.9%, to $2,731 for the six months ended April 30, 2008, as compared to $1,774 over the same prior year period. Corporate legal costs principally related to VendingData II, shareholder derivative claims and other general corporate matters (for further information on Legal Proceedings, see Note 12). Total legal expenses were offset by $650 related to legal fees reimbursable under our D&O insurance policy (see Note 3). 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.
•: Costs of $1,204 associated with the increased facilities and staffing in our Macau operation to enhance our competitive presence in that market.
•: Severance costs of approximately $360 associated with the departure of a senior executive in our corporate office.
•: Increases of approximately $1,759 at our foreign subsidiaries due to the weakening of the U.S. dollar.
•: Total SG&A expenses were offset by a gain of $738 recognized on the sale of our partial interest in a Net Jets business jet. See "SG&A-Three Months Ended" discussion for detail.

Research and Development Expenses ("R&D"). Our R&D in both periods presented is distributed among all of our product lines, as we have continued to invest in new product development. R&D expense increased $67, or 1.5%, to $4,570 for the three months ended April 30, 2008, as compared to $4,503 for the same prior year period. R&D expense increased $759, or 9.0%, to $9,159 for the six months ended April 30, 2008, as compared to $8,400 for the same prior year period. A significant part of the increase for both the three and six months ended April 30, 2008 in R&D relates to approximately $164 and $434 respectively, at our foreign subsidiaries due to the weakening of the U.S. dollar.

The increase in R&D expenses can also be attributed to our newly created Corporate Products Group ("CPG"), which was a new department 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. For the three and six months ended, April 30, 2008, approximately $248 and $388 respectively, was expended by the newly formed CPG for general operational purposes.

Each year we continue to spend significant R&D efforts on the development of newer generation products in each of our segments. For the three and six months ended April 30, 2008, R&D expenses

related to our Utility segment, were primarily in support of our next generation shufflers and secondarily in support of our card recognition products and other table accessories. For our PTG segment, R&D related to the development of new progressive table games with bonusing options and side bets. For our ETS segment, R&D predominantly focused on developing newer and more innovative e-Table configurations, which include our Table Master™, Rapid Table Games™ and Vegas Star® products such as Ultimate Draw Poker, Vegas Star Craps and Rapid Craps. For our EGM segment, R&D principally related to developing and commercializing new content with respect to the new PC4 operating platform.

We believe that one of our strengths is identifying new and relevant product opportunities and refining current products. We expect to continue to spend a significant portion of our revenues on research and development.

DEPRECIATION AND AMORTIZATION EXPENSES

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 $1,254, or 27.3%, to $5,847 for the three months ended April 30, 2008, as compared to $4,593 for the same prior year period. Depreciation and amortization expenses increased $2,371, or 25.9%, to $11,536 for the six months ended April 30, 2008, as compared to $9,165 for the same prior year period.

The increase is principally attributable to the PGIC TGD acquisition in the fourth quarter of 2007 as well as an increase in our leased asset installed base year over year. Of the increase in depreciation and amortization, approximately $1,001 and $1,901 is included in gross margin for the three and six months ended April 30, 2008, respectively.

OTHER EXPENSE

Other expense is comprised of the following:

	Three Months Ended April 30,						Six Months Ended April 30,
	2008			2007			2008			2007
Interest income	$	579		$	392		$	941		$	784
Interest expense		(1,968	)		(1,831	)		(3,992	)		(3,722	)
Amortization of debt issue costs		(325	)		(325	)		(652	)		(673	)
Foreign currency gain (loss)—net		(1,196	)		(990	)		(870	)		(1,130	)
Other		(11	)		(3	)		16			(7	)

Total Other expense	$	(2,921	)	$	(2,757	)	$	(4,557	)	$	(4,748	)

Interest income relates primarily to our investment in sales-type leases, notes receivable portfolio and cash on hand.

Interest expense for the three and six months ended April 30, 2008 and 2007, primarily relates to interest on our Notes and Revolver.

Amortization of debt issue costs for the three and six months ended April 30, 2008 and 2007, relates to our Notes and Revolver.

which have resulted in the recognition of additional foreign currency fluctuations pursuant to SFAS No. 52, "Foreign Currency Translation".

INCOME TAXES

During the six months ended April 30, 2008 and 2007, we realized income tax benefits of $0 and $1,748, respectively, related to deductions for employee stock option exercises. These tax benefits, which reduced income taxes payable and increased additional paid-in capital by an equal amount, had no effect on our provision for income taxes.

See Note 8 for a discussion of the impact of the adoption of FIN 48 in November 2007.

SEGMENT OPERATING RESULTS
(Dollars in thousands, except units and per unit/seat amounts)

UTILITY SEGMENT OPERATING RESULTS—THREE MONTHS ENDED

			Three Months Ended April 30,
			Three Months Ended April 30,						Increase (Decrease)			Percentage Change
			2008			2007			Increase (Decrease)			Percentage Change
Utility segment revenue
	Lease		$	6,911		$	5,889		$	1,022		17.4	%
	Sales—Shuffler			10,744			13,509			(2,765	)	(20.5	)%
	Sales—Chipper			1,367			315			1,052		334.0	%
	Service and other			2,831			2,387			444		18.6	%

		Total sales and service		14,942			16,211			(1,269	)	(7.8	)%

		Total Utility segment revenue	$	21,853		$	22,100		$	(247	)	(1.1	)%

Utility segment gross profit			$	12,303		$	14,177		$	(1,874	)	(13.2	)%
Utility segment gross margin				56.3	%		64.1	%
Utility segment operating income			$	9,588		$	10,602		$	(1,014	)	(9.6	)%
Utility segment operating margin				43.9	%		48.0	%
Shufflers installed base (end of quarter)
	Lease units			5,354			4,633			721		15.6	%

	Sold units, inception-to-date
		Beginning of quarter		20,703			18,245			2,458		13.5	%
		Sold during quarter		743			1,044			(301	)	(28.8	)%
		Less trade-ins and exchanges		(20	)		(70	)		50		71.4	%

		End of quarter		21,426			19,219			2,207		11.5	%

	Total installed base			26,780			23,852			2,928		12.3	%

Chipper installed base (end of quarter)
	Lease units			22			10			12		120.0	%

	Sold units, inception-to-date
		Beginning of quarter		759			646			113		17.5	%
		Sold during quarter		57			13			44		338.5	%

		End of quarter		816			659			157		23.8	%

	Total installed base			838			669			169		25.3	%

Utility segment revenue is derived primarily from our shuffler product line and secondarily from our chipper products.

