10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2006
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	41-1448495
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)

1106 Palms Airport Drive, Las Vegas	NV	89119
(Address of Principal Executive Offices)	(State)	(Zip Code)

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

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.YesþNoo

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 filerþAccelerated fileroNon-accelerated filero

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o   Noþ

As of June 9, 2006, there were 35,096,748 shares of our $.01 par value common stock outstanding.

SHUFFLE MASTER, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED APRIL 30, 2006

TABLE OF CONTENTS

		Page
	PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited):
	Condensed Consolidated Statements of Operations Three and Six months ended April 30, 2006 and 2005	1
	Condensed Consolidated Balance Sheets April 30, 2006 and October 31, 2005	2
	Condensed Consolidated Statements of Cash Flows Six months ended April 30, 2006 and 2005	3
	Notes to Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53
Item 4.	Controls and Procedures	54
	PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	56
Item 1A.	Risk Factors	56
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	58
Item 6.	Exhibits	58
Signatures		59

PART I

ITEM 1.   FINANCIAL STATEMENTS

SHUFFLE MASTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share amounts)

	Three Months Ended April 30,					Six Months Ended April 30,
	2006			2005		2006			2005
Revenue:
Utility products leases	$	6,084		$	5,873	$	12,094		$	11,185
Utility products sales and service	17,531			11,511		33,406			19,560
Entertainment products leases and royalties	6,475			6,143		12,730			12,291
Entertainment products sales and service	13,177			3,599		18,345			9,411
Other	36			2		45			51
Total revenue	43,303			27,128		76,620			52,498
Costs and expenses:
Cost of leases and royalties	2,742			2,257		5,559			4,604
Cost of sales and service	11,712			4,449		18,816			8,031
Selling, general and administrative	13,363			7,895		23,360			15,779
Research and development	3,239			2,105		5,200			3,974
In-process research and development	19,145			—		19,145			—
Total costs and expenses	50,201			16,706		72,080			32,388
Equity method investment loss	(156		)	—		(156		)	—
Income (loss) from operations	(7,054		)	10,422		4,384			20,110
Other income (expense)	(2,337		)	141		(2,827		)	(194		)
Income (loss) from continuing operations before tax	(9,391		)	10,563		1,557			19,916
Provision for income taxes	3,241			3,734		6,971			7,008
Income (loss) from continuing operations	(12,632		)	6,829		(5,414		)	12,908
Discontinued operations, net of tax	(88		)	16		47			59
Net income (loss)	$	(12,720	)	$	6,845	$	(5,367	)	$	12,967
Basic earnings (loss) per share:
Continuing operations	$	(0.37	)	$	0.19	$	(0.16	)	$	0.37
Discontinued operations	—			—		—			—
Net income (loss)	$	(0.37	)	$	0.19	$	(0.16	)	$	0.37
Diluted earnings (loss) per share:
Continuing operations	$	(0.37	)	$	0.19	$	(0.16	)	$	0.35
Discontinued operations	—			—		—			—
Net income (loss)	$	(0.37	)	$	0.19	$	(0.16	)	$	0.35
Weighted average shares outstanding:
Basic	34,555			35,301		34,522			35,116
Diluted	34,555			36,816		34,522			36,831

See notes to unaudited condensed consolidated financial statements

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SHUFFLE MASTER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands)

	April 30, 2006		October 31, 2005
ASSETS
Current assets:
Cash and cash equivalents	$	22,147		$	13,279
Investments	11,778			20,809
Accounts receivable, net	32,275			17,865
Investment in sales-type leases and notes receivable, net	8,730			8,219
Inventories, net	20,751			9,428
Prepaid income taxes	5,402			—
Deferred income taxes	3,062			1,837
Other current assets	7,925			3,255
Total current assets	112,070			74,692
Investment in sales-type leases and notes receivable, net	10,837			11,136
Products leased and held for lease, net	9,876			9,163
Property and equipment, net	8,888			4,144
Deferred income taxes	3,003			2,400
Intangible assets, net	81,311			48,477
Goodwill	84,401			36,017
Other assets	9,727			7,088
Total assets	$	320,113		$	193,117
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	8,620		$	3,540
Accrued liabilities	9,287			6,547
Customer deposits and unearned revenue	5,973			3,518
Income taxes payable	—			371
Note payable and current portion of long-term liabilities	110,244			3,082
Total current liabilities	134,124			17,058
Long-term liabilities, net of current portion	162,533			162,659
Deferred income taxes	64			—
Total liabilities	296,721			179,717
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; 35,077 and 34,527 shares issued and outstanding	351			345
Additional paid-in capital	4,944			—
Deferred compensation	—			(5,788		)
Retained earnings	11,931			17,298
Accumulated other comprehensive income	6,166			1,545
Total shareholders’ equity	23,392			13,400
Total liabilities and shareholders’ equity	$	320,113		$	193,117

See notes to unaudited condensed consolidated financial statements

2

SHUFFLE MASTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

	Six Months Ended April 30,
	2006			2005
Cash flows from operating activities:
Net income (loss)	$	(5,367	)	$	12,967
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization	8,500			5,757
In-process research and development	19,145			—
Share-based compensation	2,546			305
Provision for bad debts	39			122
Provision for inventory obsolescence	181			(50		)
Tax benefit from stock option exercises	116			4,310
Excess tax benefit from stock option exercises	(2,371		)	—
Changes in operating assets and liabilities:
Accounts receivable	(2,751		)	(1,085		)
Investment in sales-type leases and notes receivable	(181		)	(5,238		)
Inventories	(124		)	(1,313		)
Accounts payable and accrued liabilities	(3,738		)	1,308
Customer deposits and unearned revenue	1,872			(445		)
Prepaid income taxes	(3,062		)	3,629
Income taxes, net of stock option exercises	(344		)	—
Deferred income taxes	1,834			(630		)
Other	(3,857		)	(474		)
Net cash provided by operating activities	12,438			19,163
Cash flows from investing activities:
Purchases of investments	(12,022		)	(584		)
Proceeds from sale and maturities of investments	18,050			279
Proceeds from sale of leased assets	628			—
Payments for products leased and held for lease	(3,884		)	(3,621		)
Purchases of property and equipment	(1,008		)	(806		)
Purchases of intangible assets	—			(3,376		)
Acquisition of Stargames, net of cash acquired	(114,337		)	—
Other	—			(3,416		)
Net cash used by investing activities	(112,573		)	(11,524		)
Cash flows from financing activities:
Proceeds from acquisition financing	115,000			—
Proceeds from other borrowings	5,085			—
Repurchases of common stock	—			(15,256		)
Debt issuance costs	(281		)	—
Proceeds from issuances of common stock, net	5,710			4,835
Excess tax benefit from stock option exercises	2,371			—
Payments of long-term liabilities	(18,402		)	(1,736		)
Net cash provided (used) by financing activities	109,483			(12,157		)
Effect of exchange rate changes on cash	(480		)	—
Net increase (decrease) in cash and cash equivalents	8,868			(4,518		)
Cash and cash equivalents, beginning of period	13,279			20,580
Cash and cash equivalents, end of period	$	22,147		$	16,062
Cash paid for:
Income taxes, net of refunds	$	6,489		$	(298	)
Interest	2,541			982
Non-cash transactions:
Unrealized gain on investments, net of tax	$	126		$	—
Equity method loss, net of tax	$	(102	)	$	—
Note payable for patent purchase	—			9,666

See notes to unaudited condensed consolidated financial statements

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SHUFFLE MASTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except unit and per share amounts)

1.DESCRIPTION OF BUSINESS AND INTERIM BASIS OF PRESENTATION

Description of business.On February 1, 2006, we had substantially completed our acquisition of Stargames Limited (“Stargames”). Accordingly, the results of Stargames have been included in our condensed consolidated financial statements beginning February 1, 2006. Stargames is based in Sydney, Australia and develops, manufactures and distributes a wide range of innovative electronic entertainment gaming products to worldwide markets. Stargames has approximately 190 employees including 80 in design and development.

We develop, manufacture and market technology-based products for the gaming industry for placement on the casino floor. Our products primarily relate to our casino customers’ table game activities and are focused on increasing their profitability, productivity and security. Our Utility Products include a full line of automatic card shufflers for use with the vast majority of card table games and chip sorting machines for roulette. In addition, we have acquired or are developing other products to automatically gather data and to enable casinos to track table game play, such as our Intelligent Table System™ product. Our Entertainment Products include our line of live proprietary poker, blackjack, baccarat, and pai gow poker-based table games and our Table Master™ product that delivers our popular branded table game content on a multi-player video platform. In January 2005, we formed Shuffle Up ProductionsTM, Inc.(“Shuffle Up”) to leverage our intellectual property and develop live and broadcast tournament events as well as merchandise based on our extremely popular gaming offerings. In February 2006, we acquired Stargames. Stargames product offerings are classified as Entertainment Products and include Rapid Table GamesTM, Vegas Star® multi-terminal gaming machines, and a broad line of traditional video slot machines designed most specifically for the Australian and Asian gaming markets. The Rapid series of games, which we already distribute in the Americas and the Caribbean, combines a live dealer with multi-terminal electronic wagering. Current offerings include Rapid Roulette®, Rapid Sic-Bo® and Rapid Big Wheel®. Vegas Star® Multi-Terminal Gaming Machines feature animated dealers and a selection of public domain table games. The Vegas Star® Nova line utilizes Stargames’ existing slot cabinet to extend the number of wagering terminals for a Vegas Star game, while minimizing the footprint required on the gaming floor. 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 sell, lease or license our products. 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. When we lease or license our products, we generally negotiate a month-to-month operating lease. We offer our products worldwide in markets that are significantly regulated. We manufacture the majority of our products at our headquarters and manufacturing facility in Las Vegas, Nevada. In addition, we outsource the manufacturing of certain of our products in the United States, Europe and Asia Pacific.

In January 2006, we entered into a strategic alliance with Sona Mobile Holdings Corp. (“Sona”) to license, develop, distribute and market “in-casino” wireless handheld gaming content and delivery systems to casinos throughout the world. On January 25, 2006, we completed a private equity investment and purchased approximately 2,300 shares of Sona’s common stock at the price of $1.30 per share for approximately $3,000. This private equity investment is pursuant to a stock option agreement between us and Sona dated December 29, 2005. Additionally, as part of our investment in Sona, we received one seat on the Sona Board of Directors. This investment was accounted for under the equity method of accounting and is included in Other long-term assets in our condensed consolidated balance sheets. Accordingly, we

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recognized a loss of $156 which represents our pro rata share of Sona’s net loss for the three months ended April 30, 2006.

Basis of presentation.   The condensed consolidated financial statements of Shuffle Master, Inc. as of April 30, 2006, and for the three and six months ended April 30, 2006 and 2005, are unaudited, but, in the opinion of management, include all adjustments necessary for a fair presentation of the financial results for the interim periods. Our results of operations for the three and six months ended April 30, 2006, are not necessarily indicative of the results to be expected for the fiscal year ending October 31, 2006. These interim statements should be read in conjunction with the audited financial statements and notes thereto included in our annual report on Form 10-K for the year ended October 31, 2005.

2.ACQUISITIONS, DISPOSITIONS AND OTHER SIGNIFICANT TRANSACTIONS

Stargames.On February 1, 2006, we announced that our wholly owned indirect subsidiary, Shuffle Master Australasia Pty. Ltd., completed its acquisition of Stargames by purchasing 95% of the outstanding Stargames shares for AU $1.55 per share. Effective March 8, 2006, we had acquired 100% of the outstanding Stargames shares.

Consideration to Stargames consisted of an Australian-denominated cash payment of AU $148,441 or US $112,147 denominated. In addition, we estimate that our total direct acquisition costs, consisting primarily of legal and due diligence fees, to be approximately $2,190. See Note 5 for information regarding the financing of the Stargames acquisition. The following table sets forth the determination of the consideration paid for Stargames at the date of acquisition:

Cash	$	112,147
Other direct acquisition costs	2,190
Total purchase price	$	114,337

The transaction was accounted for as a purchase and, accordingly, the preliminary purchase price was allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of the acquisition. The preliminary fair values have been prepared based upon an independent appraisal which is currently in process, discounted cash flows and estimates by management. The purchase price allocation is preliminary and may be adjusted for up to one year after the acquisition. The following table sets forth the preliminary allocation of the purchase price:

Estimated fair value of Stargames’ net assets as of January 31, 2006	$	13,705
Developed technology, average life of 4 years	8,338
Customer relationships, average life of 10 years	10,015
Tradename	17,291
Goodwill	46,526
In-process research and development	19,145
Assumed liabilities	(683		)
	$	114,337

This acquisition enhances the products in our Entertainment segment as well as providing for additional electronic platforms for our branded content. Additionally, we acquired a strong brand name as well as an experienced and talented management team. These factors result in the recognition of certain intangible assets, discussed below, and significant goodwill.

A project-by-project valuation using the guidance in FASB Statement of Financial Accounting Standard No. 141, “Business Combinations” and the AICPA Practice Aid “Assets Acquired in a Business Combination to Be Used In Research and Development Activities: A Focus on Software, Electronic

5

Devices and Pharmaceutical Industries” is in the process of being performed by independent valuation specialists to determine the fair value of research and development projects of Stargames.

In-process research and development (“IPR&D”) is defined as a development project that has been initiated and achieved material progress but has not yet resulted in a technologically feasible product and has no alternative future use. The fair value was determined using the multi-period excess earnings approach on a project-by-project basis. This method is based on the present value of earnings attributable to the asset or costs avoided as a result of owning the assets and after a contributory charge on assets. This method includes risk factors, which include applying an appropriate discount rate that reflects the project’s stage of completion, the nature of the product, the scientific data associated with the technology, the current patent situation and market competition.

The forecast of future cash flows required the following assumptions to be made:

·Revenue that is likely to result from specific IPR&D projects, including the likelihood of approval of the product, estimated number of units to be sold, estimated selling prices, estimated market penetration and estimated market share and year-over-year rates over the product life cycles;

·Cost of sales related to the potential products using historical data, industry data or other sources of market data;

·Sales and marketing expense using historical data, industry data or other market data;

·General and administrative expenses; and

·Research and development expenses.

As required by Financial Accounting Standards Board (“FASB”) Interpretation No. 4, “Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method”, the portion of the purchase price allocated to in-process research and development of $19,145 was immediately expensed.

The assumed liabilities referred to above include an estimated settlement for the disposition of the assets and liabilities of Professional Vending Services Pty Ltd (“PVS”), a wholly-owned subsidiary of Stargames. PVS designs, develops, and manufactures automatic vending machines. PVS offers exclusive equipment in all main vending segments including snacks, cold drinks, food (hot and cold), coffee and cigarettes.  We have determined that the operations of PVS are non-core to our Entertainment and Utility segments.  Accordingly, we have entered into a preliminary agreement to sell its equity interests including settlement of all existing liabilities of PVS. The estimated liabilities exceed assets in the amount of approximately $683. The fair value of the PVS net assets acquired have been valued at zero in our preliminary purchase price allocation. The results of operations for PVS will be included in Discontinued Operations until the disposition is complete. See discussion below.

The operating results for Stargames are included in the accompanying condensed consolidated statements of operations from the date of the acquisition. The following unaudited pro forma condensed

6

consolidated financial information has been prepared assuming the Stargames acquisition had occurred on February 1, 2005, November 1, 2004, and November 1, 2005, respectively, is as follows:

	Three Months Ended April 30, 2005				Six Months Ended April 30, 2005				Six Months Ended April 30, 2006
Revenue		$	34,349			$	75,849			$	86,263
Operating income		5,900				16,352				15,444
Discontinued operations		(107		)		(214		)		134
Net income		$	3,527			$	10,314			$	10,095
Basic earnings per share:
Net income		$	0.10			$	0.29			$	0.29
Diluted earnings per share:
Net income		$	0.10			$	0.28			$	0.29

These unaudited pro forma results are presented for comparative purposes only. The pro forma results are not necessarily indicative of what our actual results would have been had the acquisition of Stargames been completed as of the beginning of the periods presented. The expense for IPR&D for the six months ended April 30, 2006, has not been included in the unaudited pro forma results since such expense is non-recurring in nature.

IGT Agreement.On April 28, 2006 (the “Effective Date”), we entered into an agreement with International Game Technology (“IGT”) whereby we assigned, transferred, and conveyed to IGT, our 50% share of future royalties from the licensing of the ENPAT patents to any third party or from otherwise permitting any third party to use the ENPAT patents. The total royalties to be received by IGT is limited to an amount equal to a net present value of $3,000 utilizing a discount factor of 12% (the “Royalty Amount”). Upon the receipt by IGT of the Royalty Amount, all royalty payments with respect to our 50% share of the ENPAT patents shall resume and be paid to us. The total consideration paid to us was $3,000 and is non-refundable.  The transaction has been reflected in the accompanying condensed consolidated financial statements by establishing a liability for amounts owed to IGT which will be relieved as future royalties are earned.

Discontinued operations.   In December 2003, our board of directors approved and we committed to a plan to divest our North America slot products operations and assets, based on our determination that this product line was no longer a strategic fit with our refocused core business strategy of providing products and services for the table game area of casinos.  Revenues and costs associated with our slot products are reported as discontinued operations for all periods presented. In January 2004, we entered into agreements pursuant to which we sold substantially all of our slot products assets to IGT.

Discontinued operations related to our discontinued slot operations consisted of the following:

	Three Months Ended April 30,							Six Months Ended April 30,
	2006			2005				2006			2005
Revenue		$	19		$	61		$	39		$	160
Income from operations before tax		$	14		$	25		$	15		$	89
Income tax benefit (expense)		5			(9		)	5			(31		)
Net income from operations		19			16			20			58
Gain on sale of slot assets		—			—			208			2
Income tax expense		—			—			(74		)	(1		)
Gain on sale of slot assets, net		—			—			134			1
Discontinued operations, net		$	19		$	16		$	154		$	59

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As discussed above, the results of PVS for the three months ended April 30, 2006 included in discontinued operations are as follows:

	Three Months Ended April 30, 2006
Revenue		$	693
Loss from operations before tax		(150		)
Provision for income taxes		43
Net loss		(107		)

3.ACCOUNTS RECEIVABLE, SALES-TYPE LEASES AND NOTES RECEIVABLE, INVENTORIES, AND LEASED PRODUCTS

	April 30, 2006			October 31,  2005
Accounts receivable, net:
Trade receivables	$	34,502			$	18,148
Less: allowance for bad debts	(2,227		)		(283		)
	$	32,275			$	17,865

	April 30, 2006			October 31, 2005
Investment in sales-type leases and notes receivable, net:
Minimum sales-type lease payments	$	14,690			$	13,329
Notes receivable-table game licenses	9,680				10,269
Sub-total sales-type leases and notes receivable	24,370				23,598
Less: interest sales-type leases and notes receivable	(1,559		)		(1,579		)
Less: deferred service revenue	(2,644		)		(2,033		)
Investment in sales-type leases and notes receivable, net	20,167				19,986
Less: current portion sales-type leases, net	(4,069		)		(3,929		)
Less: current portion notes receivable-table games licenses, net	(4,661		)		(4,290		)
Less: allowance for bad debts	(600		)		(631		)
Long-term portion investment in sales-type leases and notes receivable, net	$	10,837			$	11,136

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 and other notes receivables related to our financing for sales of our intellectual property products are interest-bearing at market interest rates, require monthly installment payments over periods ranging generally from 30 to 60 months and contain bargain purchase options.