Utility segment revenue decreased $247, or 1.1%, to $21,853 for the three months ended April 30, 2008, as compared to $22,100 for the same prior year period. This decrease was primarily due to a 20.5% decrease in shuffler sales revenue. This decrease was largely offset by a 17.4% increase in lease revenue, a 334.0% increase in chipper sales revenue and an 18.6% increase in service and other revenue.

The 20.5% decrease in shuffler sales revenue for the three months ended April 30, 2008, compared to the same prior year period can be directly attributed to:

•: A net decrease of 301, or 28.8%, of sold shuffler units to 743 from 1,044, which is consistent with our renewed emphasis on leasing versus selling, predominantly in North America.
•: A decrease in conversions from leased shufflers to sold shufflers of 17 units during the three months ended April 30, 2008 as compared to 102 units in the same prior year period, which reflects our renewed emphasis on leasing versus selling.
•: An increase in the average shuffler sales price on sold units from $12,940 to $14,460.

The decrease in shuffler sales revenue discussed above was offset by the following increases:

The 17.4% increase in Utility lease revenue for the three months ended April 30, 2008, compared to the same prior year period primarily reflects:

•: A net increase of 721, or 15.6%, of leased shuffler units to 5,354 from 4,633.
•: A slight increase in Utility average monthly lease price to $430 from $423. The increase was predominantly attributable to increased lease pricing for the MD2®, DeckMate® and one2six® shufflers.
•: As discussed above, a decrease in leased shuffler conversions.

The 334.0% increase in chipper sales revenue for the three months ended April 30, 2008, compared to the same prior year period primarily reflects:

•: A net increase of 44, or 338.5%, of sold chipper units to 57 from 13.

The 18.6% increase in service and other revenue for the three months ended April 30, 2008, compared to the same prior year period primarily reflects:

•: Increased service contracts and parts sold related to previously sold shufflers.
•: A net increase of 62, or 2,066.7%, of sold iShoe units to 65 from 3.

Utility gross profit and gross margin for the three months ended April 30, 2008 decreased $1,874 and 7.8%, respectively, compared to the same prior year period, primarily as a result of the decreases in shuffler sales and lease conversions as well as an increase in amortization expense associated with the one2six shuffler and Easy Chipper to $1,458 for the three months ended April 30, 2008, as compared to $1,094 for the same prior year period. Utility segment operating income and operating margin for the three months ended April 30, 2008, decreased $1,014 and 4.1%, respectively, compared to the same prior year period, also due to the decreases in shuffler sales and lease conversions and the increase in amortization expense.

UTILITY SEGMENT OPERATING RESULTS—SIX MONTHS ENDED

			Six Months Ended April, 30
			Six Months Ended April, 30						Increase (Decrease)			Percentage Change
			2008			2007			Increase (Decrease)			Percentage Change
Utility segment revenue
	Lease		$	13,735		$	11,885		$	1,850		15.6	%
	Sales—Shuffler			17,687			22,965			(5,278	)	(23.0	)%
	Sales—Chipper			2,244			912			1,332		146.1	%
	Service and other			5,704			4,123			1,581		38.3	%

		Total sales and service		25,635			28,000			(2,365	)	(8.4	)%

		Total Utility segment revenue	$	39,370		$	39,885		$	(515	)	(1.3	)%

Utility segment gross profit			$	22,909		$	25,562		$	(2,653	)	(10.4	)%
Utility segment gross margin				58.2	%		64.1	%
Utility segment operating income			$	17,545		$	18,847		$	(1,302	)	(6.9	)%
Utility segment operating margin				44.6	%		47.3	%
Shufflers installed base (end of period)
	Lease units			5,354			4,633			721		15.6	%

	Sold units, inception-to-date
		Beginning of period		20,396			17,630			2,766		15.7	%
		Sold during period		1,241			1,795			(554	)	(30.9	)%
		Less trade-ins and exchanges		(211	)		(206	)		(5	)	(2.4	)%

		End of period		21,426			19,219			2,207		11.5	%

	Total installed base			26,780			23,852			2,928		12.3	%

Chipper installed base (end of period)
	Lease units			22			10			12		120.0	%

	Sold units, inception-to-date
		Beginning of period		721			620			101		16.3	%
		Sold during period		95			39			56		143.6	%

		End of period		816			659			157		23.8	%

	Total installed base			838			669			169		25.3	%

Utility segment revenue is derived primarily from our shuffler product line and secondarily from our chipper products.

Utility segment revenue decreased $515, or 1.3%, to $39,370 for the six months ended April 30, 2008, as compared to $39,885 for the same prior year period. This decrease was primarily due to a 23.0% decrease in shuffler sales revenue, which was largely offset by a 15.6% increase in lease revenue, a 146.1% increase in chipper sales revenue and a 38.3% increase in service and other revenue.

The 23.0% decrease in shuffler sales revenue for the six months ended April 30, 2008, compared to the same prior year period can be directly attributed to:

•: A net decrease of 554, or 30.9%, of sold shuffler units to 1,241 from 1,795, which is consistent with our renewed emphasis on leasing versus selling predominantly in North America.

•: A decrease in conversions from leased shufflers to sold shufflers of 139 units during the six months ended April 30, 2008 as compared to 353 units in the same prior year period, which reflects our renewed emphasis on leasing versus selling.
•: These decreases were offset by an increase in the average shuffler sales price, from $12,794 to $14,252, which is consistent with our leasing pricing strategy.

The decrease in shuffler sales revenue discussed above was offset by the following increases:

The 15.6% increase in Utility lease revenue for the six months ended April 30, 2008, compared to the same prior year period primarily reflects:

•: A net increase of 721, or 15.6%, of leased shuffler units to 5,354 from 4,633.
•: A decrease of 214 units, or 154.0%, in conversions from leased shufflers to sold shufflers, which reflects our renewed emphasis on leasing versus selling predominantly in North America.

The 146.1% increase in chipper sales revenue for the six months ended April 30, 2008, compared to the same prior year period primarily reflects:

•: A net increase of 56, or 143.6%, of sold chipper units to 95 from 39.

The 38.3% increase in service and other revenue for the six months ended April 30, 2008, compared to the same prior year period primarily reflects:

•: Increased service contracts and parts sold related to previously sold shufflers.
•: A net increase of 62, or 2,066.7%, of sold iShoe units to 65 from 3.

Utility gross profit and gross margin for the six months ended April 30, 2008 decreased $2,653 and 5.9%, respectively, compared to the same prior year period, primarily as a result of the decreases in shuffler sales and lease conversions as well as an increase in amortization expense associated with the one2six shuffler and Easy Chipper to $2,854 for the six months ended April 30, 2008, as compared to $2,174 for the same prior year period. Utility segment operating income and operating margin for the six months ended April 30, 2008, decreased $1,302 and 2.7%, respectively, compared to the same prior year period, also due to the decreases in shuffler sales and lease conversions and the increase in amortization expense.

PROPRIETARY TABLE GAMES OPERATING RESULTS—THREE MONTHS ENDED

			Three Months Ended April 30,
			Three Months Ended April 30,						Increase (Decrease)			Percentage Change
			2008			2007			Increase (Decrease)			Percentage Change
PTG segment revenue
	Royalties and leases		$	8,150		$	6,076		$	2,074		34.1	%
	Other			—			5			(5	)	(100.0	)%

		Total royalties and leases		8,150			6,081			2,069		34.0	%

	Sales			1,488			1,359			129		9.5	%
	Service and other			138			48			90		187.5	%

		Total sales and service revenue		1,626			1,407			219		15.6	%

		Total PTG segment revenue	$	9,776		$	7,488		$	2,288		30.6	%

PTG segment gross profit			$	8,585		$	6,244		$	2,341		37.5	%
PTG segment gross margin				87.8	%		83.4	%
PTG segment operating income			$	7,609		$	5,337		$	2,272		42.6	%
PTG segment operating margin				77.8	%		71.3	%
PTG installed base (end of quarter)
	Royalty units			4,082			3,239			843		26.0	%

	Sold units, inception-to-date
		Beginning of quarter		1,460			1,312			148		11.3	%
		Sold during quarter		66			48			18		37.5	%

		End of quarter		1,526			1,360			166		12.2	%

	Total installed base			5,608			4,599			1,009		21.9	%

Total PTG segment revenue increased $2,288, or 30.6%, to $9,776 for the three months ended April 30, 2008, as compared to $7,488 for the same prior year period. The increase was primarily due to the 34.1% increase in royalty and lease revenue and secondarily due to a 15.6% increase in total sales and service revenue.

The 34.1% increase in PTG royalty and lease revenue for the three months ended April 30, 2008, compared to the same prior year period, primarily reflects:

•: A net increase of 843, or 26.0%, 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 in late September 2007 as well as measurable organic revenue growth in our traditional non-PGIC table games.
•: An increase in non-PGIC acquired table game lease units comprised primarily of increases in Ultimate Texas Hold'em®, Bet the Set "21"®, and Dragon Bonus®.
•: An increase in PTG average monthly lease price per table game to $666 from $625.
•: A net increase of 134, or 100%, in table game bonusing option add-ons, predominantly related to the increase in our Progressive Fortune Pai Gow table game.

The 15.6% increase in total sales and service revenue for the three months ended April 30, 2008, compared to the same prior year period, primarily reflects:

•: A net increase of 18, or 37.5%, PTG sold units to 66 from 48, which predominantly relates to Fortune Pai Gow sales.
•: The increase in service revenue is primarily attributable to increased service contracts and parts related to previously sold proprietary table games.

PTG gross profit and margin for the three months ended April 30, 2008 increased $2,341 and 4.4%, respectively, compared to the same prior year period, primarily as a result of the royalty and lease revenue increases discussed above. PTG segment operating income and margin for the three months ended April 30, 2008 increased $2,272 and 6.5%, respectively, from the same prior year period, also as the result of the royalty and lease revenue increases.

PROPRIETARY TABLE GAMES OPERATING RESULTS—SIX MONTHS ENDED

			Six Months Ended April 30,
			Six Months Ended April 30,						Increase (Decrease)			Percentage Change
			2008			2007			Increase (Decrease)			Percentage Change
PTG segment revenue
	Royalties and leases		$	16,235		$	11,877		$	4,358		36.7	%
	Other			—			15			(15	)	(100.0	)%

		Total royalties and leases		16,235			11,892			4,343		36.5	%

	Sales			2,332			3,922			(1,590	)	(40.5	)%
	Service and other			366			89			277		311.2	%

		Total sales and service revenue		2,698			4,011			(1,313	)	(32.7	)%

		Total PTG segment revenue	$	18,933		$	15,903		$	3,030		19.1	%

PTG segment gross profit			$	15,753		$	13,460		$	2,293		17.0	%
PTG segment gross margin				83.2	%		84.6	%
PTG segment operating income			$	14,105		$	11,169		$	2,936		26.3	%
PTG segment operating margin				74.5	%		70.2	%
PTG installed base (end of period)
	Royalty units			4,082			3,239			843		26.0	%

	Sold units, inception-to-date
		Beginning of period		1,437			1,233			204		16.5	%
		Sold during period		89			127			(38	)	(29.9	)%

		End of period		1,526			1,360			166		12.2	%

	Total installed base			5,608			4,599			1,009		21.9	%

Total PTG segment revenue increased $3,030, or 19.1%, to $18,933 for the six months ended April 30, 2008, as compared to $15,903 for the same prior year period. The increase was primarily due to the 36.7% increase in royalty and lease revenue and secondarily due to a 311.2% increase in service and other revenue. This increase was offset by a 40.5% decrease in PTG sales revenue.

The 36.7% increase in PTG royalty and lease revenue for the six months ended April 30, 2008, compared to the same prior year period, primarily reflects:

•: A net increase of 843, or 26.0%, 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 in late September 2007 as well as measurable organic revenue growth in our traditional non-PGIC table games.
•: An increase in non-PGIC acquired table game lease units comprised primarily of increases in Ultimate Texas Hold'em®, Bet the Set "21"®, and Dragon Bonus®.
•: An increase in PTG average monthly lease price per premium table game to $663 from $611.
•: A net increase of 134, or 100%, in table game bonusing option add-ons, predominantly related to the increase in our Progressive Fortune Pai Gow table game.