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	April 30, 2006			October 31, 2005
Inventories:
Raw materials and component parts	$	10,386			$	5,482
Work-in-process	2,762				820
Finished goods	10,713				4,613
	23,861				10,915
Less: allowance for inventory obsolescence	(3,110		)		(1,487		)
	$	20,751			$	9,428
Products leased and held for lease, net:
Utility products	$	20,144			$	18,091
Entertainment products	4,153				3,183
	24,297				21,274
Less: accumulated depreciation	(14,421		)		(12,111		)
	$	9,876			$	9,163

4. INTANGIBLE ASSETS AND GOODWILL

Amortized intangible assets.Substantially all of our recorded intangible assets are subject to amortization. Amortization expense was $2,382 and $1,556 for the three months ended April 30, 2006 and 2005, respectively, and $4,021 and $2,958 for the six months ended April 30, 2006 and 2005, respectively. Amortized intangible assets are comprised of the following:

	Weighted Avg Useful Life		April 30, 2006			October 31, 2005
Amortized intangible assets:
Patents, games and products		10 years	$	56,655			$	55,552
Less: accumulated amortization			(12,550		)		(9,478		)
			44,105				46,074
Customer relationships		10 years	10,035				—
Less: accumulated amortization			(251		)		—
			9,784				—
Licenses and other		6 years	2,846				3,053
Less: accumulated amortization			(1,517		)		(1,536		)
			1,329				1,517
Developed technology		4 years	8,355				—
Less: accumulated amortization			(522		)		—
			7,833				—
Total			$	63,051			$	47,591

Trademark.Intangibles with an indefinite life consisting of the Stargames and CARD trademarks are not amortized. Changes in the carrying amount of our unamortized intangibles for the six months ended April 30, 2006, are as follows:

Balance at October 31, 2005	$	886
Stargames trademark	17,325
Foreign currency translation adjustment	49
Balance at April 30, 2006	$	18,260

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Goodwill.   Changes in the carrying amount of goodwill for the six months ended April 30, 2006, are as follows:

Balance at October 31, 2005	$	36,017
Stargames goodwill	46,619
Foreign currency translation adjustment	1,765
Balance at April 30, 2006	$	84,401

All of our goodwill originated from the acquisitions of foreign subsidiaries. For foreign income tax purposes, a portion of this goodwill is amortized using the straight-line method and deducted over its statutory fifteen year life for US and foreign tax purposes. The remaining goodwill is non-deductible for tax purposes in its respective jurisdictions.

5.NOTES PAYABLE AND OTHER INDEBTEDNESS

Notes payable and other indebtedness is summarized as follows:

	April 30, 2006			October 31, 2005
Contingent convertible senior notes, fixed rate interest at 1.25%, due 2024	$	150,000			$	150,000
Bridge loan, due July 2006	100,000				—
Stargames credit facility	6,462				—
BTI acquisition contingent consideration	5,347				6,167
ENPAT note payable, non-interest bearing, due in installments through 2007	5,557				8,518
Bet the Set “21” contingent consideration	542				549
VIP note payable	323				318
Other	4,546				189
	272,777				165,741
Less: current portion	(110,244		)		(3,082		)
	$	162,533			$	162,659

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.

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;

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·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.

Bridge loan.On January 25, 2006, we entered into a Credit Agreement with Deutsche Bank AG Cayman Islands Branch, as a Lender, Deutsche Bank AG New York Branch, as Administrative Agent, and Deutsche Bank Securities Inc., as Sole Arranger and Book Manager (the “Credit Agreement”), pursuant to which we obtained a bridge loan (the “Bridge Loan”) in the amount of $115,000, in order to finance the acquisition of Stargames. On April 24, 2006, we entered into Amendment No. 1 (the “Amendment”) to the Credit Agreement. The Amendment extended the maturity date for the Bridge Loan to July 24, 2006 and we have agreed to use our commercially reasonable efforts to secure the loan extended under the Credit Agreement. The interest rate under the Credit Agreement 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 Bridge Loan is currently unsecured. The obligations under the Bridge Loan 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 January 25, 2006, if any. The Credit Agreement contains customary affirmative and negative covenants for transactions of this nature, including but not limited to restrictions and limitations on the following:

·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; and

·Agreements to restrict dividends and other payments from subsidiaries.

As of April 30, 2006, we were in compliance with all of the affirmative and negative covenants pursuant to the Credit Agreement. Additional information on these covenants may be found in Section 7 and Section 8 of the Credit Agreement included in our Current Report on Form 8-K, dated January 25, 2006. The current outstanding principal balance on the Bridge Loan as of April 30, 2006 was $100,000.

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Management intends and believes it has the ability, to refinance the Bridge Loan on a long-term basis. Financing options currently under consideration include, but are not limited to, (i) an extension of the existing Credit Agreement, (ii) a senior secured bank credit facility or (iii) convertible or other debt to be issued by private placement pursuant to Rule 144A under the Securities Act of 1933.

Total debt issuance costs incurred with the issuance of long-term debt and the Bridge Loan are capitalized and amortized as interest expense using the effective interest method. Amortization of debt issuance costs were $634 and $240 for the three months ended April 30, 2006 and 2005, respectively, and $892 and $482 for the six months ended April 30, 2006, and 2005, respectively. Unamortized debt issuance costs of $2,848 as of April 30, 2006, are included in other assets on the condensed consolidated balance sheets.

Stargames credit facility.   Stargames has banking facilities with the Australia and New Zealand Banking Group (“ANZ”).  The facilities have a borrowing capacity of AU $12,700; amounts outstanding as of April 30, 2006 were AU $8,514 or US $6,472. The banking facilities are comprised of two main components; a flexible bank overdraft that acts as a working capital facility and a bank loan facility which is an interchangeable facility comprised of commercial bills, overdrafts and advances.  There were no amounts outstanding on the bank overdraft facility as of April 30, 2006 which amounts, if borrowed, would be based on the reference rate, as defined, plus 0.25%. The US $6,472 amount outstanding is under the bank loan facility which carries a weighted average interest rate of 5.98% as of April 30, 2006.  Interest rates are based on the bank bill swap yield, as defined, plus a margin.

The facilities are secured by a cross guarantee and indemnity between all the operating entities of the Stargames group.  The agreements provide for collateralization of all the assets and operations of all members of the Stargames group as well as the operating facilities of Stargames based in Milperra, NSW Australia.

The facilities include certain financial covenants which are tested annually by ANZ at the end of each financial year.  These financial covenants include a minimum working capital ratio, a minimum ratio of net profit, as defined, to interest expense and minimum liabilities to equity ratio. As of June 30, 2005, the most recent date of review, Stargames was in compliance with all financial covenants. The facilities are subject to the next compliance assessment as of October 31, 2006.

BTI liabilities.In connection with our acquisition of certain assets from BTI, 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, 2006, was $5,347.

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, 2006, of $5,557 represents the discounted present value of the future payments, including imputed interest of approximately $118. The remaining principal and interest payments of $3,000 each are due in December 2006 and 2007.

Bet the Set “21” contingent consideration.In connection with our acquisition of Bet the Set “21”, we recorded contingent consideration of $560. The contingent consideration 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, 2006, was $542.

VIP note payable.In connection with our acquisition of VIP in August 2005, we recorded a note payable with annual installments due each July through 2010. The balance of this liability as of April 30, 2005 was $323.

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6.   SHAREHOLDERS’ EQUITY

The following table reconciles the changes in our shareholders’ equity during the six months ended April 30, 2006:

															Accumulated			Total
					Additional				Deferred						Other			Share-
	Common Stock				Paid-in				Compen-			Retained			Comprehensive			holders’
	Shares	Amount			Capital				sation			Earnings			Income			Equity
Balance, October 31, 2005	34,527		$	345		$	—		$	(5,788	)	$	17,298			$	1,545	$	13,400
Reclassification of deferred compensation to APIC	—		—			(5,788		)	5,788			—				—		—
Comprehensive income (loss):
Net loss	—		—			—			—			(5,367		)		—		(5,367		)
Currency translation	—		—			—			—			—				4,495		4,495
Unrealized gain on investments	—		—			—			—			—				126		126
Total comprehensive income (loss)																		(746		)
Options exercised	490		5			5,701			—			—				—		5,706
Share-based compensation expense	—		—			1,810			—			—				—		1,810
Tax benefit from stock options	—		—			2,487			—			—				—		2,487
Issuance of restricted stock	60		1			—			—			—				—		1
Amortization of deferred compensation	—		—			734			—			—				—		734
Balance, April 30, 2006	35,077		$	351		$	4,944		$	—		$	11,931			$	6,166	$	23,392

Stock splits.In December 2004, our board of directors approved a three-for-two common stock split, with new shares distributed in the form of a dividend on January 14, 2005, to shareholders of record on January 3, 2005 (the “January 2005 Split”). Share and per share amounts have been adjusted for all periods presented herein to reflect the January 2005 Split. In connection with the January 2005 Split, we paid cash of $68 for fractional shares and reclassified to common stock the par value of $0.01 per newly issued share.

InMarch 2004, our board of directors approved a three-for-two common stock split, with new shares distributed in the form of a dividend on April 16, 2004, to shareholders of record on April 5, 2004 (the “April 2004 Split”). Share and per share amounts have been adjusted for all periods presented herein to reflect the April 2004 Split. In connection with the April 2004 Split, we paid cash of $138 for fractional shares and reclassified to common stock the par value of $0.01 per newly issued share.

Common stock repurchases.   Our board of directors periodically authorizes us to repurchase shares of our common stock. Under our existing board authorizations, during the six months ended April 30, 2006, no shares of our common stock were repurchased compared to 558 shares of our common stock repurchased for a total cost of $15,256 at an average price of $27.36 for the same prior year period. As of April 30, 2006, $8,831 remained outstanding under our board authorizations. We cancel shares that we repurchase.

Tax benefit from stock option exercises.   During the six months ended April 30, 2006 and 2005, we realized income tax benefits of $2,487 and $4,310, respectively, related to deductions for employee stock

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option exercises. These tax benefits, which reduced income taxes payable and additional paid-in capital by an equal amount, had no affect on our provision for income taxes.

Preferred stock purchase rights.   In February 2005, we amended our Shareholder Rights Agreement, dated June 26, 1998 (the “Rights Agreement”). As more fully described therein, and subject to the terms thereof, the Rights Agreement, as amended, generally gives holders of our common stock rights to acquire shares of our preferred stock upon the occurrence of specified events.  The amendment (a) eliminated all requirements in the Rights Agreement that actions, approvals and determinations to be taken or made by our board of directors be taken or made by a majority of the “Continuing Directors,” and (b) reflects the change of the name of our stock transfer agent to Wells Fargo Bank, N.A. The amendment eliminated from the Rights Agreement those provisions commonly referred to as “dead hand” provisions.

7.   SHARE-BASED COMPENSATION

Adoption of SFAS 123R.   Effective November 1, 2005, we account for stock-based compensation in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004) (“SFAS 123R”), “Share-Based Payment”, and SEC Staff Accounting Bulletin No. 107 (“SAB 107”), “Share-Based Payment”, requiring the measurement and recognition of all share-based compensation under the fair value method. We previously accounted for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and the Financial Accounting Standards Board’s Interpretation No. 44, “Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25”, and disclosed supplemental information in accordance with Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation.”  Under these standards, we did not incur compensation expense for employee stock options when the exercise price was at least 100% of the market value of our common stock on the date of grant. SFAS 123R requires that all stock-based compensation, including shares and share-based awards to employees, be valued at fair value. We measure the fair value of share-based awards using the Black-Scholes model.

Under SFAS 123R, compensation is attributed to the periods of associated service. For awards granted prior to November 1, 2005, such expense is being recognized on an accelerated basis since that is the method that we previously applied in our supplemental disclosures. Beginning with awards granted on November 1, 2005, such expense is being recognized on a straight-line basis over the vesting period of the awards. Forfeitures are estimated at the time of grant, with such estimate updated periodically and with actual forfeitures recognized currently to the extent they differ from the estimate.

We adopted SFAS 123R by applying the modified-prospective transition method and adjusted previously recorded deferred compensation back to additional paid-in capital. Under this method, we began applying the valuation and other criteria of SFAS 123R on November 1, 2005, and began recognizing expense for the unvested portion of previously issued grants at the same time, based on the valuation and attribution methods originally used to calculate the disclosures.

The impact of adopting SFAS 123R was as follows, due to the incremental compensation cost recognized for employee stock options and restricted stock :

	Three Months Ended				Six Months Ended
	April 30, 2006				April 30, 2006
Incremental stock-based compensation under SFAS 123R		$	1,235			$	2,546
Tax benefit		(362		)		(745		)
Reduction of net income		$	873			$	1,801
Reduction in basic earnings per share		$	0.03			$	0.05
Reduction in diluted earnings per share		$	0.03			$	0.05

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

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, 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. Options granted under the 2004 Plan generally vest in equal increments over four years and expire in ten years. Options granted under the 2004 Directors’ Plan generally vest immediately and expire in ten 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, 2006, 1,127 and 903 shares are available for grant under the 2004 Plan and 2004 Directors’ Plan, respectively. A summary of activity under our share-based payment plans for the six months ended April 30, 2006 is presented below:

	Shares			Weighted Average Exercise Price			Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at October 31, 2005		3,822			$	17.01
Granted		113			33.36
Exercised		(490	)		11.65
Forfeited or expired		(119	)		12.26
Outstanding at April 30, 2006		3,326			$	18.53		7.7		$	60,680
Exercisable at April 30, 2006		2,064			$	17.80		7.4		$	36,743

The total intrinsic value of stock options exercised during the six months ended April 30, 2006 and 2005 was $9,177 and $16,672, respectively. The total income tax benefits from stock option exercises during the six months ended April 30, 2006 and 2005 were $2,487 and $4,310, respectively. As of April 30, 2006, there was a total of $7,385 of unamortized compensation related to stock options, which expense is expected to be recognized over a weighted-average period of 2.3 years. As noted earlier, we are recognizing expense for awards granted prior to November 1, 2005 on an accelerated basis, so a disproportionate amount of unamortized expense will be recognized in the first 12 months of this weighted-average period.

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

	Three Months Ended						Six Months Ended
	April 30,						April 30,
	2006			2005			2006			2005
Compensation expense:
Stock options	$	816		$	60		$	1,811		$	60
Restricted stock	419			161			735			305
Total compensation expense	1,235			221			2,546			365
Less: Related tax benefit	(362		)	(81		)	(745		)	(134		)
Total compensation expense, net of tax benefit	$	873		$	140		$	1,801		$	231

Reported share-based compensation expense was classified as follows:

	Three Months Ended						Six Months Ended
	April 30,						April 30,
	2006			2005			2006			2005
Gross margin	$	16		$	—		$	46		$	—
Selling, general and administrative	1,145			221			2,348			365
Research and development	74			—			152			—
Total share-based compensation expense	$	1,235		$	221		$	2,546		$	365
Tax benefit	(362		)	(81		)	(745		)	(134		)
Total share-based compensation expense, net of tax	$	873		$	140		$	1,801		$	231

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 (assumptions in 2005 were used to compute the pro forma compensation for disclosure purposes only). 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.

	Three Months Ended				Six Months Ended
	April 30,				April 30,
	2006		2005		2006		2005
Option valuation assumptions:
Expected dividend yield	—		—		—		—
Expected volatility	36.5	%	53.6	%	36.5	%	54.8	%
Risk-free interest rate	4.7	%	4.2	%	4.7	%	3.0	%
Expected term of options	4.4		5.5		4.4		5.5

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Pro forma disclosures.   Had we accounted for these plans during 2005 under the fair value method allowed by SFAS 123, our net income and earnings per share would have been reduced to recognize the fair value of employee options, as follows:

	Three Months Ended				Six Months Ended
	April 30, 2005				April 30, 2005
Net income
As reported		$	6,845			$	12,967
Incremental stock-based compensation under SFAS 123, net of tax benefit		(7,273		)		(8,724		)
Pro forma		$	(428	)		$	4,243
Basic (loss) earnings per share
As reported		$	0.19			$	0.37
Pro forma		(0.01		)		0.12
Diluted earnings (loss) per share
As reported		$	0.19			$	0.35
Pro forma		(0.01		)		0.12

Restricted stock.   During the six months ended April 30, 2006 and 2005, we issued 60 and 50 shares of restricted stock, respectively, with an aggregate fair value of $2,018 and $1,353, respectively. The total value of each restricted stock grant, based on the fair market value of the stock on the date of grant is amortized to compensation expense over the related vesting period. Net income, as reported, for the three months ended April 30, 2006 and 2005, reflects $296 and $104 respectively, net of tax, and $520 and $198 for the six months ended April 30, 2006 and 2005, respectively, of amortization of restricted stock compensation.

A summary of activity related to restricted stock for the six months ended April 30, 2006 is presented below:

		Weighted
		Average
		Grant-Date
	Shares	Fair Value
Nonvested at October 31, 2005	276,750		$	24.35
Granted	60,500		33.36
Exercised	—		—
Forfeited	—		—
Nonvested at April 30, 2006	337,250		$	25.96

No shares vested during the three months ended April 30, 2006. As of April 30, 2006, there was $7,071 of unamortized compensation expense related to restricted stock, which expense is expected to be recognized over a weighted-average period of 2.5 years.

8.   INCOME TAXES

Our effective income tax rate for continuing operations for the three and six months ended April 30, 2006 was (34.5%) and 447.6%, respectively. Excluding the impact of the one-time IPR&D charge in relation to the Stargames acquisition, which is non-deductible for tax purposes, the effective tax rate for the three and six months ended April 30, 2006 would have been 33.2% and 33.7%, respectively.

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9.   EARNINGS PER SHARE

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

	Three Months Ended					Six Months Ended
	April 30,					April 30,
	2006			2005		2006			2005
Income (loss) from continuing operations	$	(12,632	)	$	6,829	$	(5,414	)	$	12,908
Basic:
Weighted average shares	34,555			35,301		34,522			35,116
Diluted:
Weighted average shares, basic	34,555			35,301		34,522			35,116
Dilutive effect of options and restricted stock	—			1,321		—			1,493
Dilutive effect of contingent convertible notes	—			194		—			222
Weighted average shares, diluted	34,555			36,816		34,522			36,831
Basic earnings (loss) per share	$	(0.37	)	$	0.19	$	(0.16	)	$	0.37
Diluted earnings (loss) per share	$	(0.37	)	$	0.19	$	(0.16	)	$	0.35

We account for our contingent convertible notes in accordance with EITF 04-08, “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 applied the treasury stock method. This method results in incremental dilutive shares when the average fair value of our common stock for a reporting period exceeds the initial conversion price per share of $28.07. For the six months ended April 30, 2006 and 2005, the average fair value of our common stock did exceed $28.07, resulting in additional dilutive shares. For the three and six months ended April 30, 2006, the dilution related to our options, restricted stock and contingent convertible notes have not been included in the diluted earnings (loss) per share computation as their inclusion would be anti-dilutive.

10.   OTHER INCOME (EXPENSE)

Other income (expense) is comprised of the following:

	Three Months Ended						Six Months Ended
	April 30,						April 30,
	2006			2005			2006			2005
Interest income	$	561		$	945		$	1,070		$	1,334
Interest expense	(2,287		)	(586		)	(2,950		)	(1,096		)
Amortization of debt issue costs	(634		)	(240		)	(892		)	(482		)
Foreign currency (loss) gain	22			18			(103		)	51
Other	1			4			48			(1		)
Total other income (expense)	$	(2,337	)	$	141		$	(2,827	)	$	(194	)

Interest expense is primarily related to the $150,000 of Notes due in April 2024 and the $115,000 Bridge Loan due July 2006.

11.   OPERATING SEGMENTS

We have two reportable segments which are classified as continuing operations, Utility Products and Entertainment Products. Utility Products includes our Shufflers, Chip Sorting Machines and ITS product

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lines. Entertainment Products includes our Proprietary Table Games, Table Master products, Shuffle Up and the products developed, manufactured and distributed by Stargames. The Stargames product offerings include Rapid Table Games, Vegas Star, multi-terminal gaming machines and a broad line of traditional video slot machines designed most specifically for the Australian and Asian gaming markets. 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.

Segment revenues include sale, lease or licensing of products within each reportable segment. Segment operating income includes revenues 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 option expense, and manufacturing overhead. Corporate general and administrative expenses are not allocated to segments.  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.

As discussed in Note 2, we recognized a one-time charge related to IPR&D of $19,145 related to the acquisition of Stargames. All of the products acquired from Stargames have been classified as Entertainment products and accordingly, the Entertainment segment results for the six months ended April 30, 2006, include the impact of the IPR&D charge of $19,145.

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

	Three Months Ended April 30,						Six Months Ended April 30,
	2006			2005			2006			2005
Revenue:
Utility Products	$	23,615		$	17,384		$	45,499		$	30,745
Entertainment Products	19,653			9,742			31,076			21,702
Corporate	35			2			45			51
	$	43,303		$	27,128		$	76,620		$	52,498
Operating Income (Loss):
Utility Products	$	12,756		$	7,687		$	23,471		$	12,544
Entertainment Products	(9,489		)	7,532			(1,501		)	17,156
Corporate	(10,321		)	(4,797		)	(17,586		)	(9,590		)
	$	(7,054	)	$	10,422		$	4,384		$	20,110
Depreciation and Amortization:
Utility Products	$	2,179		$	1,806		$	4,274		$	3,692
Entertainment Products	1,659			533			2,425			1,183
Corporate	1,075			402			1,801			882
	$	4,913		$	2,741		$	8,500		$	5,757
Capital Expenditures:
Utility Products	$	1,428		$	1,651		$	2,983		$	15,568
Entertainment Products	469			496			980			763
Corporate	705			385			929			1,138
	$	2,602		$	2,532		$	4,892		$	17,469

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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, 2006, our significant inventory purchase commitments totaled $9,250 which are primarily related to our Table Master products, one2six shufflers, and the Easy Chipper roulette chip sorter machine.

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, then we are obligated to pay the employee severance benefits as specified in their individual contract. As of April 30, 2006, minimum aggregate severance benefits totaled $5,018.

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

Certain of our litigation relate to products or patents associated with our discontinued slot products operations. Legal expenses and settlement proceeds or payments associated with these matters, if any, are included in the Discontinued Operations caption on our condensed consolidated statements of income.

Continuing operations—

VendingData I—On July 12, 2005, we settled our litigation (known as VendingData I) with VendingData Corporation (“VendingData”) over VendingData’s Random Ejection shuffler. Under the terms of the settlement, VendingData was required to pay us $800, one-half of which was received on July 14, 2005, and the other half of which was paid in May 2006. We granted VendingData a conditional Covenant Not to Sue concerning our U.S. patents 6,028,258 and 6,325,373 (except for claims 6 and 7 of the 6,325,373 patent), which were the patents at issue in the VendingData I litigation. Each party has completely and fully released the other for any acts or omissions committed prior to July 12, 2005, except that, these releases have no effect with respect to our patent infringement claims against VendingData’s PokerOneTM shuffler in the VendingData II litigation. The VendingData I settlement does not restrict either party’s ability to bring new actions for any wrongful acts or acts of infringement committed after July 12, 2005.

VendingData II—In October 2004, we filed a second patent infringement lawsuit against VendingData Corporation (“VendingData II”). This second suit alleges that the use, importation and offering for sale of VendingData’s PokerOneTM shuffler infringes another patent owned by us (a different patent than the patents that were the subject of the VendingData I case mentioned above). VendingData II was filed in the U.S. District Court for the District of Nevada (the “Court”) in Las Vegas, Nevada. The complaint seeks an unspecified amount of damages against VendingData and a preliminary and permanent injunction against VendingData’s infringing conduct. VendingData has denied infringement and has also filed a counterclaim for a declaratory judgment of non-infringement.

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On November 29, 2004, the Court granted our motion for a preliminary injunction (the “Injunction”). The Injunction became effective upon our posting of a $3,000 cash security with the Court on November 30, 2004. This security deposit is included in other assets on our consolidated balance sheet and included in cash flows from investing activities in our consolidated statement of cash flows. On December 17, 2004, the Court denied VendingData’s two emergency motions to modify the Injunction.

In March 2005, the Court of Appeals for the Federal Circuit (the “Federal Circuit”) stayed the Injunction based on a technical defect in the Court’s process in granting the Injunction, and not on its merits. In May 2005, the Court held a Markman hearing for construction of the claims. On September 26, 2005, U.S. Magistrate Judge Lawrence R. Leavitt for the District of Nevada issued his Claim Construction Report and Recommendation in the Markman hearing concerning VendingData’s PokerOneTM shuffler. The Magistrate Judge’s findings were limited to his interpretation of certain words in the patent claim asserted by us, and he agreed with the interpretation put forth by VendingData. The Magistrate Judge’s Recommendation is not a determination of whether the PokerOneTM infringes the asserted patent, nor does it speak to the validity of our claims. We have filed a written objection with the Court to the Magistrate Judge’s ruling. This objection is now pending.

On December 27, 2005, the Federal Circuit vacated the Injunction and ordered the Court to perform a more complete claim construction analysis in order to deal with any future motions on whether or not to reinstate the Injunction. Two of the three judges on the Federal Circuit panel stated that they did not believe that infringement exists under VendingData’s claim construction. We continue to believe that infringement exists under either our claim construction or VendingData’s claim construction, and we continue to believe that our claim construction is the proper one. The Federal Circuit did not rule on whether our claim construction or VendingData’s claim construction is the proper one. There can be no guarantee that the Court or, upon any further appeal, the Federal Circuit will agree with our claim construction. We intend to continue to enforce our intellectual property rights by moving the litigation forward to resolve our patent infringement claim. However, in June 2006, we agreed with VendingData to a 90 day standstill in the litigation in order to pursue settlement negotiations.

VendingData III—On March 31, 2006, VendingData filed a suit alleging that we have infringed and are currently infringing United States Patent No. 6,726,206 through the use or offering for sale of the MD2 shuffler in the United States. On May 1, 2006, VendingData filed a Notice of Voluntary Dismissal.

TCS—On July 15, 2005, we executed a settlement agreement with Technical Casino Supplies, Ltd. (“TCS”). As part of the settlement agreement, each party has completely and fully released the other for any acts or omissions committed prior to June 27, 2005. Under the terms of the settlement agreement, we paid TCS a one-time payment of $215 in settlement of disputed invoices and commissions relating to the previously terminated International Distribution Agreement with TCS (the “TCS Agreement”). The TCS Agreement had been terminated by the Arbitrator on December 22, 2004.

GEI—In July 2004, we filed a patent infringement lawsuit against Gaming Entertainment, Inc. (“GEI”) in the U.S. District Court for the District of Nevada, in Las Vegas, Nevada. The lawsuit alleges that GEI’s 3-5-7 PokerTM game infringes one of our Three Card Poker® patents. We are seeking a permanent injunction and an as yet undetermined amount of damages against GEI. GEI has answered our complaint, denying infringement, and also seeking a ruling that the patent is invalid.  The case is presently in the discovery phase. In November 2005, the Court held a Markman hearing for construction of the claims. The Markman decision is now pending.

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Awada—On April 25 and April 26, 2005, our rescission trial was held in the District Court in Clark County, Nevada in the Awada and Gaming Entertainment, Inc. case against us and our CEO, Mark Yoseloff. At the conclusion of the trial, the court granted our rescission motion, ordering that the subject contract, called the “Game Option Agreement”, be rescinded and/or void. On May 18, 2005, the Court entered Findings of Fact/Conclusions of Law confirming the Court’s rescission ruling. Among the findings, the Court found that the actions of plaintiffs Yehia Awada and Gaming Entertainment, Inc. demonstrated that the plaintiffs never had any intention of conveying to us the exclusive license to the 3-Way Action game, as they had agreed and were required to do under the Game Option Agreement. The Court further found that we had established by a preponderance of the evidence that the plaintiffs had materially failed to perform their obligations under the Game Option Agreement and that we were entitled to the remedy of rescission. On May 5, 2005, the Court ruled on the parties’ damages requests in connection with the case and as required under Nevada law. Plaintiffs were seeking approximately $13,000 in damages. The Court ordered that the total damages under Nevada law due to the successful rescission of the Game Option Agreement was $130, including all interest. We had fully reserved for this amount. On June 1, 2005, the Court dismissed with prejudice all other claims asserted by plaintiffs.

Plaintiffs have appealed the Court’s order granting the rescission of the “Game Option Agreement” to the Nevada Supreme Court.

Awada II—On September 12, 2005, we filed a new lawsuit against defendants Awada and Gaming Entertainment, Inc. The lawsuit alleges that our Four Card Poker® game is being infringed and illegally copied by the defendants’ Play Four Poker game. The lawsuit claims that the defendants are violating the federal Lanham Act by infringing the trademark/trade dress of our Four Card Poker® game layout, and that the defendants are committing acts of unfair competition, interference with prospective business advantage and conversion. Our action seeks appropriate injunctive relief against defendants’ Play Four Poker game layout, as well as unspecified monetary damages. On September 15, 2005, the U.S. District Court for the District of Nevada issued a temporary restraining order prohibiting the defendants from displaying or advertising the infringing layout.

On or about December 6, 2005, the defendants answered our complaint and denied all liability. They also filed counterclaims for alleged patent misuse, anti-trust violations based on said patent misuse, patent invalidity, unfair competition, unfair trade practices, and other related claims. The counterclaims seek an unspecified amount of damages, disgorgement of our profits as a result of our alleged unfair trade practices, and preliminary and permanent injunctive relief against our alleged unfair trade practices. The defendants filed these counterclaims against both us and our CEO. We completely and uncategorically deny the defendants’ counterclaims, and intend to vigorously oppose them. On January 9, 2006, we filed a motion to dismiss all of defendants’ counterclaims. On January 24, 2006, defendants filed an opposition to our motion to dismiss. On March 27, 2006, the Court granted our motion for a preliminary injunction and dismissed four of defendants’ seven counterclaims.

MP Games I—In July 2004, we filed a complaint against MP Games LLC and certain other defendants in the U.S. District Court for the District of Nevada, in Las Vegas, Nevada. The complaint alleges that the defendants’ MP21 System infringes two patents owned by us. The complaint also alleges misappropriation of trade secrets against certain, but not all, of the defendants, and also includes claims for correction of named inventor on certain related patents held in the name of certain of the defendants. We are seeking a permanent injunction and an as yet undetermined amount of damages against all of the defendants. The defendants have answered our complaint denying infringement and also claiming that the two patents are invalid. The defendants have also counterclaimed against us, claiming that we infringe several of their patents, and that we misappropriated certain of their trade secrets, and are seeking damages against us. We deny any

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infringement, misappropriation or wrongdoing. In May 2005, the Court dismissed defendants’ breach of contract counterclaim. The case is currently in the discovery phase. In the recent Two-Party Agreement transaction with IGT, IGT purchased a 50% ownership interest in the two patents which are the subject of this lawsuit, and IGT has been added as a named plaintiff in this lawsuit. In June 2005, the defendants filed the same, previously dismissed, breach of contract claim, and several other related claims as a new lawsuit in the U.S. District Court for the Western District of Washington, as explained below. On December 20, 2005, the Court entered its Markman order, construing the disputed claims in the various patents-in-suit. The Court ruled in our favor on a number of disputed terms and in the defendants’ favor on others. Some or all of these rulings may be overturned on appeal. Litigation will continue on all claims in the case.

MP Games II (Washington)—In June 2005, MP Games LLC, Alliance Gaming and Bally Gaming, which are among the defendants in MP Games I, filed a complaint against us in the U.S. District Court for the Western District of Washington, in Seattle, Washington. The complaint includes the breach of contract claim which had been dismissed from the MP Games Nevada litigation, discussed above, as well as related claims of misappropriation of trade secrets and patent infringement. The complaint seeks a permanent injunction against our MD2 shuffler with card recognition, an unspecified amount of damages and other relief. We deny the plaintiffs’ allegations. We filed a motion to dismiss and/or stay some of the plaintiffs’ allegations. On February 22, 2006, the Court denied our motion to dismiss the trade secret claim and granted our motion to stay the trade secrets and breach of contract claims pending further order of the Court. A scheduling conference was held on March 21, 2006 and discovery is ongoing. We will vigorously contest and deny any liability.

Discontinued operations—

IGCA—In April 2001, we were sued by Innovative Gaming Corporation of America (“IGCA”), a Minnesota corporation. The suit was filed in the Second Judicial District Court of the State of Nevada, in Washoe County, Nevada. The defendants are us and Joseph J. Lahti, our former Chairman. The complaint alleges breach of contract, negligence, misrepresentation and related theories of liability, all relating to a confidentiality agreement with respect to what the plaintiff claims to be its intellectual property. The complaint seeks an unspecified amount of damages. We have answered the complaint by denying any liability and raising various affirmative defenses. We deny the plaintiff’s claims. In 2004, IGCA filed for bankruptcy and a trustee was appointed. In December 2005, we entered into a settlement agreement with the trustee to settle all of IGCA’s claims for $150. On January 25, 2006, the Bankruptcy Court approved the settlement agreement and we paid the $150 settlement on February 14, 2006. A written order has been issued and the time for appeal, if any, has not yet run.

Fleetwood—In January 2004, the Company sold its then slot operating system (the “System”) to IGT. Prior to the sale, the Company had been negotiating with Fleetwood Manufacturing, Inc. (“Fleetwood”) about a sale of the System, but no agreement was reached and the negotiations were terminated. After the termination of the negotiations, however, the Company came to believe that Fleetwood was claiming that the Company had an obligation to continue to negotiate with Fleetwood regarding the System. Accordingly, in January 2004, the Company filed a complaint for declaratory relief in the District Court in Clark County, Nevada seeking a judicial ruling that the negotiations with Fleetwood had terminated and that the Company had the legal right to negotiate with third parties, including IGT, regarding a sale of the System.

Fleetwood disagreed with the Company’s position and filed an Answer denying the Company’s claimed right for declaratory relief. Fleetwood also filed a counterclaim alleging that the Company breached its obligations to negotiate in good faith with Fleetwood. Fleetwood claimed that its damages were in excess of $10.

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Prior to June, 2006, Fleetwood never put forth the damages, or any proof relating thereto, that were allegedly caused by the Company’s alleged breaches. In June 2006, Fleetwood, for the first time, produced an expert report which opined that Fleetwood’s business had suffered in the last two years and that the cause of its losses was the Company’s failure to sell the System to Fleetwood. Fleetwood has alleged that its losses are approximately $12,000.

The Company completely rejects Fleetwood’s arguments and positions, and believes that Fleetwood’s claims and theory of damages have no support either in fact or law. The Company believes that it committed no wrongful acts against Fleetwood and caused it no damages. The Company is continuing to vigorously oppose Fleetwood’s claims and believes that it will prevail in this lawsuit. A trial is scheduled for October 2006.

This litigation is now being disclosed due to the newly alleged amount of damages, and not because the Company believes that Fleetwood’s claims have any validity. The Company strongly believes that Fleetwood’s claims and allegations of damages completely lack merit.

In the ordinary course of conducting our business, we are, from time to time, involved in other litigation, administrative proceedings and regulatory government investigations. We believe that the final disposition of any of these or other matters will not have a material adverse effect on our financial position, results of operations or liquidity.

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

BUSINESS OVERVIEW
(In thousands, except units)

We develop, manufacture and market technology-based products for the gaming industry for placement on the casino floor. Our products primarily relate to our casino customers’ table game activities and are focused on increasing their profitability, productivity and security. Our Utility Products include a full line of automatic card shufflers for use with the vast majority of card table games and chip sorting machines for roulette. In addition, we have acquired or are developing other products to automatically gather data and to enable casinos to track table game play, such as our Bloodhound® and Intelligent Table System™ products. Our Entertainment Products include our line of live proprietary poker, blackjack, baccarat, and pai gow poker-based table games and our Table Master™ product that delivers our popular branded table game content on a multi-player video platform. In January 2005, we formed Shuffle Up ProductionsTM, Inc.(“Shuffle Up”) to leverage our intellectual property and develop live and broadcast tournament events as well as merchandise based on our extremely popular gaming offerings. In November 2005, we hosted the finals of our Three Card Poker National ChampionshipTM with a grand prize of $1,000. In February 2006, we acquired Stargames Limited (“Stargames”). Stargames product offerings are classified as Entertainment Products and include Rapid Table GamesTM, Vegas Star® multi-terminal gaming machines, and a broad line of traditional video slot machines designed most specifically for the Australian and Asian gaming markets. The Rapid series of games, which we already distribute in the Americas and the Caribbean, combines a live dealer with multi-terminal electronic wagering. Current offerings include Rapid Roulette®, Rapid Sic-Bo® and Rapid Big Wheel®. Vegas Star® multi-terminal gaming machines feature animated dealers and a selection of public domain table games. The Vegas Star® Nova line utilizes Stargames existing slot cabinet to extend the number of wagering terminals for a Vegas Star game, while minimizing the footprint required on the gaming floor. 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 sell, lease or license our products. 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. When we lease or license our

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products, we generally negotiate a month-to-month operating lease. We offer our products worldwide in markets that are significantly regulated. We manufacture the majority of our products at our headquarters and manufacturing facility in Las Vegas, Nevada. In addition, we outsource the manufacturing of certain of our products in the United States, Europe and Asia Pacific.

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. Additional information regarding Shuffle Up can be accessed at www.shuffleupproductions.com.

Management’s Discussion and Analysis contains forward-looking statements. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors discussed in “Forward Looking Statements” elsewhere in this quarterly report.

SHARE-BASED COMPENSATION

On November 1, 2005, we adopted the provisions of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard No. 123 (revised 2004) (“SFAS 123R”), “Share-Based Payment”, and SEC Staff Accounting Bulletin No. 107 (“SAB 107”), “Share-Based Payment”, requiring the measurement and recognition of all share-based compensation under the fair value method. Under the fair value recognition provisions of this statement, share-based compensation cost is estimated at the grant date based on the value of the award and is recognized as expense over the vesting period. Option valuation models require the input of highly subjective assumptions, and changes in the assumptions used can materially affect the fair value estimate. Additionally, judgment is required in estimating stock price volatility, expected dividends, and expected term for options that remain outstanding. Actual results, and future estimates, may differ substantially from our current estimates. See Note 7 of our condensed consolidated financial statements for additional information regarding the adoption of SFAS 123R.

ACQUISITIONS, DISPOSITIONS AND OTHER SIGNIFICANT TRANSACTIONS

Stargames.As discussed elsewhere, on February 1, 2006, we had substantially completed our acquisition of Stargames by purchasing 95% of the outstanding Stargames shares for AU$1.55 per share. Effective March 8, 2006, we had acquired 100% of the outstanding Stargames shares.  Consideration to Stargames consisted of an Australian-denominated cash payment of $148,441 AUD or $112,147 USD denominated. In addition, we estimate that our total direct acquisition costs, consisting primarily of legal and due diligence fees, to be approximately $2,190.  The shares purchase was funded by temporary bridge financing which has a maturity date of July 24, 2006. We expect to secure permanent financing through i) an extension of the existing Credit Agreement, ii) a senior secured bank credit facility or iii) convertible or other debt to be issued by private placement pursuant to Rule 144A under the Securities Act of 1933. For additional information on the bridge financing see Note 5 to our condensed consolidated financial statements.

The acquisition enhances the products in our Entertainment segment as well as provides for additional electronic platforms for the Company’s branded content. Additionally, the Company acquired a strong brand name as well as an experienced and talented management team. These factors result in the recognition of certain intangible assets, discussed below, and significant goodwill.

The transaction was accounted for as a purchase and, accordingly, the preliminary purchase price was allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of the acquisition. The preliminary fair values have been prepared based upon an independent

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appraisal, which is currently in process, discounted cash flows and estimates by management. The purchase price allocation is preliminary and may be adjusted for up to one year after the acquisition.

On April 28, 2006 (the “Effective Date”), we entered into an agreement with International Game Technology (“IGT”) whereby we assigned, transferred, and conveyed to IGT, our 50% share of future royalties from the licensing of the ENPAT patents to any third party or from otherwise permitting any third party to use the ENPAT patents. The total royalties to be received by IGT is limited to an amount equal to a net present value of $3,000 utilizing a discount factor of 12% (the “Royalty Amount”). Upon the receipt by IGT of the Royalty Amount, all royalty payments with respect to our 50% share of the ENPAT patents shall resume and be paid to us. The total consideration paid to us was $3,000 and is non-refundable. The transaction has been reflected in the accompanying condensed consolidated financial statements by establishing a liability for amounts owed to IGT which will be relieved as future royalties are earned.

DISPOSITIONS

In December 2003, our board of directors approved and we committed to a plan to divest our North America slot products operations and assets, based on our determination that this product line was no longer a strategic fit with our refocused core business strategy of providing products and services for the table game area of casinos. Revenues and costs associated with our slot products are reported as discontinued operations for all periods presented. In January 2004, we entered into agreements pursuant to which we sold substantially all of our slot products’ assets and substantially completed our divestiture plans.

As part of the acquisition of Stargames, we acquired Professional Vending Services Pty Ltd (“PVS”), a wholly-owned subsidiary of Stargames. PVS designs, develops, and manufactures automatic vending machines. PVS offers exclusive equipment in all main vending segments including snacks, cold drinks, food (hot and cold), coffee and cigarettes. We have determined that the operations of PVS are non-core to our gaming Entertainment and Utility segments. Accordingly, we have entered into a preliminary agreement to sell our equity interests including settlement of all existing liabilities of PVS.

Further detail is included under the heading “Discontinued Operations” in Note 2 to our condensed consolidated financial statements.