The 311.2% increase in service and other revenue for the six months ended April 30, 2008, compared to the same prior year period, primarily reflects:

•: Increased service contracts, parts and other peripheral sales related to previously sold proprietary table games.

The increases in PTG royalty and lease revenue as well as service and other revenue discussed above were offset by the following decreases:

The 40.5% decrease in PTG sales revenue for the six months ended April 30, 2008, compared to the same prior year period can be directly attributed to:

•: A net decrease of 38, or 29.9%, of sold PTG units to 89 from 127, which is consistent with our renewed emphasis on leasing versus selling predominantly in North America.
•: A decrease in PTG average sales price per table game to $26,202 from $30,882. This decline is primarily attributable to sales of PTG to our Asia distributor, of which pricing is lower than that of third-party sales, and a change in the product sales mix.

PTG gross profit for the six months ended April 30, 2008 increased $2,293, or 17.0%, compared to the same prior year period, as a result of the increase in royalty and lease revenue discussed above. PTG gross margin for the six months ended April 30, 2008 decreased 1.4% compared to the same prior year period, due to installation and other up-front costs related to certain newer PTG products placed during the three-months ended January 31, 2008. PTG segment operating income and margin for the six months ended April 30, 2008 increased $2,936 and 4.3%, respectively, from the same prior year period, also as a result of the increase in royalty and lease revenues.

ELECTRONIC TABLE SYSTEMS OPERATING RESULTS—THREE MONTHS ENDED

			Three Months Ended April 30,
			Three Months Ended April 30,						Increase (Decrease)			Percentage Change
			2008			2007			Increase (Decrease)			Percentage Change
ETS segment revenue
	Royalties and leases		$	2,323		$	1,080		$	1,243		115.1	%
	Other			—			—			—		0.0	%

		Total Royalties and leases		2,323			1,080			1,243		115.1	%

	Sales			3,702			3,774			(72	)	(1.9	)%
	Service and other			647			262			385		146.9	%

		Total sales and service revenue		4,349			4,036			313		7.8	%

		Total ETS segment revenue	$	6,672		$	5,116		$	1,556		30.4	%

ETS segment gross profit			$	3,407		$	2,609		$	798		30.6	%
ETS segment gross margin				51.1	%		51.0	%
ETS segment operating income			$	1,811		$	969		$	842		86.9	%
ETS segment operating margin				27.1	%		18.9	%
ETS installed base (end of quarter)
	Lease seats			1,268			634			634		100.0	%

	Sold seats, inception-to-date
		Beginning of quarter		5,154			4,345			809		18.6	%
		Sold during quarter		178			194			(16	)	(8.2	)%
		Less trade-ins and exchanges		—			(20	)		20		100.0	%

		End of quarter		5,332			4,519			813		18.0	%

	Total installed base			6,600			5,153			1,447		28.1	%

Total ETS segment revenue increased $1,556, or 30.4%, to $6,672 for the three months ended April 30, 2008, as compared to $5,116 for the same prior year period. The increase was primarily due to a 115.1% increase in royalty and lease revenues and secondarily to a 146.9% increase in service and other revenue. This increase was offset by a 1.9% decrease in ETS sales revenue.

The 115.1% increase in ETS segment lease and royalty revenue for the three months ended April 30, 2008, compared to the same prior year period, primarily reflects:

•: A net increase of 634, or 100%, of e-Table seats on lease, which includes 495 incremental seats of Table Master™ and 110 incremental seats of Vegas Star® e-Table seats on lease.
•: This increase in Table Master™ lease seats mentioned above was primarily related to the five year exclusive agreement with the Delaware State Lottery System as well as several properties in Pennsylvania.
•: An increase in the average lease price per seat to $611 from $568.

The 146.9% increase in ETS segment service and other revenue for the three months ended April 30, 2008, compared to the same prior year period, primarily reflects:

•: Increased parts and other peripheral sales related to previously sold ETS seats, especially relating to the Vegas Star product.

The increases in ETS royalty and lease revenue as well as service and other revenue discussed above were offset by:

•: A 1.9% decrease in ETS sales revenue for the three months ended April 30, 2008, compared to the same prior year period, which is a result of a decrease of 16, or 8.2%, ETS sold seats. This is consistent with our renewed emphasis on leasing versus selling, predominantly in North America.

ETS gross profit three months ended April 30, 2008 increased $798 as compared to the same prior year period. Gross margin remained relatively flat, increasing by only 0.1%. ETS operating income and margin for the three months ended April 30, 2008 increased $842 and 8.2%, from the same prior year period. The increases in ETS gross profit and operating income as well as gross margin and operating margin were predominantly caused by the $1,243 increase in royalty and lease revenue.

ELECTRONIC TABLE SYSTEMS OPERATING RESULTS—SIX MONTHS ENDED

			Six Months Ended April 30,
			Six Months Ended April 30,						Increase (Decrease)			Percentage Change
			2008			2007			Increase (Decrease)			Percentage Change
ETS segment revenue
	Royalties and leases		$	4,433		$	2,259		$	2,174		96.2	%
	Other			—			—			—		0.0	%

		Total Royalties and leases		4,433			2,259			2,174		96.2	%

	Sales			6,343			7,883			(1,540	)	(19.5	)%
	Service and other			1,434			441			993		225.2	%

		Total sales and service revenue		7,777			8,324			(547	)	(6.6	)%

		Total ETS segment revenue	$	12,210		$	10,583		$	1,627		15.4	%

ETS segment gross profit			$	5,697		$	5,332		$	365		6.8	%
ETS segment gross margin				46.7	%		50.4	%
ETS segment operating income			$	2,100		$	1,392		$	708		50.9	%
ETS segment operating margin				17.2	%		13.2	%
ETS installed base (end of period)
	Lease seats			1,268			634			634		100.0	%

	Sold seats, inception-to-date
		Beginning of period		5,040			4,142			898		21.7	%
		Sold during period		292			397			(105	)	(26.4	)%
		Less trade-ins and exchanges		—			(20	)		20		100.0	%

		End of period		5,332			4,519			813		18.0	%

	Total installed base			6,600			5,153			1,447		28.1	%

Total ETS segment revenue increased $1,627, or 15.4%, to $12,210 for the six months ended April 30, 2008, as compared to $10,583 for the same prior year period. The increase was primarily due to a 96.2% increase in royalty and lease revenues and secondarily to a 225.2% increase in service and other revenue. This increase was offset by a 19.5% decrease in ETS sales revenue.

The 96.2% increase in ETS segment lease and royalty revenue for the six months ended April 30, 2008, compared to the same prior year period, primarily reflects:

•: A net increase of 634, or 100%, of e-Table seats on lease, which includes 495 incremental seats of Table Master™ and 110 incremental seats of Vegas Star® e-Table seats on lease. The increase of 634 seats includes the impact of conversions of leased seats to sales offset by newly placed leased seats.
•: This increase in Table Master™ lease seats mentioned above was primarily related to the five year exclusive agreement with the Delaware State Lottery System as well as several properties in Pennsylvania.

The 225.2% increase in ETS segment service and other revenue for the six months ended April 30, 2008, compared to the same prior year period, 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 products.

The increases in ETS royalty and lease revenue as well as service and other revenue discussed above were offset by:

•: A 19.5% decrease in ETS sales revenue for the six months ended April 30, 2008, compared to the same prior year period, which is a result of a decrease of 105, or 26.4%, ETS sold seats to 292 from 397. This is consistent with our renewed emphasis on leasing versus selling, predominantly in North America.

ETS gross profit for the six months ended April 30, 2008 increased $365 as compared to the same prior year period. ETS gross margin for the six months ended April 30, 2008 decreased 3.7% as compared to the same prior year period, due to the negative impact of initial installation costs of new e-Table seats on lease. ETS segment operating income and margin for the six months ended April 30, 2008 increased $708 and 4.0%, respectively, from the same prior year period. The increases in ETS operating income as well as operating margin were predominantly caused by the $2,174 increase in royalty and lease revenue. Additionally, operating margin was favorably impacted by a reduction in the amount of indirect costs allocated to the ETS segment.

ELECTRONIC GAMING MACHINES OPERATING RESULTS—THREE MONTHS ENDED

			Three Months Ended April 30,
			Three Months Ended April 30,						Increase (Decrease)			Percentage Change
			2008			2007			Increase (Decrease)			Percentage Change
EGM segment revenue
	Lease revenue		$	—		$	17		$	(17	)	(100.0	)%
	Sales			8,288			8,836			(548	)	(6.2	)%
	Service and other			2,395			1,030			1,365		132.5	%

		Total sales and service revenue		10,683			9,866			817		8.3	%

		Total EGM segment revenue	$	10,683		$	9,883		$	800		8.1	%

EGM segment gross profit			$	5,186		$	3,670			1,516		41.3	%
EGM segment gross margin				48.5	%		37.1	%
EGM segment operating income			$	3,051		$	1,992		$	1,059		53.2	%
EGM segment operating margin				28.6	%		20.2	%
EGM installed base (end of quarter)
	Lease seats			2			7			(5	)	(71.4	)%
	Sold seats, inception-to-date
		Beginning of quarter		19,267			16,720			2,547		15.2	%
		Sold during quarter		550			721			(171	)	(23.7	)%

		End of quarter		19,817			17,441			2,376		13.6	%

	Total installed base			19,819			17,448			2,371		13.6	%

Total EGM segment revenue increased $800, or 8.1%, to $10,683 for the three months ended April 30, 2008, as compared to $9,883 for the same prior year period. The increase was primarily due to the 132.5% increase in service and other revenues. This increase was offset by a 6.2% decrease in EGM sales revenue.

The 132.5% increase in service and other revenue for the three months ended April 30, 2008, compared to the same prior year period reflects:

•: An increase of $1,626, or 855.8%, of parts and other peripheral sales related to previously sold EGM seats.

The increase in EGM service and other revenue discussed above was offset by:

A 6.2% decrease in EGM sales revenue for the three months ended April 30, 2008, compared to the same prior year period and is primarily attributable to:

•: A decrease of 171, or 23.7%, EGM sold seats to 550 from 721.
•: Offset by an increase in the average sales price to $15,000 from $12,300.

EGM gross profit and gross margin for the three months ended April 30, 2008 increased $1,516 and 11.4%, respectively, as compared to the same prior year period. EGM segment operating income and margin for the three months ended April 30, 2008 increased $1,059 and 8.4%, respectively, from the same prior year period. EGM gross profit and operating profit for the prior year period were negatively impacted by a minimum royalty shortfall of $950. The increases in EGM gross profit and operating income as well as EGM gross margin and operating margin were primarily caused by the expiration of the agreement under which this minimum royalty was required and a substantial increase in the average sales price of our EGMs.

ELECTRONIC GAMING MACHINES OPERATING RESULTS—SIX MONTHS ENDED

			Six Months Ended April 30,
			Six Months Ended April 30,						Increase (Decrease)			Percentage Change
			2008			2007			Increase (Decrease)			Percentage Change
EGM segment revenue
	Lease revenue		$	—		$	17		$	(17	)	(100.0	)%
	Sales			11,918			12,361			(443	)	(3.6	)%
	Service and other			4,406			3,145			1,261		40.1	%

		Total sales and service revenue		16,324			15,506			818		5.3	%

		Total EGM segment revenue	$	16,324		$	15,523		$	801		5.2	%

EGM segment gross profit			$	7,067		$	5,560		$	1,507		27.1	%
EGM segment gross margin				43.3	%		35.8	%
EGM segment operating income			$	3,190		$	2,369		$	821		34.7	%
EGM segment operating margin				19.5	%		15.3	%
EGM installed base (end of period)
	Lease seats			2			7			(5	)	(71.4	)%
	Sold seats, inception-to-date
		Beginning of period		18,993			16,279			2,714		16.7	%
		Sold during period		824			1,162			(338	)	(29.1	)%

		End of period		19,817			17,441			2,376		13.6	%

	Total installed base			19,819			17,448			2,371		13.6	%

Total EGM segment revenue increased $801, or 5.2%, to $16,324 for the six months ended April 30, 2008, as compared to $15,523 for the same prior year period. The increase was primarily due

to the 40.1% increase in service and other revenues. This increase was offset by a 3.6% decrease in EGM sales revenue.