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CONSOLIDATED RESULTS OF OPERATIONS
(In thousands, except per share amounts)

	Three Months Ended April 30,				Six Months Ended April 30,
	2006		2005		2006		2005
Revenue
Utility products	54.5	%	64.1	%	59.4	%	58.6	%
Entertainment products	45.4	%	35.9	%	40.6	%	41.3	%
Other	0.1	%	0.0	%	0.1	%	0.1	%
Total revenue	100.0	%	100.0	%	100.0	%	100.0	%
Cost of revenue	33.4	%	24.7	%	31.8	%	24.1	%
Gross margin	66.6	%	75.3	%	68.2	%	75.9	%
Selling, general and administrative	30.9	%	29.1	%	30.5	%	30.1	%
Research and development	7.5	%	7.8	%	6.8	%	7.6	%
In-process research and development	44.2	%	0.0	%	25.0	%	0.0	%
Equity method investment loss	(0.4	)%	0.0	%	(0.2	)%	0.0	%
Income from operations	(16.3	)%	38.4	%	5.7	%	38.2	%
Other income (expense), net	(5.4	)%	0.5	%	(3.7	)%	(0.4	)%
Income (loss) from continuing operations before tax	(21.7	)%	38.9	%	2.0	%	37.8	%
Provision for income taxes	7.5	%	13.8	%	9.1	%	13.3	%
Income (loss) from continuing operations	(29.2	)%	25.1	%	(7.1	)%	24.5	%
Discontinued operations, net of tax	(0.2	)%	0.1	%	0.1	%	0.1	%
Net income (loss)	(29.4	)%	25.2	%	(7.0	)%	24.6	%

Our revenue and results of operations are most affected by unit placements, through sale or lease, 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. To a lesser extent, our overall financial results are affected by fluctuations in selling, general and administrative expenses and our continued investment in research and development activities.  As discussed earlier, our results include a one-time charge subject to the one-year window for final purchase price allocation related to IPR&D of Stargames.

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REVENUE AND GROSS MARGIN

Three Months Ended
April 30, % Six Months Ended
April 30, %

	2006			2005			Change		2006			2005			Change
Revenue:
Leases and royalties	$	12,559		$	12,016		4.5	%	$	24,824		$	23,476			5.7	%
Sales and service	30,708			15,110			103.2	%	51,751			28,971				78.6	%
Other	36			2			1,700.0	%	45			51				(11.8	)%
Total	$	43,303		$	27,128		59.6	%	$	76,620		$	52,498			45.9	%
Cost of revenue:
Leases and royalties	$	2,742		$	2,257		21.5	%	$	5,559		$	4,604			20.7	%
Sales and service	11,712			4,449			163.3	%	18,816			8,031				134.3	%
Total	$	14,454		$	6,706		115.5	%	$	24,375		$	12,635			92.9	%
Gross margin:
Leases and royalties	$	9,817		$	9,759		0.6	%	$	19,265		$	18,872			2.1	%
Sales and service	18,996			10,661			78.2	%	32,935			20,940				57.3	%
Total	$	28,813		$	20,420		41.1	%	$	52,200		$	39,812			31.1	%
Gross margin percentage:
Leases and royalties	78.2		%	81.2		%			77.6		%	80.4		%
Sales and service	61.9		%	70.6		%			63.6		%	72.3		%
Total	66.5		%	75.3		%			68.1		%	75.8		%

We earn our revenue in several ways. Revenue transactions include leasing or licensing our products to casino customers, generally under month-to-month fixed fee contracts (product lease contracts typically include parts and service) or we offer most 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 overall revenue growth for the three and six months ended April 30, 2006, was the result of strong results in both operating segments as well as both of our lease and royalties and sales and service business models. We experienced strong results in our sold units installed base within our Utility segment. Our Entertainment segment showed strong results due to organic growth as well as to our acquisition of Stargames whose numbers are reflected in the quarter. The increase in the number of units sold resulted from the introduction of new products, greater placements of existing products, acquisitions of products, market growth and the expansion of operations both domestically and internationally. A more detailed discussion of our revenue is included for each of our operating segments under the heading “Segment Operating Results.”

Overall gross margin dollars increased for the three and six months ended April 30, 2006. However, as a percentage of revenue, our gross margin percentage decreased 8.8% and 7.7% for the three and six months ended April 30, 2006, respectively, compared to the prior year periods. The decline in our gross margin percentages are attributed to the product shift year-over-year and the inclusion of the results of Stargames. The margins of the Stargames products are lower than those traditionally experienced in our Entertainment segment. Our sales of the Easy Chipper and Table Master, higher cost products, have also increased year-over-year and have also unfavorably impacted our overall margin. The gross margin for the Easy Chipper is negatively impacted by the amortization expense associated with the acquired CARD product. Additionally, we had fewer lifetime license sales in the current period which typically has a favorable impact on gross margin dollars.

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OPERATING EXPENSES

	Three Months Ended April 30,						%			Six Months Ended April 30,						%
	2006			2005			Change			2006			2005			Change
Selling, general and administrative	$	13,363		$	7,895			69.3	%	$	23,360		$	15,779			48.0	%
Percentage of revenue	30.9		%	29.1		%				30.5		%	30.1		%
Research and development	$	3,239		$	2,105			53.9	%	$	5,200		$	3,974			30.9	%
Percentage of revenue	7.5		%	7.8		%				6.9		%	7.6		%
In-process research and development	$	19,145		$	—			100.0	%	$	19,145		$	—			100.0	%
Percentage of revenue	44.2		%	0.0		%				25.0		%	0.0		%
Total operating expenses	$	35,747		$	10,000			257.5	%	$	47,705		$	19,753			141.5	%
Percentage of revenue	82.6		%	36.9		%				62.3		%	37.6		%

Selling, General and Administrative Expenses (“SG&A”).SG&A increased at a rate slightly higher than our revenues during the three and six months ended April 30, 2006. Accordingly, SG&A as a percentage of revenue increased. The fluctuation in SG&A expenses primarily reflects the following:

·SG&A related to Stargames, CARD and VIP were $4,764 for the three months ended April 30, 2006, compared to $881 for CARD in the same prior year period. SG&A related to Stargames, CARD and VIP were $5,874 for the six months ended April 30, 2006, compared to $1,769 for CARD in the same prior year period.

·Corporate legal fees were $1,024 and $1,568 for the three months ended April 30, 2006 and 2005, respectively, and $2,514 and $3,373 for the six months ended April 30, 2006 and 2005, respectively. The reduction in legal fees quarter over quarter is attributable to the settlement of the TCS and Vending Data I lawsuits in fiscal 2005. The reductions are offset to some extent by increases in our MP Games I and II litigation. We expect that our legal fees will continue to vary from period to period depending on our level of legal activity to protect our intellectual property and our involvement in non-routine transactions.

·Share-based compensation expense under SFAS 123R was $1,235, including $419 of amortization of restricted stock compensation, for the three months ended April 30, 2006, compared to $221, consisting predominately of amortization of restricted stock compensation in the same prior year period. Share-based compensation expense under SFAS 123R was $2,546, including $735 of amortization of restricted stock compensation, for the six months ended April 30, 2006, compared to $365, consisting predominately of amortization of restricted stock compensation, in the same prior year period.

·Payroll and related expenses, excluding Stargames, CARD and VIP, increased approximately $1,017 and $1,914 for the three and six months ended April 30, 2006, respectively, primarily due to an increase in the number of employees in order to support the growth of our business.

Excluding the impact of the costs associated with the expensing of share-based compensation and our additional professional fees related to the delayed filing of our Form 10-K for fiscal 2005, SG&A decreased as a percentage of revenue to 26.6% as compared to 29.1% in the prior year period.

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. For the six months ended April 30, 2006, R&D increased primarily due to our R&D efforts that continue at CARD and domestically as well as those at Stargames. Additionally, share-based compensation expense allocated to R&D under SFAS 123R was $74 and $152 for the three and six months ended April 30, 2006, compared to no expense in the same prior year period.

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R&D includes amortization of our patents for products still under development. Amortization related to the RFID patents was $100 and $183 for the three and six months ended April 30, 2006, respectively, compared to $299 and $498 in the same prior year period. Our amortization has been, and will continue to, be favorably impacted as a result of the Two-Party Agreement with IGT and the related sale of a 50% ownership interest in these RFID patents.

As required by FASB Interpretation No. 4, “Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method” (FIN 4), the portion of the purchase price allocated to IPR&D of $19,145 was immediately expensed.

A project-by-project valuation using the guidance in SFAS 141 and the American Institute of Certified Public Accountants (AICPA) Practice Aid “Assets Acquired in a Business Combination to Be Used In Research and Development Activities: A Focus on Software, Electronic Devices and Pharmaceutical Industries” is in the process of being performed by an independent valuation specialist to determine the fair value of research and development projects of Stargames.

IPR&D is defined as a development project that has been initiated and achieved material progress but has not yet resulted in a commercially viable product and has no alternative future uses. The fair value was determined using the income approach on a project-by-project basis. This method is based on the present value of earnings attributable to the asset or costs avoided as a result of owning the assets. This method includes risk factors, which include applying an appropriate discount rate that reflects the project’s stage of completion, the nature of the product, the scientific data associated with the technology, the current patent situation and market competition. The expensing of IPR&D through purchase accounting allows for the expensing of certain R&D efforts at the acquisition date consistent with the expensing of R&D efforts as they are incurred for in-house development efforts. This charge is preliminary pending completion of our final purchase price allocation which will be finalized within one year. Any adjustments to this charge will be adjusted to the income statement caption IPR&D when finalized.

OTHER INCOME (EXPENSE)

Other income (expense) is comprised of the following:

	Three Months Ended April 30,						Six Months Ended April 30,
	2006			2005			2006			2005
Interest income	$	561		$	945		$	1,070		$	1,334
Interest expense	(2,287		)	(586		)	(2,950		)	(1,096		)
Amortization of debt issue costs	(634		)	(240		)	(892		)	(482		)
Foreign currency (loss) gain	22			18			(103		)	51
Other	1			4			48			(1		)
Total other income (expense)	$	(2,337	)	$	141		$	(2,827	)	$	(194	)

Interest income decreased primarily as a result of a reduction in the Company’s investment portfolio. Proceeds of matured investments were not re-invested, but were used to pay down the Bridge Loan during the three months ended April 30, 2006. This decrease was partially offset by an increase in interest income attributable to increased interest bearing sales-type leases and notes receivable as of April 30, 2006.

Interest expense is primarily related to the $150,000 of contingent convertible senior notes due in April 2024 (the “Notes”) and the $115,000 bridge loan due in July 2006. A more detailed discussion of the Notes and the Bridge Loan are included below under the heading “Liquidity and Capital Resources.”

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INCOME TAXES

Our effective income tax rate for continuing operations for the three and six months ended April 30, 2006 was (34.5%) and 447.6%, respectively. Excluding the impact of the one-time non-deductible IPR&D charge in relation to the Stargames acquisition, the effective tax rate for the three and six months ended April 30, 2006 would have been 33.2% and 33.7%, respectively.

Looking forward, our annual effective tax rate may fluctuate due to changes in our amount and mix of U.S. and foreign income, changes in tax legislation and changes in our estimates of federal tax credits and other tax deductions.

During the three months ended April 30, 2006 and 2005, we realized income tax benefits of $1,869 and $870 and for the six months ended April 30, 2006 and 2005, we realized income tax benefits of $2,487 and $4,310, 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.

EARNINGS PER SHARE

	Three Months Ended April 30,						Six Months Ended April 30,
	2006			2005			2006			2005
Income (loss) from continuing operations	$	(12,632	)	$	6,829		$	(5,414	)	$	12,908
Basic (loss) earnings per share	$	(0.37	)	$	0.19		$	(0.16	)	$	0.37
Diluted (loss) earnings per share	$	(0.37	)	$	0.19		$	(0.16	)	$	0.35
Weighted average shares data:
Basic	34,555			35,301			34,522			35,116
Dilutive effect of options and restricted stock	—			1,321			—			1,493
Dilutive effect of contingent convertible notes	—			194			—			222
Diluted	34,555			36,816			34,522			36,831
Outstanding shares data:
Shares outstanding, beginning of period	34,694			35,422			34,527			34,958
Options exercised	323			156			490			723
Shares repurchased	—			(407		)	—			(558		)
Restricted stock issued	60			—			60			50
Other	—			—			—			(2		)
Shares outstanding, end of period	35,077			35,171			35,077			35,171

For the three and six months ended April 30, 2006, we were in a loss position, accordingly the dilutive impact of options, restricted stock and the dilutive effect of our Notes have been excluded from our earnings per share calculation as their impact is anti-dilutive.

In December 2004, our board of directors approved a three-for-two common stock split, with new shares distributed in the form of a dividend on January 14, 2005, to shareholders of record on January 3, 2005 (the “January 2005 Split”). Share and per share amounts have been adjusted for all periods presented herein to reflect the January 2005 Split.

InMarch 2004, our board of directors approved a three-for-two common stock split, with new shares distributed in the form of a dividend on April 16, 2004, to shareholders of record on April 5, 2004 (the “April 2004 Split”). Share and per share amounts have been adjusted for all periods presented herein to reflect the April 2004 Split.

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

SEGMENT OVERVIEW

We have two reportable segments which are classified as continuing operations, Utility Products and Entertainment Products. Utility Products includes our Shufflers, Chip Sorting Machines and ITS product lines. Entertainment Products includes our Proprietary Table Games, Table Master products, Shuffle Up and the products developed, manufactured and distributed by Stargames. The Stargames product offerings include Rapid Table Games, Vegas Star, multi-terminal gaming machines and a broad line of traditional video slot machines designed most specifically for the Australian and Asian gaming markets. 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.

Utility Products.Our strategy in the Utility Products segment is the development of products for our casino customers that enhance table game speed, productivity and security. Currently, Utility Products segment revenue is derived substantially from our automatic card shufflers. We develop and market a full complement of automatic card shufflers for use with the vast majority of card table games placed in casinos and other gaming locations, including our own proprietary table games. In addition to selling and servicing, we also lease shufflers, which provide us with recurring revenue. Our current shuffler product portfolio consists of 6 distinct models, including both second and third generation shufflers, in the categories of single deck, multi-deck batch and multi-deck continuous card shufflers. As of April 30, 2006, our shuffler installed base totaled 20,368 units, a 19.5% increase from 17,048 as of April 30, 2005. Our growth strategy for our shuffler business is the development and distribution of next generation, patent protected shufflers which enhance the value proposition for our customers through technological advancements. As a result, we expect to replace our older generation shufflers over time, while at the same time, increasing the penetration of our shufflers in the marketplace.

As part of the CARD acquisition in May 2004, we acquired a next generation chip sorting machine, the Easy Chipper. The Easy Chipper simplifies the handling of gaming chips and accurately tracks chip volume and value, which increases the productivity and security on high volume chip tables such as Roulette. During May 2005, we announced our first Easy Chipper orders, marking the first release of a new product developed by CARD since the acquisition. During the six months ended April 30, 2006, our installed base increased to 297 units as compared to 33 as of April 30, 2005, a 800.0% increase.

Our ITS products remain in the development stage, including our Intelligent Shoe which increases table game security by reading each card as it is removed from the shoe to reduce game manipulation.

Entertainment Products.Our strategy in the Entertainment Products segment is the development and delivery of proprietary table game content, which enhances our casino customers’ table game operations. Currently, Entertainment Products segment revenue is derived substantially from our live proprietary table game content. We develop and market a full complement of poker, pai gow poker, baccarat and blackjack table game content. Our current table game portfolio consists of 14 revenue generating titles, including industry leading brands such as Three Card Poker®, Let It Ride®, Four Card Poker® and Fortune Pai Gow Poker®. The majority of these games are licensed to our customers, which provides us with recurring revenue. In fiscal 2003, we began selling lifetime licenses of our older proprietary table games to allow access to expanded casino floor space for our newer table game introductions. As of April 30, 2006, our proprietary table game installed base totaled 3,816 games, a 14.9% increase from 3,321 games as of April 30, 2005. Our growth strategy for our live proprietary table games business is to broaden our content through increased development and/or acquisition. As a result, we expect to further increase the penetration of our content in the marketplace, as well as create a longer-term replacement opportunity.

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In late fiscal 2004, we expanded on the distribution of our proprietary table game portfolio with the introduction of our Table Master product. Table Master is a fixed five station, electronic table game featuring a video screen with a virtual dealer who interacts with players. In addition to selling and servicing, we also lease our Table Master product, which provides us with recurring revenue. Our growth strategy for Table Master is to position the product as a more cost effective way to offer lower stakes table games to our casino customers. Additionally, our Table Master platform enables us to offer table game content into markets where live table games are not permitted, such as racino, video lottery and arcade markets.

With the acquisition of Stargames, effective February 1, 2006, we added product offerings including Rapid Table Games and Vegas Star multi-terminal gaming machine platforms and a broad line of traditional video slot machines designed most specifically for the Australian and Asian gaming markets.

The Rapid Table Games product line combines a live dealer with multi-terminal electronic wagering for popular games like Roulette and Sic-Bo. With over 65% of its installed base currently installed in Australia and Asia, the Rapid Table Games product line focuses on combining popular high-volume gaming content with unparalleled game play, operator usability, systems integration and technical support. Rapid Roulette, the product line’s signature offering, currently has the leading Australian market share and accounts for over 90% of the automated roulette multi-player products currently in use.

The Vegas Star multi-terminal gaming machines feature animated virtual dealers, touch screen player betting and a selection of public domain table games including roulette, baccarat and Sic-Bo. The Vegas Star has a modular design which makes it easy to add additional play stations as terminal demand increases. Originally designed for the Australian and Asian markets where its market shares exceed 60% and 35% respectively, Vegas Star has rapidly become an integral part of casinos within its two primary markets. Each Vegas Star configuration can accommodate up to 16 player stations, and will eventually offer all of our proprietary game content.

The Electronic Gaming Machines (“EGMs”) feature a variety of game selections including licensed content provided by WMS Gaming, Stargames’ EGMs are designed specifically for the Australian and Asian markets where over 75% of the installed base is located.

In January 2005, through the formation of Shuffle Up, we broadened the distribution of our branded content and intellectual property outside of our traditional live table game offerings by developing live and broadcast tournament events and retail merchandise. In June 2005, we commenced with our plans to host a Three Card Poker National ChampionshipTM offering participants the chance to compete for a $1 million grand prize. The tournament consisted of a series of regional tournaments, with the finals held in Las Vegas, Nevada in late November 2005. Additionally, we have contracted with LMNO Productions to develop and produce a television program based on the tournament, which we aired in April 2006. Our long-term strategy through Shuffle Up is further development of additional distribution channels for our branded content and intellectual property, including “for fun” gaming activities on the internet, cellular phones, wireless hand-held devices, board games and home computer games.

Segment revenues include sale, lease or licensing of products within each reportable segment. We measure segment revenue performance in terms of dollars and Installed Unit Base. Installed Unit Base is the sum of product units under lease or license agreements and inception-to-date sold units. We have combined the presentation of our Table Master, Rapid and Vegas Star products as Electronic Wagering Seats or multi-terminal gaming seats. Due to their modular design, both the Rapid and Vegas Star products are best analyzed based upon number of seats sold. As our Table Master is a fixed five seat station, we have converted units into five seats rather than one unit. We believe that Installed Unit Base is an important gauge of segment performance because it measures historical market placements of leased and sold units and it provides insight into potential markets for service and next-generation products.  Some sold units may no longer be in use by our casino customers or may have been replaced by other

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models or products. Accordingly, we are unable to determine precisely the number of units currently in active use.

Segment operating income includes revenues 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 share-based compensation expense, and manufacturing overhead. Corporate general and administrative expenses are not allocated to segments.

UTILITY PRODUCTS SEGMENT OPERATING RESULTS

	Three Months Ended April 30,						Increase				Percentage
	2006			2005			(Decrease)				Change
Utility Products segment revenue
Lease	$	6,084		$	5,873			$	211			3.6	%
Sales—Shuffler	15,138			9,207				5,931				64.4	%
Sales—Chipper	463			929				(466		)		(50.2	)%
Service and other	1,930			1,375				555				40.4	%
Total sales and service	17,531			11,511				6,020				52.3	%
Total Utility Products segment revenue	$	23,615		$	17,384			$	6,231			35.8	%
Utility Products segment operating income	$	12,756		$	7,687			$	5,069			65.9	%
Utility Products segment operating margin	54.0		%	44.2		%
Shufflers installed base (end of period)
Lease units	4,630			4,768				(138		)		(2.9	)%
Sold units, inception-to-date
Beginning of quarter	14,580			11,583				2,997				25.9	%
Sold during quarter	1,293			777				516				66.4	%
Less trade-ins and exchanges	(135		)	(80		)		(55		)		68.8	%
End of quarter	15,738			12,280				3,458				28.2	%
Total installed base	20,368			17,048				3,320				19.5	%
Chipper installed base (end of period)
Lease units	10			2				8				400.0	%
Sold units, inception-to-date
Beginning of quarter	273			—				273				100.0	%
Sold during quarter	14			31				(17		)		(54.8	)%
Subtotal	287			31				256				825.8	%
Total installed base	297			33				264				800.0	%

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Utility Products segment revenue is derived substantially from our shuffler product line and secondarily from our chipper product. Revenue from our non-automated Bloodhound product is not material for the periods presented and our automated Bloodhound and ITS products remain in the development stage.

For the three months ended April 30, 2006, Utility Products segment revenue increased 35.8%, compared to the same prior year period, primarily due to a 52.3% increase in Utility Products sales and service revenue. Additionally, Utility Products lease revenue increased 3.6% compared to the same prior year period.

The increase in Utility Products lease revenue for the three months ended April 30, 2006, compared to the same prior year period, primarily reflects:

·An increase in average monthly lease price of $428 as compared to $422 in the prior year period.

·A shift in product mix from lower average lease price models to higher average lease price models. Placements in the quarter were predominately our third generation shuffler products, including the Deck Mate®, one2sixTM and MD2® shufflers.

·The net shuffler leased units declined slightly over the prior year period. This decrease is consistent with Management’s strategy to convert leased second generation shufflers to sold units, predominantly the ACE shuffler, in anticipation of introducing the next generation specialty table game shuffler, and Deck Mate and MD2 shufflers. Net shuffler lease activity includes the conversion of 252 leased units to sold units in the current period and 247 leased units to sold units in the prior year period. Shuffler conversions for the same prior year period were comprised primarily of ACE, MD2 and Deck Mate shufflers.

The increase in Utility Products sales and service revenue for the three months ended April 30, 2006, compared to the same prior year period primarily reflects:

·A net increase of 461 shuffler units sold from 697 to 1,158; a 66.1% increase.

·The increase in sold shuffler units was comprised primarily of additional sales of MD2, one2six and Deck Mate shufflers of 420, 384 and 251, respectively, in the current quarter compared to 117, 173 and 223, respectively, in the prior year quarter. Further, approximately 14% of worldwide shuffler sales and 22% of domestic shufflers sales represented replacement of older generation shufflers.

·Record sales of the MD2 shufflers contributing $5,100 in revenue for the three months ended April 30, 2006 as compared to $1,350 in the prior year comparable period.

·A decline in Easy Chipper unit sales of 14 units as compared to 31 units sold for the same prior year period. The decrease primarily resulted from a 29 unit sale in the three months ended April 30, 2005 which did not exist in the three months ended April 30, 2006.

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Utility Products segment operating income and operating margin for the three months ended April 30, 2006, increased 65.9% and 9.8%, respectively, compared to the same prior year period, primarily due to greater sales volume of our shuffler business. This increase was partially offset by a larger percentage of one2six shuffler sales, which carries a lower gross margin due to amortization expense related to the acquired CARD products. Amortization expense associated with one2six shuffler and Easy Chipper cost of sales and leases was $863 for the three months ended April 30, 2006, compared to $638 for the same prior year period.

	Six Months Ended April 30,						Increase				Percentage
	2006			2005			(Decrease)				Change
Utility Products segment revenue
Lease	$	12,094		$	11,185			$	909			8.1	%
Sales—Shuffler	26,759			15,852				10,907				68.8	%
Sales—Chipper	3,345			998				2,347				235.2	%
Service and other	3,302			2,710				592				21.8	%
Total sales and service	33,406			19,560				13,846				70.8	%
Total Utility Products segment revenue	$	45,500		$	30,745			$	14,755			48.0	%
Utility Products segment operating income	$	23,471		$	12,544			$	10,927			87.1	%
Utility Products segment operating margin	51.6		%	40.8		%
Shufflers installed base (end of period)
Lease units	4,630			4,768				(138		)		(2.9	)%
Sold units, inception-to-date
Beginning of period	13,780			11,151				2,629				23.6	%
Sold during period	2,250			1,335				915				68.5	%
Less trade-ins and exchanges	(292		)	(206		)		(86		)		41.7	%
End of period	15,738			12,280				3,458				28.2	%
Total installed base	20,368			17,048				3,320				19.5	%
Chipper installed base (end of period)
Lease units	10			2				8				400.0	%
Sold units, inception-to-date
Beginning of period	122			—				122				100.0	%
Sold during period	165			31				134				432.3	%
Subtotal	287			31				256				825.8	%
Total installed base	297			33				264				800.0	%

For the six months ended April 30, 2006, Utility Products segment revenue increased 48.0%, compared to the same prior year period, primarily due to a 70.8% increase in Utility Products sales and service revenue. Additionally, Utility Products lease revenue increased 8.1%, compared to the same prior year period.

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The increase in Utility Products lease revenue for the six months ended April 30, 2006, compared to the same prior year period, primarily reflects:

·An increase in the average monthly lease price of $420 as compared to $418 in the prior year period.

·A shift in product mix from lower average lease price models to higher average lease price models. Placements in the six month period were predominately our third generation shuffler products, including the Deck Mate®, one2sixTM and MD2® shufflers. Net shuffler lease additions include the conversion of 526 leased units to sold units in the current period and 380 leased units to sold units in the prior year period. Shuffler conversions for the current period were comprised primarily of second generation ACE® shufflers, in anticipation of introducing the next generation specialty table game shuffler, and Deck Mate and MD2 shufflers. Shuffler conversions for the same prior year period were comprised primarily of ACE, MD2 and Deck Mate shufflers.

The increase in Utility Products sales and service revenue for the six months ended April 30, 2006, compared to the same prior year period primarily reflects:

·A net increase of 829 shuffler units sold; from 1,129 to 1,958.

·The increase in sold shuffler units was comprised primarily of additional sales of Deck Mate, one2six and MD2 shufflers of 625, 604 and 580, respectively, in the current period compared to 329, 370 and 177, respectively, in the same prior year period. Further, approximately 17% of domestic shuffler sales in the current period represented replacements of older generation shufflers.

·For the six months ended April 30, 2006, we sold 165 Easy Chipper units, compared to 31 units sold for the same prior year period. For the six months ended April 30, 2006, total revenue contribution from the Easy Chipper was approximately $3,277 as compared to $859 in the prior year period.

Utility Products segment operating income and operating margin for the six months ended April 30, 2006, increased 87.1% and 10.8%, respectively, compared to the same prior year period, primarily due to greater sales volume of our shuffler business and increased sales of the Easy Chipper product. This increase was partially offset by a larger percentage of one2six shuffler sales and Easy Chipper sales, which carry a lower gross margin due to amortization expense related to these acquired CARD products. Amortization expense associated with one2six shuffler and Easy Chipper cost of sales and leases was $1,711 for the six months ended April 30, 2006, compared to $1,233 for the same prior year period.

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ENTERTAINMENT PRODUCTS SEGMENT OPERATING RESULTS

	Three Months Ended April 30,						Increase				Percentage
	2006			2005			(Decrease)				Change
Entertainment Products segment revenue
Royalties and leases—Table games	$	6,123		$	6,043			$	80			1.3	%
Royalties and leases—Multi-Terminal Gaming	341			73				268				367.1	%
Royalties and leases—EGMs	—			—				—				100.0	%
Other	11			27				(16		)		(59.3	)%
Total royalties and leases	6,475			6,143				332				5.4	%
Sales—Table games	1,697			3,074				(1,377		)		(44.8	)%
Sales—Multi-Terminal Gaming	5,433			467				4,966				1,063.4	%
Sales—EGMs	2,879			—				2,879				100.0	%
Service and other	3,168			58				3,110				5,362.1	%
Total sales and service revenue	13,177			3,599				9,578				266.1	%
Total Entertainment Products segment revenue	$	19,652		$	9,742			$	9,910			101.7	%
Entertainment Products segment operating income (loss)	$	(9,489	)	$	7,532			$	(17,021	)		(226.0	)%
Entertainment Products segment operating margin	(48.3		)%	77.3		%
Entertainment Products segment operating income (loss) excluding IPR&D expense	$	9,656		$	7,532			$	2,124			28.2	%
Entertainment Products segment operating margin excluding IPR&D expense	49.1		%	77.3		%
Table games installed base (end of period)
Royalty units	2,952			2,688				264				9.8	%
Sold units, inception-to-date
Beginning of quarter	833			563				270				48.0	%
Sold during quarter	31			70				(39		)		(55.7	)%
Subtotal	864			633				231				36.5	%
Total installed base	3,816			3,321				495				14.9	%
Multi-Terminal Gaming Products installed base (end of period)
Lease seats	214			75				139				185.3	%
Sold seats, inception-to-date
Beginning of quarter	440			100				340				340.0	%
Sold during quarter	249			25				224				896.0	%
Stargames acquired base	3,025			—				3,025				100.0	%
Subtotal	3,714			125				3,589				2,871.2	%
Total installed base	3,928			200				3,728				1,864.0	%
EGMs installed based (end of period)
Lease units	—			—				—				0.0	%
Sold units, inception-to-date
Beginning of quarter	—			—				—				0.0	%
Sold during quarter	281			—				281				100.0	%
Stargames acquired base	14,672			—				14,672				100.0	%
Subtotal	14,953			—				14,953				100.0	%
Total installed base	14,953			—				14,953				100.0	%

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For the three months ended April 30, 2006, Entertainment Products segment revenue increased 101.7%, compared to the same prior year period. The increase was primarily due to the $10,700 contribution from Stargames. This increase was partially offset by a decrease in lifetime license sales.

The 5.4% increase in Entertainment Products royalty and lease revenue for the three months ended April 30, 2006, compared to the same prior year period, primarily reflects:

·A net increase of 264 table game royalty units on lease.

·The increase in net table game lease additions comprised primarily of unit increases in Ultimate Texas Hold’em, Four Card Poker, Fortune Pai Gow Poker, Dragon Bonus®, and our more recently acquired games. Additionally, effective January 1, 2006, we increased the monthly lease rate for Three Card Poker, which benefited the quarter. The table game royalty unit increases were offset by the conversion of 26 royalty units to lifetime license sales, consisting primarily of Three Card Poker which currently yields higher average monthly royalty rates than our more recent game introductions. These conversions are consistent with our replacement sale strategy of selling our older proprietary table games to allow access to expanded casino floor space for our newer table game introductions. Prior period conversions totaled 67 royalty units and consisted primarily of Three Card Poker and Let It Ride.

·A net increase of 139 Multi-Terminal Gaming product seats on lease from 75 to 214 seats.

The increase in Entertainment Products sales and service revenue for the three months April 30, 2006, compared to the same prior year period is primarily attributed to the $10,700 revenue contribution of Stargames. Stargames contributed the following during the three months ended April 30, 2006:

·An acquired installed base of 3,025 Rapid and Vegas Star seats

·An acquired installed base of 14,672 Electronic Gaming Machines

·Additions of Rapid and Vegas Star seats of 222

·Additions of EGMs of 281 seats

Entertainment Products segment operating income, excluding IPR&D, for the three months ended April 30, 2006, increased compared to the same prior year period. The decreases in operating margin for the three months ended April 30, 2006, as compared to the same prior year period were due to lower lifetime license sales in the current period which typically has a favorable impact on margin dollars and our Table Master products have overall lower margins than our other table game products. Additionally, the products contributed by Stargames have a lower operating margin than the traditional entertainment product.

As discussed earlier, we recognized a one-time charge related to IPR&D of $19,145 related to the acquisition of Stargames.  All of the products acquired from Stargames have been classified as Entertainment products and accordingly, the Entertainment segment results for the three months ended April 30, 2006, include the impact of the IPR&D charge of $19,145.

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Entertainment Products Segment Operating Results

	Six Months Ended
	April 30,						Increase				Percentage
	2006			2005			(Decrease)				Change
Entertainment Products segment revenue
Royalties and leases—Table games	$	12,051		$	12,109			$	(58	)		(0.5	)%
Royalties and leases—Multi-Terminal Gaming	662			139				523				376.3	%
Royalties and leases—EGMs	—			—				—				100.0	%
Other	17			43				(26		)		(60.5	)%
Total royalties and leases	12,730			12,291				439				3.6	%
Sales—Table games	4,715			8,331				(3,616		)		(43.4	)%
Sales—Multi-Terminal Gaming	7,615			926				6,689				722.4	%
Sales—EGMs	2,879			—				2,879				100.0	%
Service and other	3,136			154				2,982				1,936.4	%
Total sales and service revenue	18,345			9,411				8,934				94.9	%
Total Entertainment Products segment revenue	$	31,075		$	21,702			$	9,373			43.2	%
Entertainment Products segment operating income (loss)	$	(1,501	)	$	17,156			$	(18,657	)		(108.7	)%
Entertainment Products segment operating margin	(4.8		)%	79.1		%
Entertainment Products segment operating income (loss) excluding IPR&D expense	17,644			17,156				$	488			2.8	%
Entertainment Products segment operating margin excluding IPR&D expense	56.8		%	79.1		%
Table games installed base (end of period)
Royalty units	2,952			2,688				264				9.8	%
Sold units, inception-to-date
Beginning of period	768			365				403				110.4	%
Sold during period	96			268				(172		)		(64.2	)%
Subtotal	864			633				231				36.5	%
Total installed base	3,816			3,321				495				14.9	%
Multi-Terminal Gaming Seats installed base (end of period)
Lease seats	214			75				139				185.3	%
Sold seats, inception-to-date
Beginning of period	310			75				235				313.3	%
Sold during period	379			50				329				658.0	%
Stargames acquired base	3,025			—				3,025				100.0	%
Subtotal	3,714			125				3,589				2,871.2	%
Total installed base	3,928			200				3,728				1,864.0	%
EGMs installed based (end of period)
Lease seats	—			—				—				0.0	%
Sold seats, inception-to-date
Beginning of period	—			—				—				0.0	%
Sold during period	281			—				281				100.0	%
Stargames acquired base	14,672			—				14,672				100.0	%
Subtotal	14,953			—				14,953				100.0	%
Total installed base	14,953			—				14,953				100.0	%

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For the six months ended April 30, 2006, Entertainment Products segment revenue increased 43.2%, compared to the same prior year period primarily due to the $10,700 revenue contribution of Stargames. The results for the six months ended April 30, 2006, for Stargames are consistent with the three months ended April 30, 2006 as the acquisition was complete on February 1, 2006. These increases were partially offset by decreases in lifetime license sales, which were partially offset by increases in revenue related to our Table Master products.

The increase in Entertainment Products royalty and lease revenue for the six months ended April 30, 2006, compared to the same prior year period, primarily reflects:

·A net increase of 264 table game royalty units on lease.

·The increase in net table game lease additions comprised primarily of unit increases in Ultimate Texas Hold’em, Fortune Pai Gow Poker, Dragon Bonus®, and our more recently acquired games. Additionally, effective January 1, 2006, we increased the monthly lease rate for Three Card Poker, which partially benefited the six month period. The table game royalty unit increases were offset by the conversion of 86 royalty units to lifetime license sales, consisting primarily of Three Card Poker and Let It Ride which currently yields higher average monthly royalty rates than our more recent game introductions. These conversions are consistent with our replacement sale strategy of selling our older proprietary table games to allow access to expanded casino floor space for our newer table game introductions. Prior period conversions totaled 263 royalty units and consisted primarily of Three Card Poker and Let It Ride.

As discussed above, the increase in Entertainment Products sales and service revenue for the six months ended April 30, 2006, compared to the same prior year period is primarily attributed to the Stargames contribution offset by decreases in lifetime license sales.

Entertainment Products segment operating income, excluding IPR&D, for the six months ended April 30, 2006, increased compared to the same prior year period. The decreases in operating margin for the six months ended April 30, 2006 as compared to the prior year period were due to lower lifetime license sales in the current period which typically has a favorable impact on margin dollars and our Table Master products have overall lower margins than our other table game products. Additionally, the products contributed by Stargames have a lower operating margin than the traditional Entertainment product.

As discussed earlier, we recognized a one-time charge related to IPR&D of $19,145 related to the acquisition of Stargames. All of the products acquired from Stargames have been classified as Entertainment products and accordingly, the Entertainment segment results for the six months ended April 30, 2006, include the impact of the IPR&D charge of $19,145.

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REVENUE BY GEOGRAPHIC AREA

The following provides financial information concerning our revenues by geographic area for the three and six months ended April 30, 2006:

	Three Months Ended								Six Months Ended
	April 30, 2006				April 30, 2005				April 30, 2006				April 30, 2005
Revenue:
United States	$	21,493	49.6	%	$	20,732	76.4	%	$	45,374	59.2	%	$	40,564	77.3	%
Canada	2,885		6.7	%	1,787		6.6	%	4,087		5.3	%	2,621		5.0	%
Other North America	913		2.1	%	465		1.7	%	1,790		2.3	%	920		1.8	%
Europe	1,604		3.7	%	1,511		5.6	%	4,099		5.3	%	5,323		10.1	%
Australia	9,896		22.9	%	964		3.6	%	10,268		13.4	%	1,176		2.2	%
Asia	6,373		14.7	%	1,548		5.7	%	10,674		13.9	%	1,557		3.0	%
Other	139		0.3	%	121		0.4	%	328		0.4	%	337		0.6	%
	$	43,303	100.0	%	$	27,128	100.0	%	$	76,620	100.0	%	$	52,498	100.0	%

Revenues by geographic area are determined based on the location of our customer. For the three and six months ended April 30, 2006, sales to customers outside the United States accounted for 50.4% and 40.8%, respectively, of consolidated revenue, compared to 23.6% and 22.7%, respectively, for the comparable prior year periods. The period-over-period increase in sales to customers outside the United States is primarily attributed to our increased penetration into the Asia market and the contributions from our recent acquisition of Stargames in Australia. Going forward, including the Stargames acquisition, we expect our international revenues to continue to grow, particularly in the Pacific Rim region.

DISCONTINUED OPERATIONS

Slot Products Operations

In December 2003, our board of directors approved and we committed to a plan to divest our North America slot products operations and assets, based on our determination that this product line was no longer a strategic fit with our refocused core business strategy of providing products and services for the table game area of casinos. Revenues and costs associated with our slot products are reported as discontinued operations for all periods presented. In January 2004, we entered into agreements pursuant to which we sold substantially all of our slot products’ assets and substantially completed our divestiture plans. Discontinued operations consisted of the following:

	Three Months Ended April 30,							Six Months Ended April 30,
	2006			2005				2006			2005
Revenues		$	19		$	61		$	39		$	160
Income from operations before tax		$	14		$	25		$	15		$	89
Income tax expense		5			(9		)	5			(31		)
Net income from operations		19			16			20			58
Gain on sale of slot assets		—			—			208			2
Income tax expense		—			—			(74		)	(1		)
Gain on sale of slot assets, net		—			—			134			1
Discontinued operations, net		$	19		$	16		$	154		$	59

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PVS

Professional Vending Services Pty Ltd (“PVS”), a wholly-owned subsidiary of Stargames, designs, develops, and manufactures automatic vending machines. PVS offers exclusive equipment in all main vending segments including snacks, cold drinks, food (hot and cold), coffee and cigarettes. We have determined that the operations of PVS are non-core to our gaming Entertainment and Utility segments. Accordingly, we have entered into a preliminary agreement to sell our equity interests including settlement of all existing liabilities of PVS. The results of operations for PVS will be included in Discontinued Operations until the disposition is complete. Discontinued operations consisted of the following:

	Three Months Ended April 30, 2006
Revenue		$	693
Loss from operations before tax		(150		)
Benefit for income taxes		43
Net loss		(107		)

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LIQUIDITY AND CAPITAL RESOURCES
 (In thousands, except ratios and per share amounts)

Our primary historical source of liquidity and capital resources has been cash flow generated by our profitable operations. We use cash to fund growth in our operating assets, including accounts receivable, inventory, sales-type leases and notes receivable and to fund new products through both research and development and strategic acquisition of businesses and intellectual property.  In April 2004, we obtained additional capital resources, through the issuance of $150,000 of Notes. Additionally, in January 2006, we entered into a credit agreement among the Company, Deutsche Bank AG Cayman Islands Branch as Lender, Deutsche Bank AG New York Branch as Administrative Agent and Deutsche Bank Securities Inc. as Sole Arranger and Book Manager (the “Credit Agreement”). The Credit Agreement provided for a bridge loan (the “Bridge Loan”) in the amount of $115,000. The proceeds of this Bridge Loan were used to finance the acquisition of Stargames.

LIQUIDITY

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

	April 30, 2006			October 31, 2005			Increase (Decrease)				Percentage Change
Cash, cash equivalents, and investments	$	33,925			$	34,088		$	(163	)		(0.5	)%
Working capital	$	(22,054	)		$	57,634		(79,688		)		(138.3	)%
Current ratio	0.8				4.4			(3.6		)		(81.0	)%

The Bridge Loan is due to mature July 24, 2006, accordingly it has been classified in current liabilities. This current maturity results in negative working capital. Management intends and believes it has the ability, to refinance the Bridge Loan on a long-term basis. Financing options currently under consideration, include, but are not limited to (i) an extension of the existing Credit Agreement, (ii) a senior secured bank credit facility or (iii) convertible or other debt to be issued by private placement pursuant to Rule 144A under the Securities Act of 1933. The decrease in the current ratio is also impacted by the short-term bridge financing. Excluding the short-term bridge financing of $100,000, the current ratio was approximately 3.3 as of April 30, 2006.