The 40.1% increase in service and other revenue for the six months ended April 30, 2008, compared to the same prior year period reflects:

•: An increase of $2,115, or 182.2%, of parts and other peripheral sales related to previously sold EGM seats.

The increase in EGM service and other revenue discussed above was offset by:

A 3.6% decrease in EGM sales revenue for the six months ended April 30, 2008, compared to the same prior year period is primarily attributable to:

•: A decrease of 338, or 29.1% EGM sold seats to 824 from 1,162.
•: Offset by an increase in the average sales price to $14,500 from $10,600.

EGM gross profit and gross margin for the six months ended April 30, 2008 increased $1,507 and 7.5%, respectively, as compared to the same prior year period. EGM segment operating income and margin for the six months ended April 30, 2008 increased $821 and 4.2%, respectively, from the same prior year period. Segment gross profit and operating profit for the prior year period were negatively impacted by a minimum royalty shortfall of $950. The increases in EGM gross profit and operating income as well as gross margin and operating margin were primarily caused by the expiration of the agreement under which this minimum royalty was required and a substantial increase in the average sales price of our EGMs.

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 accounts receivable, inventory, products leased and held for lease, sales-type leases and notes receivable and to fund new products through both research and development and strategic acquisitions of businesses and intellectual property.

We have two financial maintenance covenants under our Credit Facility: a Total Leverage Ratio and an Interest Expense Coverage ratio. Our Credit Agreement prohibits us from exceeding a Total Leverage Ratio, as defined therein, of 4.5:1. Our Total Leverage Ratio as of October 31, 2007 was 3.9 to 1.0; our ratio as of April 30, 2008 was 3.8 to 1.0. Our Credit Agreement requires us 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, 2007 was 8.4 to 1.0; our ratio as of April 30, 2008 was 7.6 to 1.0.

The holders of our 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 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.

As indicated above, the Notes may be converted to cash on April 15, 2009. We expect that the Note holders will exercise this option on April 15, 2009, accordingly, we have classified the entire $150,000 Notes in current portion of debt. Due to the classification of the Notes as of April 30, 2008, we have a working capital deficit of $85,919. Prior to or at the time of such mandatory repurchase, we would have to refinance the Notes or otherwise obtain the capital to repurchase the Notes. We currently do not have financing alternatives in place, however we are exploring various financing alternatives. Our ability to refinance the Notes would be subject to prevailing market conditions at the time and could lead to a higher cost of capital or dilute our equity, depending on which strategy or combination of strategies we select.

LIQUIDITY

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

	April 30, 2008			October 31, 2007		Increase (Decrease)			Percentage Change
Cash, cash equivalents, and investments	$	9,351		$	4,392	$	4,959		112.9	%
Working capital	$	(85,919	)	$	61,768	$	(147,687	)	(239.1	)%
Current ratio		0.5			2.6		(2.1	)	(80.8	)%

Negative working capital as of April 30, 2008, is due to the re-class of our Notes to current based on the substantial likelihood that the holders of our Notes will require us to repurchase them on April 15, 2009.

Excluding the classification of $150,000 of our Notes to current liabilities, our working capital and current ratio was approximately $64,081 and 3.2, respectively, as of April 30, 2008.

Cash Flows Summary

	Six Months Ended April 30,
	Six Months Ended April 30,						Provided (Used)			Percentage Change
	2008			2007			Provided (Used)			Percentage Change
Operations	$	25,360		$	15,412		$	9,948		64.5	%
Investing		(7,263	)		(7,877	)		614		7.8	%
Financing		(13,453	)		(9,219	)		(4,234	)	(45.9	)%
Effects of exchange rates		315			(87	)		402		462.1	%

Net Change	$	4,959		$	(1,771	)	$	6,730		380.0	%

Operations

Cash flows provided by operating activities increased $9,948, or 64.5%, to $25,360 for the six months ended April 30, 2008 as compared to $15,412 for the same prior year period, primarily due to the following:

•: Reductions in inventory for the current year, from $34,081 as of October 31, 2007 to $28,484 as of April 30, 2008. In the prior year, inventory increased from $24,658 as of October 31, 2006 to $33,015 as of April 30, 2007.
•: Increased accounts receivable collections resulting in operating cash flows of $4,789 as compared to $2,080 in the same prior year period.
•: Increased collections related to our investment in sales-type lease and notes receivable portfolio of $4,322 as compared to $2,308 for the same prior year period.
•: Increased depreciation and amortization expense of $11,536 as compared to $9,165 for the same prior year period.
•: Offset by a gain on the sale of our fractional ownership corporate airplane of $738 as compared to $0 for the same prior year period. See SG&A discussion in our MD&A for more information.
•: Offset by gain on sale of leased assets of $960 as compared to $0 for the same prior year period.

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 are not expected to impact our results of operations, financial position, or cash flows until the end of fiscal year 2008 or the first quarter of fiscal year 2009. The result of our formal emphasis on inventory management was demonstrated in our first quarter of fiscal year 2008 results and is expected to continue 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.

The increased collections in our accounts receivable and investment in the sales-type lease portfolio and notes receivable for the quarter ended April 30, 2008 were impacted by our focused collection efforts, including the addition of collections personnel. We cannot predict the impact these efforts will have in future periods.

Investing

Cash flows used by investing activities decreased $614, or 7.8%, to ($7,263) for the six months ended April 30, 2008 versus ($7,877) for the same prior year period primarily due to the following:

•: Proceeds received from the sale of our fractional ownership in a corporate airplane of approximately $1,300.
•: Proceeds received from the sale of leased assets of $1,515, compared to $818 in the same prior year period.
•: Decrease in cash used in business acquisitions of $958, or 54.7%, to ($792) for the six months ended April 30, 2008 from ($1,750) for the same prior year period. The current year amounts related to our acquisition of the PGIC TGD. See Note 2 for more information.
•: Offset by an increase in payments for products leased and held for lease of $3,621, or 96.7%, to ($7,366) for the six months ended April 30, 2008 versus ($3,745) for the same prior year period. Consistent with our strategy of leasing versus selling, we expect this trend to continue.