Cash flows.

Operating Activities—Significant items included in cash flows from operating activities are as follows:

	Six Months Ended April 30,						Increase				Percentage
	2006			2005			(Decrease)				Change
Income (loss) from continuing operations	$	(5,414	)	$	12,908			$	(18,322	)		(141.9	)%
Non-cash items	30,411			6,134				24,277				395.8	%
Income tax related items	(3,827		)	7,309				(11,136		)		(152.4	)%
Investment in sales-type leases and note receivable	(181		)	(5,238		)		5,057				(96.5	)%
Other changes in operating assets and liabilities	(8,598		)	(2,009		)		(6,589		)		328.0	%
Slot-sale related items:
Discontinued operations, net of tax	47			59				(12		)		(20.3	)%
Cash flow provided by operating activities	$	12,438		$	19,163			$	(6,725	)		(35.1	)%

·Non-cash items are comprised of depreciation and amortization, share-based compensation expense, provision for bad debts, and provision for inventory obsolescence. The increase in non-cash items for the six months ended April 30, 2006, is substantially due to a charge for in-process research and development related to the Stargames acquisition of $19,145 and share-based

44

compensation of $2,546 for the six months ended April 30, 2006, compared to $0 and $305 in the same prior year period. Additionally, amortization of intangible assets acquired from Stargames, BTI and CARD was $4,021 and $2,958 for the six months ended April 30, 2006 and 2005, respectively.

·Income tax related items include deferred income taxes, tax benefit from stock option exercises, prepaid income taxes and is net of excess tax benefit from stock option exercises.

·We utilize sales-type leases and notes receivable as a means to provide financing alternatives to our customers. It is our intent to continue offering a variety of financing alternatives, including sales, sales-type leases and notes receivable, and operating leases, to meet our customers’ product financing needs, which may vary from quarter to quarter.  We expect that some of our customers will continue to choose sales-type leases and notes receivable as their preferred method of purchasing our products. The volume of sales-type leases and notes receivable in any period may fluctuate, largely due to our customers’ preferences.

·Other changes in operating assets and liabilities primarily consisted of net changes in accounts receivable, inventories, and accounts payable and accrued liabilities.

Investing Activities—Significant items included in cash flows from investing activities are as follows:

	Six Months Ended April 30,						Increase			Percentage
	2006			2005			(Decrease)			Change
Net purchases of investments	$	6,028		$	(305	)	$	6,333			(2,076.4	)%
Capital expenditures	(4,892		)	(7,803		)	2,911				(37.3	)%
Proceeds from sale of leased assets	628			—			628				100.0	%
Acquisition of Stargames, net of cash acquired	(114,337		)	—			(114,337		)		100.0	%
Other	—			(3,416		)	3,416				(100.0	)%
Cash flow used by investing activities	$	(112,573	)	$	(11,524	)	$	(101,049	)		876.9	%

·Net purchases of investments consist primarily of a $3,000 equity method investment related to Sona Mobile Holdings Corp. and the net of proceeds from the sale and maturities of investments of $3,028.

·Capital expenditures include purchases of product for lease, property and equipment, and intangible assets.

·During the six months ended April 30, 2005, we posted a security deposit of $3,000 related to a preliminary injunction that we were granted by a judicial court.

Financing Activities—Significant items included in cash flows from financing activities are as follows:

	Six Months Ended April 30,						Increase			Percentage
	2006			2005			(Decrease)			Change
Repurchases of common stock	$	—		$	(15,256	)	$	15,256			(100.0	)%
Proceeds from stock option exercises, net	5,710			4,835			875				18.1	%
Proceeds from bridge financing, net of issue costs	114,719			—			114,719				100.0	%
Proceeds from other borrowings	5,085			—			5,085				100.0	%
Excess tax benefit from stock option exercises	2,371			—			2,371				100.0	%
Payments of long-term liabilities	(18,402		)	(1,736		)	(16,666		)		960.0	%
Cash flow provided (used) by financing activities	$	109,483		$	(12,157	)	$	121,640			(1,000.6	)%

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·During the six months ended April 30, 2006, no shares of our common stock were repurchased, compared to 558 shares of our common stock at an average price of $27.36 for the same prior year period.

·Our employees and directors exercised 490 options during the six months ended April 30, 2006, at an average exercise price of $11.65 per share, compared to 723 options at an average exercise price of $6.57 per share during the same prior year period.

·We received $114,719 proceeds, net of debt issuance costs, from bridge financing used for the Stargames acquisition.

·With the adoption of SFAS 123R the benefit of tax deductions in excess of the compensation cost recognized for those options are classified as financing cash inflows rather than operating cash inflows.

·During the six months ended April 30, 2006, we paid $15,000 on the bridge financing and made installment payments of $2,609 for the ENPAT note payable and $820 for BTI liabilities.

On January 25, 2006, we entered into a Credit Agreement with Deutsche Bank AG Cayman Islands Branch, as Lender, Deutsche Bank AG New York Branch, as Administrative Agent, and Deutsche Bank Securities Inc., as Sole Arranger and Book Manager (the “Credit Agreement”), pursuant to which we obtained a bridge loan (the “Bridge Loan”) in the amount of $115,000, in order to finance the acquisition of Stargames. On April 24, 2006, we entered into Amendment No. 1 (the “Amendment”) to the Credit Agreement. The Amendment extended the maturity date for the Bridge Loan to July 24, 2006. The outstanding principal balance on the Bridge Loan as of April 30, 2006 was $115,000; the outstanding balance on the Bridge Loan as of June 8, 2006 was $90,000.

Management intends and believes it has the ability, to refinance the Bridge Loan on a long-term basis. Financing options currently under consideration, include, but are not limited to (i) an extension of the existing Credit Agreement, (ii) a senior secured bank credit facility or (iii) convertible or other debt to be issued by private placement pursuant to Rule 144A under the Securities Act of 1933.

CAPITAL RESOURCES

Excluding any significant acquisitions of businesses, and assuming we are successful in obtaining permanent financing related to our recent acquisition of Stargames, 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 the foreseeable future. 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. Under our existing board authorizations, during the six months ended April 30, 2006, no shares of our common stock were repurchased compared to 558 shares of our common stock repurchased for a total cost of $15,256 at an average price of $27.36 for the same prior year period. As of April 30, 2006, $8,831 remained outstanding under our board authorizations. We cancel shares that we repurchase.

The timing of our repurchases of our common stock 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. Alternatives that we

46

consider as possible uses of our capital resources include investment in new products, acquisitions, principle payments on our Bridge Loan, funding of internal growth in working capital, and investments in sales-type leases and notes receivable.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

Except for the bridge loan discussed elsewhere, 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, 2005.  We do not have material off-balance sheet arrangements.

INDEBTEDNESS

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.

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

47

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.

Bridge loan.On January 25, 2006, we entered into a Credit Agreement with Deutsche Bank AG Cayman Islands Branch, as a Lender, Deutsche Bank AG New York Branch, as Administrative Agent, and Deutsche Bank Securities Inc., as Sole Arranger and Book Manager (the “Credit Agreement”), pursuant to which we obtained a bridge loan (the “Bridge Loan”) in the amount of $115,000, in order to finance the acquisition of Stargames. On April 24, 2006, we entered into Amendment No. 1 (the “Amendment”) to the Credit Agreement. The Amendment extended the maturity date for the Bridge Loan to July 24, 2006 and we have agreed to use our commercially reasonable efforts to secure the loan extended under the Credit Agreement. The interest rate under the Credit Agreement 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 Bridge Loan is currently unsecured. The obligations under the Bridge Loan 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 January 25, 2006, if any. The Credit Agreement contains customary affirmative and negative covenants for transactions of this nature, including but not limited to restrictions and limitations on the following:

·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; and

·Agreements to restrict dividends and other payments from subsidiaries.

As of April 30, 2006, we were in compliance with all of the affirmative and negative covenants pursuant to the Credit Agreement. Additional information on these covenants may be found in Section 7 and Section 8 of the Credit Agreement included in our Current Report on Form 8-K, dated January 25, 2006. The current outstanding principal balance on the Bridge Loan as of April 30, 2006 was $100,000. The outstanding principal balance has been reduced to $90,000 as of June 8, 2006.

Management intends and believes it has the ability, to refinance the Bridge Loan on a long-term basis. Financing options currently under consideration, include, but are not limited to (i) an extension of the existing Credit Agreement, (ii) a senior secured bank credit facility or (iii) convertible or other debt to be issued by private placement pursuant to Rule 144A under the Securities Act of 1933.

Total debt issuance costs incurred with the issuance of long-term debt and the Bridge Loan are capitalized and amortized as interest expense using the effective interest method. Amortization of debt issuance costs were $634 and $240 for the three months ended April 30, 2006 and 2005, respectively, and $892 and $482 for the six months ended April 30, 2006, and 2005, respectively. Unamortized debt issuance costs of $2,848 as of April 30, 2006, are included in Other Assets on the condensed consolidated balance sheet.

Stargames credit facility.   Stargames has banking facilities with the Australia and New Zealand Banking Group (“ANZ”).  The facilities have a borrowing capacity of AU $12,700; amounts outstanding as of April 30, 2006 were AU $8,514 or US $6,472. The banking facilities are comprised of two main components; a flexible bank overdraft that acts as a working capital facility and a bank loan facility which is

48

an interchangeable facility comprised of commercial bills, overdrafts and advances.  There were no amounts outstanding on the bank overdraft facility as of April 30, 2006 which amounts, if borrowed, would be based on the reference rate, as defined, plus 0.25%. The US $6,472 amount outstanding is under the bank loan facility which carries a weighted average interest rate of 5.98% as of April 30, 2006.  Interest rates are based on the bank bill swap yield, as defined, plus a margin.

The facilities are secured by a cross guarantee and indemnity between all the operating entities of the Stargames group.  The agreements provide for collateralization of all the assets and operations of all members of the Stargames group as well as the operating facilities of Stargames based in Milperra, NSW Australia.

The facilities include certain financial covenants which are tested annually by ANZ at the end of each financial year.  These financial covenants include a minimum working capital ratio, a minimum ratio of net profit, as defined, to interest expense and minimum liabilities to equity ratio. As of June 30, 2005, the most recent date of review, Stargames was in compliance with all financial covenants. The facilities are subject to the next compliance assessment as of October 31, 2006.

BTI liabilities.   In connection with our acquisition of certain assets from BTI, 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, 2006, was $5,347.

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, 2006, of $5,557 represents the discounted present value of the future payments, including imputed interest of approximately $118. The remaining principal and interest payments of $3,000 each are due in December 2006 and 2007.

Bet the Set “21” contingent consideration.In connection with our acquisition of Bet the Set “21”, we recorded contingent consideration of $560. The contingent consideration 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, 2006, was $542.

VIP note payable.In connection with our acquisition of VIP in August 2005, we recorded a note payable with annual installments due each July through 2010. The balance of this liability as of April 30, 2006 was $323.

Spur Gaming Systems.Effective August 1, 2005, we purchased certain assets from SPUR, a privately held corporation that develops and distributes table games and related products to casinos throughout North America. Pursuant to a separate consulting agreement, consulting fees payable to SPUR in the amount of $25 per year, commencing on the closing date or August 1, 2005, and continuing for a period of five years, for a maximum of $125.

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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; amortization, depreciation, and valuation of long-lived tangible and intangible assets; inventory obsolescence and costing methods; provisions for bad debts; accounting for share-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.

We believe that the following accounting policies and related estimates are critical to the preparation of our consolidated financial statements.

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

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

·shipment has occurred or services have been rendered,

·the price is fixed or determinable, and

·collectibility is reasonably assured.

Specifically, we earn our revenue in a variety of ways. We offer our products for lease or sale. We also sell service and warranty contracts for our sold equipment. Proprietary table games are sold under lifetime licensing agreements or licensed on a monthly or daily fee basis.

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

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

Some of our revenue arrangements contain multiple deliverables, such as a product sale combined with a service element or the delivery of a future product.  If an arrangement requires the delivery or performance of multiple elements, we recognize the revenue separately for each element only if the delivered item has stand-alone value to the customer and the fair value of the undelivered item can be reliably determined. If these criteria are not met, we do not recognize revenue until all essential elements have been delivered.

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Some of our sales are made through distributorships, particularly for sales in our international markets. We evaluate these sales for proper revenue recognition by evaluating, among other factors, the following, which, if present, might indicate that an arrangement represents a consignment of inventory rather than a sale:

·the distributor pays us only if the product is ultimately sold to the end customer,

·the sale is completely financed by us,

·we dictate the number of units and type purchased by the distributor under a “quota” system,

·we take a very active interest in the internal management of the distributor,

·we have taken over many of our distributorships as a result of the distributor’s failure to pay for or sell previously delivered products, and

·extended payment terms are granted that are substantially different from those given to normal customers.

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

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

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

·Whether the development and production costs of the software as a component of the cost of the product is incidental (as defined in SFAS 86).

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

Based on such guidance we have concluded that 1) the software associated with our shuffler and chipper products is incidental to the product as a whole and therefore is outside of the scope of SOP 97-2. We have determined that our Table Master, Vegas Star, Rapid and Electronic Gaming Machine products are subject to the provisions of SOP 97-2 and accordingly, revenue is recognized when all of the following criteria have been met:

·Evidence of an arrangement exists;

·Delivery has occurred or ownership rights have passed;

·The fee is fixed or determinable and;

·Collectibility is probable

If the installation of the product is not considered inconsequential and perfunctory, then we defer revenue recognition until installation is complete.

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Business Combinations.

We account for business combinations in accordance with Statement of Financial Accounting Standards No. 141, “Accounting for Business Combinations” (“SFAS 141”) and Statement of Financial Accounting Standards No. 142, “Accounting for Goodwill and Other Intangible Assets” (“SFAS 142”), and related interpretations. SFAS 141 requires that we record the net assets of acquired businesses at fair value, and we must make estimates and assumptions to determine the fair value of these acquired assets and assumed liabilities.

In determining the fair value of acquired assets and assumed liabilities in the Stargames acquisition, we hired third-party valuation specialists to assist us with certain fair value estimates, primarily related to intangible assets, including IPR&D, developed technology, tradename and customer relationships, as well as land, property and equipment. We and the third-party specialists applied significant judgment and utilized a variety of assumptions in determining the fair value of acquired assets and liabilities assumed, and in-process research and development, including market data, estimated future cash flows, growth rates, current replacement cost for similar capacity for certain fixed assets, market rate assumptions for contractual obligations and settlement plans for contingencies and liabilities.

The Stargames purchase price allocation is preliminary and may be adjusted for up to one year after the acquisition.  Changes to the assumptions we used to estimate fair value could impact the recorded amounts for acquired assets and assumed liabilities and significant changes to these balances could have a material impact to our future reported results. For instance, lower or higher fair values assigned to in-process research and development and certain amortizable intangible assets could result in lower or higher amounts of income statement charges.

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

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

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

We review our goodwill and indefinite-lived intangibles for impairment in October annually using a two step impairment test. The review is performed at the reporting unit level, which we have determined is the equivalent to our reportable segments.  In the first step, we estimate the fair value of the reporting unit and compare it to the book value of the reporting unit, including its goodwill. If the fair value is less than the book value, then we would perform a second step to compare the implied fair value of the reporting unit’s goodwill to its book value. The implied fair value of the goodwill is determined based on the

52

estimated fair value of the reporting unit less the fair value of the reporting unit’s identifiable assets and liabilities. We would record an impairment charge to the extent that the book value of the reporting unit’s goodwill exceeds its fair value.

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

Inventory Obsolescence and Costing Methods.We value our inventory at the lower of cost, determined on a first-in-first-out basis, or market and estimate a provision for obsolete or unsalable inventories based on assumptions about the future demand for our products and market conditions. If future demand and market conditions are less favorable than our assumptions, additional provisions for obsolete inventory could be required. Likewise, favorable future demand could positively impact future operating results if fully-reserved-for inventory is sold.

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

Share-based Compensation.On November 1, 2005, we adopted the provisions of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard No. 123 (revised 2004) (“SFAS 123R”), “Share-Based Payment”, and SEC Staff Accounting Bulletin No. 107 (“SAB 107”), “Share-Based Payment”, requiring the measurement and recognition of all share-based compensation under the fair value method. We implemented SFAS 123R using the modified prospective transition method. We have evaluated the provisions of SFAS 123R, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards” and have elected the alternative method for establishing the APIC pool and the corresponding presentation for cash flows.

Restricted Stock—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.

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

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.

Interest rate risk.Our current investment portfolio primarily consists of fixed income and investment grade securities. Our investment policy emphasizes return of principal and liquidity and is focused on fixed returns that limit volatility and risk of principal. Because of our investment policies, the primary market risk associated with our portfolio is interest rate risk. If interest rates were to change by 10%, the net hypothetical change in fair value of our investments would be $661.

53

Contingent convertible senior notes.We estimate that the fair value of our Notes as of April 30, 2006 is $206,625. The fair value of our Notes is sensitive to changes in both our stock and interest rates. Assuming interest rates are held constant, a 10% decrease in our stock price would decrease the fair value of our Notes by $16,620. Assuming our stock price remains constant, a 10% increase in interest rates would decrease the fair value of our Notes by $540.

Foreign currency risk.We operate in numerous countries around the world. Historically, our business has been denominated in U.S. currency, and accordingly, our exposure to foreign currency risk has been immaterial. With our acquisition of CARD in May 2004 and Stargames in February 2006, our volume of business that is denominated in foreign currency will increase. As such, we expect an increase in the exposure to our cash flows and earnings that could result from fluctuations in foreign currency exchange rates. When appropriate, we may attempt to limit our exposure to changing foreign exchange rates by entering into foreign currency exchange contracts. However, as of April 30, 2006, we have not entered into any foreign currency exchange contracts.

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 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 Chief Financial Officer, evaluated the design and operating effectiveness as of April 30, 2006 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 Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of April 30, 2006. Such conclusion resulted from the identification of deficiencies that were determined to be a material weakness as reported in Item 9A of our Annual Report on Form 10-K dated February 27, 2006, and described under “Changes in Internal Control Over Financial Reporting”.

Notwithstanding management’s evaluation that our disclosure controls and procedures were not effective as of April 30, 2006, we believe that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q correctly present our financial condition, results of operations and cash flows for the periods covered thereby in all material respects.

Changes in Internal Control Over Financial Reporting

As reported in Item 9A of our Annual Report on Form 10-K dated February 27, 2006, management concluded that its internal control over financial reporting was not effective as of October 31, 2005. Such conclusion resulted from the identification of deficiencies that were determined to be a material weakness. Specifically, we did not have appropriate internal controls specific to the recognition of revenue related to the identification and communication of non-standard transactions. This included the lack of a comprehensive process to address the sales, legal and financial functions’, identification and communication, of such non-standard transactions. The controls in place were not adequate to identify and evaluate the appropriate accounting treatment for revenue transactions with non-standard terms, including extended payment terms, future commitments and establishment of reasonable assurance of collectibility that affected the timing and amount of revenue recognized. The deficiencies were concluded to be a material weakness based on the significance of the potential misstatement of the annual and interim

54

financial statements and the significance of the controls over revenue recognition to the preparation of reliable financial statements.

During our second quarter ended April 30, 2006, and subsequent thereto, we have completed certain remediation initiatives, and will continue to undertake, extensive work to remedy the material weakness described above. This includes, but is not limited to, the following remediation initiatives:

·The improvement of the contract administration process, including approval of distributor agreements, to ensure the approval and circulation of non-standard contracts, arrangements or transactions;

·Providing additional and on-going training to our finance and accounting staff (including our foreign subsidiaries) on the application of technical accounting pronouncements, especially in the area of revenue recognition. Additionally, we will provide on-going training to our sales organization to heighten the awareness of revenue recognition concepts, with emphasis on non-standard contracts; and

·Employing additional finance and accounting staff as well as adding additional qualified personnel and consultants, as necessary, to further assist in the remediation and monitoring of internal control deficiencies.

While management believes significant progress has been made regarding the implementation of these initiatives, additional procedures and further evaluation are on-going. Remediation of the material weakness identified at October 31, 2005, remains a priority for us during fiscal 2006.

Except for the remediation initiatives with respect to the material weakness described above, there have been no changes in our internal control over financial reporting that occurred during our fiscal quarter ended April 30, 2006, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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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.

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

ITEM 1A.RISK FACTORS

Forward Looking Statements

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 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,” “might,” “may,” “could,” “will” and similar expressions or the negative thereof, as they relate to us or our management, identify forward-looking statements.

Forward-looking statements reflect and are subject to risks and uncertainties that could cause actual results to differ materially from expectations. Risk factors that could cause actual results to differ materially from expectations include, but are not limited to, the following:

·changes in the level of consumer or commercial acceptance of our existing products and new products as introduced;

·increased competition from existing and new products for floor space in casinos;

·acceleration and/or deceleration of various product development, promotion and distribution schedules;

·product performance issues;

·higher than expected manufacturing, service, selling, legal, administrative, product development, promotion and/or distribution costs;

·changes in our business systems or in technologies affecting our products or operations;

·reliance on strategic relationships with distributors and technology and manufacturing vendors;

·current and/or future litigation, claims and costs or an adverse judicial finding;

56

·tax matters including changes in tax legislation or assessments by taxing authorities;

·acquisitions or divestitures by us or our competitors of various product lines or businesses and, in particular, integration of businesses that we may acquire;

·changes to our intellectual property portfolio, such as the issuance of new patents, new intellectual property licenses, loss of licenses, claims of infringement or invalidity of patents;

·regulatory and jurisdictional issues (e.g., technical requirements and changes, delays in obtaining necessary approvals, or changes in a jurisdiction’s regulatory scheme or approach, etc.) involving us and our products specifically or the gaming industry in general;

·general and casino industry economic conditions;

·the financial health of our casino and distributor customers, suppliers and distributors, both nationally and internationally;

·our ability to meet debt service obligations and to refinance our indebtedness, including our senior convertible notes and our bridge loan, which will depend on our future performance and other conditions or events and will be subject to many factors that are beyond our control;

·various risks related to our customers’ operations in countries outside the United States, including currency fluctuation risk, which could increase the volatility of our results from such operations; and

·our ability to successfully and economically integrate the operations of any acquired companies, such as Stargames.

Additional information on these and other risk factors that could potentially affect our financial results may be found in other documents filed by us with the Securities and Exchange Commission, including our annual reports on Form 10-K, other quarterly reports on Form 10-Q and current reports on Form 8-K.

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ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a)Not applicable

(b)Not applicable

(c)In May 2005, our board of directors authorized management to repurchase up to $30,000 of our common stock in the open market under a share repurchase program with no expiration. We did not have any common share repurchases during the quarter in anticipation of closing the Stargames acquisition and as a result of the delay in filing our Annual Report on Form 10-K for the year ended October 31, 2005. As of April 30, 2006, $8,831 remained outstanding under our existing board authorizations. Repurchases under all previous authorizations have been substantially completed.

ITEM 6.EXHIBITS

10.1	Asia Representative Agreement dated April 11, 2006, by and between Shuffle Master Inc., Stargames Corporation Pty Limited, Melco International Development Limited and Elixir Group Limited (Request for Confidential Treatment filed with SEC).
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of 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 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.

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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 14, 2006

/s/ Mark L. Yoseloff

Mark L. Yoseloff
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)

/s/ Richard L. Baldwin

Richard L. Baldwin
Senior Vice President and Chief Financial Officer
(Principal Accounting Officer)

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EX-10.1

Exhibit 10.1

*** Confidential Treatment Requested Under 17 C.F.R. Section 240.24b-2

Elixir Group Limited

and

Melco International Development Limited

and

Stargames Corporation Pty Ltd

ACN 001 660 537

ABN 69 001 660 537

and

Shuffle Master Inc

Asia Representative Agreement

TABLE OF CONTENTS

			Page no.
1	Definitions		1
	1.1	Definitions	1
	1.2	Words and expressions	5
	1.3	Other rules of interpretation	7
2	Term		7
3	Grant of rights		7
	3.1	Grant of Exclusive Rights	7
	3.2	Distribution of Relevant Table Gaming Products	8
	3.3	Consideration of Possible Grant of Certain Non-Exclusive Rights	8
	3.4	Licence	9
	3.5	Retail Prices	9
	3.6	Agency	9
	3.7	Reserved Rights	10
4	Servicing of Products		10
	4.1	Right to service	10
	4.2	Second level support	10
	4.3	Acquisition of Spare Parts	10
5	Exclusivity and Non-Competition		11
	5.1	Exclusivity of Representative	11
	5.2	Exceptions	11
	5.3	Representative’s remedy	11
	5.4	Referral of Customers	11
	5.5	Adjustments as a consequence of certain Supplier sales outside the Exclusive Territory	12
	5.6	Sales Outside the Territory	12
	5.7	Exclusive distribution of Products	12
	5.8	Exceptions to exclusivity	13
	5.9	Adjustments as a consequence of Representative’s sales outside the Exclusive Territory	13
	5.10	Stargames’ remedy	13
	5.11	Termination by [***]	14
6	Joint Co-operation		14
	6.1	Right of refusal over new opportunities	14
	6.2	Originating Party may pursue	14
	6.3	Related Party sales	14
	6.4	Access to information	14
	6.5	Access to Technology and Improvements	15
7	Obligations of the Representative		15
	7.1	Representative’s Obligations	15
8	Obligations of each Supplier		17
	8.1	Supplier’s Obligations	17
9	Obligations of all Parties		20
	9.1	Costs and Expenses	20
	9.2	R & D Centre Agreement	20
10	Warranties		20
	10.1	Warranties of Stargames	20
	10.2	Warranties of the Representative	21
	10.3	Status of warranties	22
11	Products warranty		22
	11.1	Factory Warranty	22
	11.2	Product Liability	22
	11.3	Limited Warranty	22
	11.4	Excluded Claims	22
	11.5	Limitation of Liabilities	23

***Confidential Treatment Requested

i

12	Orders and deliveries		23
	12.1	Order Forms	23
	12.2	Deliveries	24
	12.3	[***] Adjustment	24
	12.4	Accepted Order Forms	24
	12.5	Products manufactured in Australia	24
	12.6	Stargames’ rights	25
	12.7	Advance payment or credit	25
13	Manufacture of Relevant Gaming Machines		25
	13.1	Stargames to initially manufacture Relevant Gaming Machines	25
	13.2	Representative to be able to monitor manufacturing	25
	13.3	No Obligation	25
	13.4	Representative’s ability to commence manufacturing	26
	13.5	Ownership of Manufacturing Plant	26
	13.6	Limitation on Representative’s ability to manufacture	26
	13.7	Products warranty	27
	13.8	Manufacture of Relevant Table Gaming Products	27
14	Payments for Relevant Gaming Machines		27
	14.1	Royalties	27
	14.2	Payment of Cost and Royalty	27
	14.3	Minimum Royalty	28
	14.4	Audit Rights	28
	14.5	Stargames [***]	28
	14.6	Changes to the Gaming Machine Cost	29
15	Payments for Relevant Table Gaming Products		29
	15.1	Table Gaming Product Prices	29
	15.2	[***] Table Gaming Products	29
	15.3	Changes to the Relevant Table Gaming Product Distribution Price	30
	15.4	Audit Rights	30
16	Ownership and protection of Intellectual Property		30
	16.1	Pre-Existing Intellectual Property	30
	16.2	Improvements	30
17	Confidentiality		30
	17.1	Confidential Information	30
	17.2	Exclusions	30
	17.3	Compliance by employees, agents and sub-contractors	31
18	Gaming Machine branding		31
	18.1	Branding of Relevant Gaming Machines	31
	18.2	Stargames’ Name	31
	18.3	Trademark	31
	18.4	Branding of Relevant Gaming Machines	31
	18.5	Joint Logo	31
19	Escrow		32
	19.1	Escrow of Stargames’ Intellectual Property	32
	19.2	Release from Escrow of Stargames’ Intellectual Property	32
	19.3	Escrow of the Representative’s Intellectual Property	32
	19.4	Release from Escrow of the Representative’s Intellectual Property	32
20	[***] Representative		32
	20.1	[***]	32
	20.2	Participation by Shuffle Master	32
21	Indemnity		33
	21.1	Indemnity by Each Party	33
	21.2	Indemnity by Stargames	33
	21.3	Indemnity by Representative	33
	21.4	Regulatory compliance	34
	21.5	Status of indemnities	34
22	Termination		34
	22.1	Termination by the Representative	34
	22.2	Termination by Stargames	34

***Confidential Treatment Requested

ii

	22.3	Termination by either Party	35
	22.4	Interest	35
23	Obligations and rights following termination		36
	23.1	Confidential Information, Products and Services	36
	23.2	Rights and liabilities of Parties	36
	23.3	Survival of certain terms and conditions	36
	23.4	Notice to Stargames	36
	23.5	Election of Stargames	36
24	Relationship of Parties		37
	24.1	Position of Stargames	37
	24.2	Relationship of Parties	38
	24.3	No power to bind	38
	24.4	Responsible for sub-contractors	38
	24.5	No relief from obligations	38
	24.6	No liability for tax	38
25	Publicity		38
26	Non-solicitation		39
	26.1	Non-solicitation	39
	26.2	Exceptions to non-solicitation	39
	26.3	Employment	39
27	Dispute Resolution		39
	27.1	No court proceedings	39
	27.2	Notice	39
	27.3	Initial Period	39
	27.4	Appointment of mediator	39
	27.5	Role of mediator	40
	27.6	Referral if no resolution	40
	27.7	Venue and representation	40
	27.8	Timeframe	40
	27.9	Confidentiality	40
	27.10	Costs	40
	27.11	Litigation	40
	27.12	Limits of Review	40
28	Notices		41
	28.1	Method	41
	28.2	Receipt	41
	28.3	Address of Parties	41
29	General		42
	29.1	Entire agreement	42
	29.2	Paramountcy of document	42
	29.3	No merger	42
	29.4	Amendment	42
	29.5	Assignment	42
	29.6	Severability	42
	29.7	Waiver	42
	29.8	Rights, remedies additional	42
	29.9	Further assurances	43
	29.10	Costs	43
	29.11	Counterparts	43
	29.12	Force Majeure	43
	29.13	Waiver	43
	29.14	Governing law and jurisdiction	43
	29.15	Circumvention	43
	SCHEDULE 1 - COUNTRIES IN THE ASIAN REGION IN WHICH THE SALE OF GAMING MACHINES IS LAWFUL AND ARE WITHIN THE EXCLUSIVE TERRITORY, AS OF THE COMMENCEMENT DATE		45
	SCHEDULE 2 - EXISTING ELIXIR AGREEMENTS		46

iii

SCHEDULE 3 - [***]	47
SCHEDULE 4 - EXISTING AND PROPOSED STARGAMES AND SHUFFLE MASTER AGREEMENTS	48
SCHEDULE 5 - RELEVANT TABLE GAMING PRODUCT DISTRIBUTION PRICES AS OF THE DATE OF THIS AGREEMENT	49

***Confidential Treatment Requested

iv

THIS ASIA REPRESENTATIVE AGREEMENT is made on 2006

PARTIES

ELIXIR GROUP LIMITED

of 38/F., The Centrium, 60 Wyndham Street, Central, Hong Kong

(“Elixir”)

and

MELCO INTERNATIONAL DEVELOPMENT LIMITED

of 38/F., The Centrium, 60 Wyndham Street, Central, Hong Kong

(“Melco”)

and

STARGAMES CORPORATION

ACN 001 660 537

of 1 Sheridan Close, Milperra, New South Wales, Australia

(“Stargames”)

and

SHUFFLE MASTER INC

of 1106 Palms Airport Drive, Las Vegas, Nevada, United States of America

(“Shuffle Master”)

BACKGROUND

Subject to each of the terms and conditions of this Agreement, Stargames and Shuffle Master have agreed to appoint the Representative and the Representative hereby accepts such appointment, as their sole and exclusive distributor and system integrator for promoting, selling and distributing Products to Casinos in the Exclusive Territory.

AGREED TERMS

1Definitions

1.1Definitions

In this Agreement, unless the context requires otherwise:

“Actioned Material Breach on the part of the Representative” means:

(a)the Representative is in material breach of any of the provisions of this Agreement and has failed to cure that breach within any applicable grace period; and

(b)as a consequence of that breach, Stargames has purported to terminate this Agreement.

“Agreement” means this Asia Representative Agreement as amended, modified or replaced from time to time.

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“Associated Company” means a company in which the relevant Party and/or any of its holding companies has an interest (whether directly or indirectly and whether aggregate or otherwise) of not less than 19.9%.

“Bank” means a corporation authorised by law in a jurisdiction to carry on the general business of banking in that jurisdiction.

“Business Day” means a day on which Banks are open for general banking business in Sydney, Australia, excluding Saturdays, Sundays and public holidays.

“Casino” means any legally-operating, under the applicable laws of its jurisdiction, venue (including cruise ships based in the Exclusive Territory) in which Gaming Machines and/or Table Gaming Products are legally permitted to be installed and played, under the applicable laws of the jurisdiction.

“Claim” means, in relation to a Party, a demand, claim, action or proceeding made or brought by or against the Party, however arising (whether under contract, tort (including negligence) or statue), in respect of the obligations imposed upon the Parties by this Agreement and includes a claim for breach of warranty.

“Commencement Date” means 11 April 2006.

“Competitive Products” means any products (including without limitation, Gaming Machines and Table Gaming Products) which are the same or substantially similar to any of the Products.

“Confidential Information” means all customer, marketing, design and technical information and data and computer software developed by a Party and any other information received from a Party which at the time of disclosure is clearly labelled or identified as being confidential to that Party or is otherwise provided in circumstances of confidence by that Party.

“Designated Client” means:

(a)any Casino in Macau that operates under the concession granted to SJM or any sub-concession granted by SJM; and

(b)any other Casino if SJM, STDM, Melco or the Melco-PBL Venture have a direct or indirect legal or beneficial interest of at least 19.9% of the equity interest in the entity that owns, manages or operates that Casino.

“Distributor” means any distributor or agent of the Representative that has been approved in advance by Stargames, which approval will not be unreasonably withheld or delayed.

“Exclusive Territory” means:

(a)each Designated Client, no matter where located;

(b)the countries listed in Schedule 1 (including cruise ships based in such countries);

(c)subject to Shuffle Master’s consent, which consent will not be unreasonably withheld, any other countries in the Asian region, excluding Australia and New Zealand, in which Shuffle Master, acting reasonably, but with due regard, in its sole and final discretion, for, and subject to any regulatory issues, agrees that the operation of Casinos, and the selling and installation of the relevant Product (whether operated from that country or from a cruise ship based in that country) has become lawful;

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(d)if Shuffle Master’s planned distribution agreement in [***] does not eventuate for any reason, then [***]; and

(e)with respect to Relevant Table Gaming Products, when the Intergaming Distribution Agreement listed in Schedule 4 is no longer in full force and effect, then [***] (excluding the [***]) and if the [***] Agreement is terminated then all of [***].

“F.O.B.” means free on board.

“Game Concept” means a game that is played on a Gaming Machine other than a game which is not capable of being reasonably produced in any form by any Supplier due to the fact that to do so would infringe the rights of any third party.

“Gaming Machines” means electronic gaming machines and multi-terminal gaming machines.

“Gaming Machine Cost” in respect of any Relevant Gaming Machine means the labour and material costs, the allocation of factory overhead costs and transportation costs (including insurance) from the factory to the destination specified by the Representative, that the Supplier has actually incurred in accordance with United States generally accepted accounting principles consistently applied in manufacturing that Relevant Gaming Machine as determined by the Parties on an open book basis.

“GST” has the meaning given to that term in the GST Act.

“GST Act” means the Act known as A New Tax System (Goods and Services Tax) Act 1999 (Cth).

“Gross Margin” means [***].

“Group” in relation to any Party means, any subsidiary, Associated Company or holding company or related body corporate of the relevant Party or any subsidiary or Associated Company of such holding company from time to time.

“Hong Kong” means Hong Kong Special Administrative Region of the People’s Republic of China.

“ICC” means International Chamber of Commerce.

[***]

“Improvements” means all improvements, modifications or adaptations effected to any component of the Technology after the Commencement Date.

“Insolvency Event”, in relation to a person, means the occurrence of any of the following events in relation to that person:

(a)the person enters into bankruptcy, liquidation, administration or other type of insolvency;

(b)the person is wound up, dissolved or the person suspends payment of its debts; or

(c)the person ceases or threatens to cease to carry on all or a material part of its business or becomes unable to pays its debts when they fall due.

“Intellectual Property” means patents, copyright, registered and unregistered design rights, registered and unregistered trade marks, rights in know-how, inventions,

***Confidential Treatment Requested

3

improvements, trade secrets, formulae, discoveries, business names, databases and Confidential Information and all other intellectual and industrial property rights (without limitation) and similar or analogous rights existing under the laws of any country and all rights to apply for or register such rights.

“Intellectual Property Rights” means all rights (whether registered or unregistered) in any Intellectual Property.

“Joint Ownership Period” means any period of time in which the R & D Centre is jointly owned and funded by Shuffle Master and Stargames, on the one hand, and the Representative, on the other hand.

“Macau” means Macau Special Administrative Region of the People’s Republic of China.

“Melco” means Melco International Development Limited.

“Melco-PBL Venture” means the venture between PBL and Melco in Asia.

“Minimum Royalty” has the meaning given that term in clause 14.3.

“Minimum Table Gaming Product Units” has the meaning given that term in clause 15.2(a).

“Party” means each party to this Agreement.

“PBL” means Publishing and Broadcasting Limited (ACN 009 071 167).

“Pre-Existing Representative Intellectual Property” means all Intellectual Property owned or acquired by any member of the Representative’s Group prior to the Commencement Date.

“Pre-Existing Shuffle Master Intellectual Property” means all Intellectual Property owned or acquired by any member of the Shuffle Master Group prior to the Commencement Date.

“Products” means Relevant Gaming Machines and Relevant Table Gaming Products.

“R & D Centre” means the R & D Centre that Elixir is planning to establish in Macau or mainland China or such other place as the parties to the R & D Centre Agreement may mutually agree for undertaking research and development of Relevant Gaming Machines, Relevant Table Gaming Products and other gaming technologies or products.

“R & D Centre Agreement” means the R & D Centre Agreement to be entered into between the Representative, Stargames and Shuffle Master as soon as practicable after the date of this Agreement.

“related body corporate” has the meaning given to that term in the Corporations Act (Cth) 2001;

“Relevant Gaming Machine” means a Gaming Machine but, (subject to clause 5.11, does not include any [***] Gaming Machines that Stargames is distributing) that utilises the Technology in its operation and Spare Parts for each such Gaming Machine.

“Relevant Table Gaming Product” means a Table Gaming Product that is offered for sale by a Supplier (either directly or through a distributor) and the Spare Parts for each such Relevant Table Gaming Product.

***Confidential Treatment Requested

4

“Relevant Table Gaming Product Distribution Price” in respect of any Relevant Table Gaming Product means the price of a Relevant Table Gaming Product payable to the Supplier by the Representative in accordance with clause 3.2(c).

“Representative” means Elixir Group Limited and its subsidiaries from time to time, (which includes, without limitation, Elixir Group (Macau) Limited).

“Retail Prices” means the sales prices of the Products and/or Services determined by the Representative for selling or providing the same to Casinos in the Exclusive Territory.

[***]

[***]

“Services” means the services related to the Products provided by the Representative as contemplated in clause 4.

“SJM” means Sociedade de Jogos de Macau.

“SJM Concession” means the gaming concession held by SJM for operating a gaming business in Macau or any sub-concession granted by SJM

“Spare Part” means any part or component of a Relevant Gaming Machine or Relevant Table Gaming Product.

“Stargames” means Stargames Corporation Pty Ltd (ABN 69 001 660 537), and each of its present and future subsidiaries.

“STDM” means Sociedade de Turismo e Diversoes de Macau, S.A.

“Supplier” in relation to a Product means Shuffle Master or any member of its Group including, without limitation, Stargames or any other Group company of Stargames that supplies that Product.

“Table Gaming Product” means shufflers, intelligent shoes, roulette chip sorters,  deck checkers and verifiers, proprietary table games, intelligent table system components (excluding RFID chips) and wireless gaming devices.

“Technology” means the current and future Intellectual Property and Confidential Information of any member of the Supplier relating to the design and manufacture of Gaming Machines and includes without limitation all Intellectual Property and Confidential Information in the source code and the PC3 and PC4 hardware platforms and in the design and manufacture of the “Table Master” multi-terminal gaming machines.