Capital Expenditures:

	Six Months Ended April 30,
	Six Months Ended April 30,						Provided (Used)			Percentage Change
	2008			2007			Provided (Used)			Percentage Change
Payments for products leased and held for lease		(7,366	)		(3,745	)		(3,621	)	(96.7	)%
Purchases of property and equipment		(1,194	)		(1,582	)		388		24.5	%
Purchases of intangible assets		(810	)		(1,618	)		808		49.9	%

Total capital expenditures	$	(9,370	)	$	(6,945	)	$	(2,425	)	(34.9	)%

Financing

Cash flows used by financing activities increased $4,234, or 45.9%, to ($13,453) for the six months ended April 30, 2008 as compared to ($9,219) for the same prior year period primarily due to the following:

•: Decrease in debt payments of ($57,878), or 69.9%, to ($26,002) for the six months ended April 30, 2008 as compared to ($83,880) for the same prior year period. As of April 30, 2008, total debt decreased to $221,671 as compared to $235,011 as of October 31, 2007. For the six months ended April 30, 2007, the ($83,880) of debt payments included ($70,000) of debt payments made on our Old Credit Agreement.
•: Decrease in debt proceeds of ($61,817), or 83.1%, to $12,548 for the six months ended April 30, 2008 as compared to $74,365 for the same prior year period. During the six months ended April 30, 2007, we received $70,958 proceeds, net of debt issuance costs, from our Revolver.
•: Net debt reduction in the current year was greater than those in the same prior year period due to amounts of cash available for debt reduction.

CAPITAL RESOURCES

Excluding any significant acquisitions of businesses and the impact of refinancing the Notes, we believe our existing cash, investments, debt financing and projected cash flow from future operations will be sufficient to fund our operations, long-term obligations, capital expenditures, and new product development for at least the next twelve months. Projected cash flows from operations are based on our estimates of revenue and expenses and the related timing of cash receipts and disbursements. If

actual performance differs from estimated performance, projected cash flows could be positively or negatively impacted.

STOCK REPURCHASE AUTHORIZATIONS

Our board of directors periodically authorizes us to repurchase shares of our common stock, however we generally prioritize bank debt reduction over share repurchases. As such, for the three months ended April 30, 2008 and 2007, no shares of our common stock were repurchased. For the six month periods ended April 30, 2008 and 2007, we repurchased 0 and 75 shares of our common stock for a total cost of $0 and $1,993 at an average price of $0 and $25.77. As of April 30, 2008, $28,203 remained outstanding under our board authorizations. We cancel shares that we repurchase.

Alternatives that we consider as possible uses of our capital resources include investment in new products, acquisitions, principal payments on the Revolver, funding of internal growth in working capital, and investments in sales-type leases and notes receivable.

DEBT, OTHER LONG-TERM LIABILITES AND CONTRACTUAL OBLIGATIONS

Our contractual obligations have not changed materially from the amounts disclosed in our Annual Report on Form 10-K for the year ended October 31, 2007. We do not have material off-balance sheet arrangements. See Note 5 to our unaudited condensed consolidated financial statements for further discussion.

CRITICAL ACCOUNTING POLICIES

The preparation of our condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires that we adopt accounting policies and make estimates and assumptions that affect our reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and our reported amounts of revenue and expenses. We periodically evaluate our policies, estimates and related assumptions, including: revenue recognition; the amortization, depreciation, and valuation of long-lived tangible and intangible assets; inventory obsolescence and costing methods; provisions for bad debts; accounting for stock-based compensation; and contingencies. We base our estimates on historical experience and expectations of the future. Actual reported and future amounts could differ from those estimates under different conditions and assumptions.

Our significant accounting policies are discussed in Note 1, Description of Business and Summary of Significant Accounting Policies, to the audited consolidated financial statements for the year ended October 31, 2007 included in our Annual Report on Form 10-K. Our significant accounting policies, those that we consider to be the most critical to aid in fully understanding and evaluating our reported financial results, as they require management's most difficult, subjective, or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain, are disclosed in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, "Critical Accounting Policies and Estimates", to our 2007 Annual Report on Form 10-K.

In November 2007, we adopted FIN 48. See Note 8 to the condensed consolidated financial statements included in Part I of this Quarterly Report on Form 10-Q. Other than the adoption of FIN 48, since the filing of our 2007 Annual Report on Form 10-K, there have been no material changes to our critical accounting policies.

ITEM 3. 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 are presented below.

Contingent convertible senior notes. We estimate that the fair value of our Notes, as of April 30, 2008, was $133,775. The fair value of our Notes is sensitive to changes in both our stock and interest rates. Assuming interest rates are held constant, we estimate a 10% decrease in our stock price would decrease the fair value of our Notes by $2. Assuming our stock price is held constant, we estimate a 10% increase in interest rates would decrease the fair value of our Notes by $501.

As of April 30, 2008, we had approximately $66,180 of variable rate debt. Assuming a 1% change in the average interest rate as of April 30, 2008, our annual interest cost would change by approximately $662.

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, of which the most significant to our operations during the three and six months ended April 30, 2008 and 2007, were the Australian dollar and the Euro. With our acquisition of CARD and Stargames, we expect that a significant portion of the volume of our business will continue to be denominated in foreign currency. 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. Although we have thus far not engaged in hedging activities, we may use forward contracts and options designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in our forecasted net revenues and, to a lesser extent, cost of leases and sales denominated in currencies other than the U.S. dollar. Alternatively, we may choose not to hedge the foreign currency risk associated with our foreign currency exposures if such exposure acts as a natural foreign currency hedge for other offsetting amounts denominated in the same currency or the currency is difficult or too expensive to hedge. Further, hedging or not hedging does not eliminate the foreign currency risk.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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 April 30, 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 our disclosure controls and procedures were effective as of April 30, 2008.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during our fiscal quarter ended April 30, 2008, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS

For information on Legal Proceedings, see Note 12 to our condensed consolidated financial statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

For a complete description of the facts and circumstances surrounding material litigation we are a party to, see our Annual Report on Form 10-K for the year ended October 31, 2007. There have been no significant developments in any of the cases disclosed in our Form 10-K or in the three or six months ended April 30, 2008 or any new cases during that time, except as discussed herein.

ITEM 1A. RISK FACTORS

A complete description of certain factors that may affect our future results and risk factors is set forth in our Annual Report on Form 10-K for the year ended October 31, 2007. For the six months ended April 30, 2008, material changes to those factors include:

The possible transition to a new Chief Executive Officer, and any search for and transition to a permanent Chief Financial Officer, could be disruptive to our business.

On November 10, 2007, we announced that the Board of Directors had retained Spencer Stuart to conduct an executive search to assist in evaluating and determining our long-term succession plans for our Chief Executive Officer position. Mark Yoseloff, Ph.D., our current Chairman and Chief Executive Officer, has expressed a desire to possibly re-evaluate his role with us at the end of his current employment contract. The CEO search is still an on-going process.

Dr. Yoseloff's employment contract expires on October 31, 2008. The Board, along with Dr. Yoseloff, is currently evaluating and considering its alternatives, including either a possible extension of Dr. Yoseloff's contract, or whether a new Chief Executive Officer should be hired and, if so, at what point.

In addition, on November 2, 2007, we announced the resignation of Richard Baldwin, formerly our Senior Vice President and Chief Financial Officer. At that time, Paul Meyer, our President and Chief Operating Officer, was appointed Acting Chief Financial Officer, a capacity in which he has previously served. Subsequently, 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 in that role. Mr. Meyer will continue as our President and Chief Operating Officer. We are currently still conducting a search for a permanent Chief Financial Officer.

While Dr. Yoseloff and Ms. Sawdon are fully cooperating with the search process, there can be no assurances that the transition to a new Chief Executive Officer and a permanent Chief Financial Officer will be smooth.

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 leaves the CEO role or we choose to reduce his role, we may not be able to find a suitable successor. Similarly, we may not be able to find a suitable successor for the Chief Financial Officer position in a timely manner. There are also no assurances that a new Chief Executive Officer or Chief Financial Officer would 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 transition to such successors could have a material adverse effect on our business, results of operations or financial condition.

Additionally, should Dr. Yoseloff choose to leave us before the search process for a new Chief Executive Officer has been completed, there can be no assurances that we will 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.

Risk factors that could cause actual results to differ materially from expectations include, but are not limited to, the following:

•: our intellectual property may be infringed, misappropriated or subject to 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;
•: any search for and possible transition to a new Chief Executive Officer could be disruptive to our business;
•: the search for and transition to a permanent Chief Financial Officer could be disruptive to our business;
•: litigation may subject us to significant legal expenses and liability;
•: our products currently in development may not achieve commercial success;
•: we compete in a single industry, and our business would suffer if our products become obsolete or demand for them decreases;
•: our gaming operations, particularly our Utility Products, Electronic Table Systems and Electronic Gaming Machines may experience losses due to technical difficulties or fraudulent activities;
•: we operate in a very competitive business environment;
•: we are dependent on the success of our customers and are subject to industry fluctuations;
•: risks that impact our customers may impact us;
•: certain market risks may affect our business, results of operations and prospects;
•: if we do not retain our key personnel and attract and retain other highly skilled employees, our business may suffer;
•: a downturn in general economic conditions or in the gaming industry or a reduction in demand for gaming may adversely affect our results of operations;
•: economic, political and other risks associated with our international sales and operations could adversely affect our operating results;
•: foreign currency risk;
•: we could face considerable business and financial risk in implementing acquisitions, in our strategic plan and in our related financial forecasting;
•: if our products contain defects, our reputation could be harmed and our results of operations adversely affected;
•: our business is subject to quarterly fluctuation;
•: our ability to meet debt service obligations is subject to many factors that are beyond our control and may affect future operations;
•: our continued compliance with our financial covenants in our Revolver is subject to many factors, some of which are beyond our control;

•: substantial leverage—our available cash and access to additional capital may be limited by our substantial leverage;
•: additional borrowings available—despite our substantial leverage, we and our subsidiaries will be able to incur more indebtedness. This could further exacerbate the risks described above, including our ability to service our indebtedness;
•: the restrictive covenants in the agreement governing our Revolver may limit our ability to finance future operations or capital needs or engage in other business activities that may be in our interest;
•: our ability to implement our five point strategic plan successfully is subject to many factors, some of which are beyond our control;
•: the success of our shift of emphasis from selling to leasing is subject to many factors, some of which are beyond our control; and
•: we may be required to repurchase our contingent convertible senior notes.

ITEM 6. EXHIBITS

31.1		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.

*: Exhibits 32.1 and 32.2 are furnished to accompany this report on Form 10-Q 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.

SIGNATURES

Pursuant to the requirements of 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. (Registrant)
Date: June 9, 2008
/s/ MARK L. YOSELOFF Mark L. Yoseloff Chairman of the Board and Chief Executive Officer (Principal Executive Officer)
/s/ COREEN SAWDON Coreen Sawdon Senior Vice President, Chief Accounting Officer and Acting Chief Financial Officer (Principal Accounting Officer)

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SHUFFLE MASTER, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED APRIL 30, 2008 TABLE OF CONTENTS
PART I

ITEM 1. FINANCIAL STATEMENTS

SHUFFLE MASTER, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited, in thousands, except per share amounts)
SHUFFLE MASTER, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited, in thousands except share amounts)
SHUFFLE MASTER, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands)
SHUFFLE MASTER, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited, in thousands, except unit/seat and per share amounts)

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

BUSINESS OVERVIEW (In thousands, except units/seats and per share amounts)
CONSOLIDATED STATEMENTS OF INCOME (In thousands)
SEGMENT OPERATING RESULTS (Dollars in thousands, except units and per unit/seat amounts)
LIQUIDITY AND CAPITAL RESOURCES (In thousands, except ratios and per share amounts)
CRITICAL ACCOUNTING POLICIES

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (In thousands)

ITEM 4. CONTROLS AND PROCEDURES

PART II

ITEM 1. LEGAL PROCEEDINGS

ITEM 1A. RISK FACTORS

ITEM 6. EXHIBITS

SIGNATURES