“Term” means the period commencing on the Commencement Date and ending on the twentieth anniversary of the Commencement Date or any earlier date on which this Agreement is terminated.

[***] Gaming Machine” means a Relevant Gaming Machine utilizing games developed by [***] or a related body corporate thereof, designed to operate utilizing the Technology.

1.2Words and expressions

In this Agreement, unless the context requires otherwise:

(a)the singular includes the plural and vice versa;

(b)words denoting any gender include all genders;

***Confidential Treatment Requested

5

(c)where a word or phrase is defined, its other grammatical forms have a corresponding meaning;

(d)a reference to a party, clause, paragraph, schedule or annexure is a reference to a party, clause, paragraph, schedule or annexure to or of this Agreement;

(e)a reference to this Agreement includes any schedules or annexures;

(f)headings are for convenience and do not affect interpretation;

(g)the background or recitals to this Agreement are adopted as and form part of this Agreement;

(h)a reference to any document or agreement includes a reference to that document or agreement as amended, novated, supplemented, varied or replaced from time to time;

(i)a general reference in one clause to other provisions of this Agreement (as opposed to a specific cross reference to another clause) is not intended to override any other provision that specifically deals with that subject matter;

(j)any reference to the Representative or Melco being in material breach of any of the provisions of this Agreement (or words to that effect) are taken to refer to a material breach that has not been rectified within any applicable grace period;

(k)any reference to Stargames or any Supplier being in material breach of any of the provisions of this Agreement (or words to that effect) are taken to refer to a material breach that has not been rectified within any applicable grace period;

(l)a reference to “HK$” is a reference to Hong Kong currency; all other references to “$” shall mean United States dollars;

(m)a reference to “A$” is a reference to Australian currency; all other references to “$” shall mean United States dollars;

(n)a reference to a time is a reference to Australian Eastern Standard time, or where applicable, Australian Eastern Summer time;

(o)a reference to a party includes its executors, administrators, successors, substitutes (including persons taking by novation) and permitted assigns;

(p)a reference to writing includes any method of representing words, figures or symbols in a permanent and visible form;

(q)words and expressions denoting natural persons include bodies corporate, partnerships, associations, firms, governments and governmental authorities and agencies and vice versa;

(r)a reference to any legislation or to any provision of any legislation includes:

(i)any modification or re-enactment of the legislation;

(ii)any legislative provision substituted for, and all legislation, statutory instruments and regulations issued under, the legislation or provision; and

(iii)where relevant, corresponding legislation in any other jurisdiction;

(s)no rule of construction applies to the disadvantage of a party because that party was responsible for:

(i)the preparation of this Agreement or any part of it; or

(ii)the inclusion or amendment of any provision of this Agreement; or

(iii)the deletion of any provision from any draft of this Agreement reviewed by the Parties in the course of negotiating this Agreement; and

6

(t)the words “including”, “for example”, “such as” or other similar expressions (in any form) are not words of limitation.

1.3Other rules of interpretation

In this Agreement, unless expressly provided otherwise:

(a)(method of payment) any payment of money by one Party to another will be made in United States currency by bank cheque or by credit of cleared funds to a bank account specified by the recipient.

(b)(consents and approvals) other than where expressly stated to the contrary in this Agreement (such as where a provision provides that a decision or act is within a Party’s sole and final discretion), if the doing of any act, matter or thing requires the consent, approval or agreement of any Party, that consent, approval or agreement must not be unreasonably withheld or delayed;

(c)(joint and several liability) a promise, representation or warranty given by or in favour of two or more persons under this Agreement is given by them or for their benefit jointly and severally;

(d)(Business Days) if:

(i)the day on or by which any act, matter or thing is to be done is a day other than a Business Day, the act, matter or thing will be done on the next Business Day; and

(ii)any money falls due for payment on a date other than a Business Day, that money will be paid on the next Business Day (without interest or any other amount being payable in respect of the intervening period); and

(e)(inconsistency within document) if a clause of this Agreement is inconsistent with a schedule or annexure of this Agreement, the clause prevails to the extent of the inconsistency.

2Term

This Agreement will commence on the Commencement Date and will continue in full force and effect for the Term.

3Grant of rights

3.1Grant of Exclusive Rights

(a)Subject to clause 3.6 and to each of the other terms and conditions in this Agreement, and further provided that there is no Actioned Material Breach of this Agreement on the part of the Representative, Stargames (on its own behalf and on behalf of each relevant Supplier) grants to the Representative the exclusive rights to promote, sell and distribute (either directly or through Distributors) the Relevant Gaming Machines on an exclusive basis to Casinos in the Exclusive Territory for use in the Exclusive Territory. In addition, subject to clause 13 and to each of the other terms and conditions in this Agreement provided that there is no Actioned Material Breach on the part of the Representative, Stargames grants to the Representative the exclusive rights to manufacture Relevant Gaming Machines for sale to Casinos in the Exclusive Territory, and, if applicable and if otherwise mutually agreed to, in writing, also for sale by the Supplier to any of the Supplier’s customers in other jurisdictions. For the avoidance of doubt, all of the rights referred to in this clause 3.1(a) extend to any Relevant Gaming Machines that any Supplier has developed or may in the future develop.

7

(b)The Representative may not assign or delegate any of its rights under this clause 3 to any other party or entity unless that party or entity is a Distributor, provided that any manufacturing rights granted to the Representative shall not be assignable, sub-licensable or delegatable to any other party, entity or person, including Distributor, except as may be permitted by clause 13. If the Representative or a Distributor wants to lease a Relevant Gaming Machine to a customer, the Parties shall first mutually agree, in writing, on the terms of such leasing arrangement.

(c)If the Representative or a Distributor wants to lease a Relevant Gaming Machine for distribution in the Exclusive Territory, the Parties shall first mutually agree, in writing, on the terms of such leasing arrangement.

(d)The exclusive rights granted in this clause 3.1 are subject to:

(i)agreements that Shuffle Master or Stargames have entered into or are at an advanced state of negotiations in respect of the manufacture or distribution of Products, as disclosed in schedule 4 but only for the term of those agreements;

(ii)if applicable, the rights previously granted by Stargames to [***] in respect of the [***], that terminate 90 days from 21 February 2006; and

(iii)with respect to manufacturing rights, the provisions of clause 13.

3.2Distribution of Relevant Table Gaming Products

Subject to clauses 3.6 and 15.2, and to each of the other terms and conditions in this Agreement, and further provided that there is no Actioned Material Breach on the part of the Representative, Stargames (on its own behalf and on behalf of each relevant Supplier) grants to the Representative the right to purchase Relevant Table Gaming Products, at the Relevant Table Gaming Product Distribution Prices, for distribution, sale and use only by Casinos in the Exclusive Territory, and the exclusive rights to promote, sell and distribute (either directly or through Distributors) Relevant Table Gaming Products on an exclusive basis:

(a)in the first year of the Term, only to Designated Clients for use by Designated Clients and the Parties agree that there will be [***] relating to the distribution of Relevant Table Gaming Products during the [***]; and

(b)thereafter, for the remainder of the Term, to Casinos in the Exclusive Territory for use in the Exclusive Territory, on terms to be negotiated in good faith, including the Minimum Table Gaming Product Units as required by clause 15.2(a);

(c)The Relevant Table Gaming Product Distribution Prices as of the date of this Agreement are set forth in Schedule 5. The Parties’ intent is that at all times during the Term where commercially reasonable, and subject to competitive factors in the Asian Market, that the Representative be able to obtain a gross profit representing approximately [***] and the Supplier be able to sell at the [***] that each normally achieves in comparable circumstances; or

(d)if the Representative or a Distributor wants to lease a Relevant Table Gaming Product, the Parties shall first mutually agree, in writing, on the terms of such leasing arrangement.

3.3Consideration of Possible Grant of Certain Non-Exclusive Rights

(a)During the Term, if a Casino (other than a Designated Client) located outside the Exclusive Territory approaches the Representative for the supply of Relevant Gaming Machines, Stargames and the Representative will negotiate in good faith on a case-by-case basis, (with Stargames’ refusal being permitted where it considers in its sole and final discretion that to permit the Representative to do so would be against either Stargames’ or Shuffle Master’s commercial interests, or

***Confidential Treatment Requested

8

where to do so, would trigger the provisions of clauses 22.2(c), 22.2(d), 22.2(e) or 22.2(f)), whether the Representative should distribute and sell Relevant Gaming Machines to that Casino, and if so, the terms and conditions of any such sales.

(b)During the Term, if a Casino (other than a Designated Client) located outside the Exclusive Territory approaches the Representative for the supply of Relevant Table Gaming Products, Stargames and the Representative will negotiate in good faith on a case-by-case basis, (with Stargames’ refusal being permitted where it considers, in its sole and final discretion, that to permit the Representative to do so would be against its commercial interests, or where to do so, would trigger the provisions of clauses 22.2(c), 22.2(d), 22.2(e) or 22.2(f)), whether the Representative should distribute and sell the Relevant Table Gaming Products to that Casino, and if so, the terms and conditions of any such sales.

(c)For the avoidance of doubt and subject to the provisions of clause 5, the Representative agrees not to sell any Relevant Gaming Machines and/or Relevant Table Gaming Products to any person outside the Exclusive Territory who is not a Designated Client, unless the express written consent of Stargames is first obtained, which consent may be withheld or delayed in Stargames’ sole and final discretion in the circumstances described in clauses 3.3(a) and 3.3(b).

3.4Licence

Subject to each of the terms and conditions in this Agreement, and further provided that there is no Actioned Material Breach on the part of the Representative, Stargames (on its own behalf and on behalf of each Supplier) grants to the Representative a [***] licence for the Term to use, adapt, alter and modify the Technology and any Improvements that belong to any Supplier (whether or not developed by the Supplier or any of its agents, contractors or otherwise) for the purposes of enabling the Representative to design, manufacture, deliver, modify and/or install Relevant Gaming Machines in the Exclusive Territory, provided however, that any alteration or modification of any such Technology or Improvements shall first require, prior to being used in a Relevant Gaming Machine that is to be delivered or installed by the Representative, the written consent of Stargames, which consent shall not be unreasonably withheld, particularly where the relevant alteration or modification does not adversely affect the performance of the Products nor the ability to gain or maintain any registered intellectual property rights in respect of those Products. Upon the commencement of the Joint Ownership Period, any alterations or modifications to the Technology will only be able to be made by Representative in the R & D Centre and in accordance with the requirements of the R & D Centre Agreement.

3.5Retail Prices

The Representative shall have the right to determine the Retail Prices of the Products and Services at its sole discretion provided always that the Retail Prices that are determined by the Representative from time to time shall be normal commercial and arms length selling prices, and shall be established in good faith by the Representative.

3.6Agency

(a)The Parties acknowledge that Stargames may appoint [***] as its direct distributor for a period not exceeding one year from the Commencement Date (“Initial Period”) in respect of the distribution and sale of:

(i)Relevant Gaming Machines and Relevant Table Gaming Products in the [***]; and

(ii)if [***] is so appointed, the Parties will agree to reduce the [***] based on Stargames’ [***] which have been used as the basis for determining the [***].

(b)The Parties agree to investigate options to enable [***] to be appointed as a sub-distributor of the Representative rather than as a distributor of Stargames

***Confidential Treatment Requested

9

(including by way of an assignment of any existing distribution agreement) provided that the economic impact of such an appointment on the Parties will be nil. For the avoidance of doubt:

(i)during the Initial Period, any commission or fees (whether by way of cash, discount, rebate, free units or otherwise) paid to [***] as a sub-distributor of the Representative shall be borne by Stargames;

(ii)during the Initial Period, the Representative will not receive any [***] in respect of the [***] if [***] is appointed as a sub-distributor in the [***]; and

(iii)after the Initial Period, in case the Representative continues to engage [***] as its Distributor, any commissions or fees (whether by way of cash, discount, rebate, free units or otherwise) paid to [***] as Distributor of the Representative shall be borne by the Representative.

3.7Reserved Rights

All rights to the Products not expressly granted to the Representative in this Agreement or in any other written agreement executed concurrently or hereafter by Shuffle Master, Stargames or the Supplier with the Representative shall be fully reserved and retained by the applicable Supplier in its sole and final discretion.

4Servicing of Products

4.1Right to service

The Representative shall, at its sole cost and subject to clause 4.2 responsibility, provide services related to all Relevant Gaming Machines and Relevant Table Gaming Products sold by it in the Exclusive Territory (which such services include but are not limited to maintenance services, training services, installation services and customisation services), and shall be solely entitled to any service fees received from such customers.

4.2Second level support

(a)With respect to any Products manufactured by a Supplier, at the reasonable request of the Representative, Stargames shall procure each Supplier to provide second level maintenance and support services to customers in the Exclusive Territory, within 10 days from any written notification issued by the Representative requesting such services and such second level maintenance and support services shall include, without limitation, the actual remedial action taken and/or correction made on the Products.

(b)The cost of such second level maintenance and support services shall be borne by the Supplier where:

(i)the Product has been manufactured by the Supplier; and

(ii)the maintenance and support is required to correct an inherent defect in a Relevant Gaming Machine or Relevant Table Gaming Product that requires the Supplier’s involvement to remedy.

In all other cases, the costs of any servicing, support and remedying any Product problems or defects shall be at the Representative’s sole cost.

4.3Acquisition of Spare Parts

During the Term, and subject to each of the terms and conditions in this Agreement, and further provided that there is no Actioned Material Breach on the part of the Representative, the Representative will be entitled to acquire Spare Parts at [***] on the then retail price offered by the Supplier to comparable customers at the time the Representative places an order for those Spare Parts and in sufficient volumes to enable the Representative, to maintain and service the Products.

***Confidential Treatment Requested

10

5Exclusivity and Non-Competition

5.1Exclusivity of Representative

Subject to clause 5.2 and to each of the other terms and conditions in this Agreement and further provided that there is no Actioned Material Breach on the part of the Representative, during the Term, Stargames undertakes that, except through the Representative, it will not, and will ensure that no Supplier nor any of its or any Supplier’s other distributors or agents will:

(a)either solely or jointly with or on behalf of any other person directly or indirectly promote, sell, provide, offer for sale or distribute any Products or Services to persons in the Exclusive Territory or procure, solicit or accept any purchase order for any Products or Services from any persons in the Exclusive Territory;

(b)exercise or appoint any other third party as reseller, distributor or agent (whether on an exclusive basis or not) of similar rights or functions as conferred on the Representative under this Agreement in respect of the Products or Services being offered to persons in the Exclusive Territory;

(c)promote, distribute or sell the Products and/or Services to, or accept any purchase order for any Products or Services from, any persons outside the Exclusive Territory, where any Supplier (or any of the Supplier’s other distributors or agents) has actual knowledge, or a reasonable person in that entity’s circumstances would, (without any duty of inquiry or diligence, except in the circumstance where such entity actually suspects, or a reasonable person in such entity’s circumstances would actually suspect (without any duty of inquiry or diligence) that the person intends to resell, lease, licence or otherwise part with the possession of the relevant Products and/or Services to any Casino in the Exclusive Territory), consider it more probable than not, at the time of the relevant sale, that the person will resell, lease, licence or otherwise part with the possession of the relevant Products and/or Services to any Casino in the Exclusive Territory,

5.2Exceptions

Nothing in clause 5.1 prevents the Supplier:

(a)from distributing Relevant Table Gaming Products during the [***] of the Term as contemplated in clause 3.2;

(b)appointing [***] as a distributor as contemplated in clause 3.6; or

(c)selling, promoting, licensing or distributing Products, in its sole and final discretion, outside of the Exclusive Territory, provided that the Supplier is not in breach of clause 5.1.

5.3Representative’s remedy

If it is agreed by the Parties that a Supplier may sell direct to persons in the Exclusive Territory, Stargames will procure that that Supplier will pay the Representative:

(a)a [***] earned by it on the sale of the Relevant Gaming Machine and [***] earned by the Supplier shall be [***] in accordance with clause 14.3; and

(b)an amount that is equivalent to [***] that the Representative would have received on the sale of any Relevant Table Gaming Products and an [***] that apply in that year pursuant to clause 15.2.

5.4Referral of Customers

Subject to clause 5.3 and to each of the other terms and conditions in this Agreement, and further provided that there is no Actioned Material Breach on the part of the Representative, and further subject to the rights of Stargames to have the Relevant Table

***Confidential Treatment Requested

11

Gaming Products distributed by the Supplier within the Exclusive Territory in the [***] of the Term as referred to in clause 3.2, during the Term Stargames shall procure that each Supplier shall refer all customers or potential customers of, and any query that they or any Supplier receives regarding the purchase of, any Products or Services in the Exclusive Territory that comes to their attention to the Representative for handling.

5.5Adjustments as a consequence of certain Supplier sales outside the Exclusive Territory

If any Supplier or any distributor or agent of any Supplier is in breach of clauses 5.1(a) or 5.1(b) or if any Supplier or any distributor, agent or customer of any Supplier, within three (3) years of its purchase, sells or resells Relevant Gaming Machines to any person outside the Exclusive Territory which are subsequently transferred into the Exclusive Territory in violation of clause 5.1(c), Stargames will pay, as the Representative’s sole remedy, to the Representative:

(a)in respect of the Relevant Gaming Machine, [***] that would have been earned by the Representative or [***] earned by the Supplier on the sale, (excluding fees, commissions or price discounts paid or allowed to any distributor or agent (as the case may be) by the Supplier) and the [***] earned by the Supplier or which would have been earned by the Supplier if the Representative had made the sale shall be [***] in accordance with clause 14.3; and

(b)in respect of a Relevant Table Gaming Product, an amount representing [***] of the Relevant Table Gaming Product.

5.6Sales Outside the Territory

Nothing contained in this Agreement shall in any way prohibit, prevent or hinder a Supplier in its sole and absolute discretion, from selling, leasing or distributing any Products outside the Exclusive Territory or to Casinos inside the Exclusive Territory where the Products are intended for transportation and installation, as soon as reasonably practicable, outside the Exclusive Territory, at prices and in a manner that is solely determined, in its sole and final discretion, by the Supplier.

5.7Exclusive distribution of Products

Subject to clause 5.8, during the Term, the Representative will not, and will ensure that none of its subsidiaries (including without limitation, Elixir Group (Macau) Limited) will sell, promote, distribute, accept orders for, or market, (or exercise or appoint any other person to do any of the foregoing) any Competitive Products manufactured, developed, owned or being marketed by any person, other than the Supplier to:

(a)any person or Casino in the Exclusive Territory; or

(b)any person or Casino outside the Exclusive Territory if either the Representative or Melco or any subsidiary of the Representative or Melco or any of its or their respective distributors or agents have actual knowledge, or a reasonable person in their circumstances would (without any duty of inquiry or diligence, except in the circumstance where such entity actually suspects, or a reasonable person in that entity’s circumstances would actually suspect (without any duty of inquiry or diligence) that the person intends to resell, lease, licence or otherwise part with the possession of the relevant Competitive Products and/or related Services to any Casino in the Exclusive Territory) consider it more probable that not, at the time of the relevant sale, that the person will resell, lease, license or otherwise part with possession of the relevant Products to any person in the Exclusive Territory.

For the avoidance of doubt, Melco will not establish nor permit any of its subsidiaries, nor any of its Group entities which it owns or controls, to establish a business or subsidiary that competes with the Representative in the distribution, selling or manufacturing of Gaming Machines and Table Gaming Products.

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5.8Exceptions to exclusivity

Nothing in clause 5.7 prevents the Representative from:

(a)During the twelve month period commencing on the Commencement Date the Representative may sell Products manufactured, developed, owned or being marketed by a person other than a Supplier only in order to honour any agreement that is in existence and legally binding on it at the Commencement Date, as disclosed in schedule 2, provided that from the date that is six months after the Commencement Date, the Representative will pay [***] that it receives on any such sale to Stargames and in respect of the sale of a Gaming Machine, [***] and provided further that under the agreement with [***] the Representative shall not at any time sell any Competitive Products manufactured by [***]

(b)selling Gaming Machines that are not multi-player Gaming Machines, developed and manufactured by [***]; or

(c)selling, after 6 months’ prior written notice to Stargames, any Gaming Machine based on a Game Concept that any Supplier is unable to reasonably supply, with the same or substantially the same Game Concept and in the quantities or with the material quality available to the Representative from other suppliers, for so long as any Supplier is unable to reasonably supply such a Gaming Machine.

5.9Adjustments as a consequence of Representative’s sales outside the Exclusive Territory

(a)If, the Representative is in breach of clause 5.7, or if without the prior, written, express consent of Stargames the Representative sells any Relevant Gaming Machines or Table Gaming Products outside the Exclusive Territory in violation of clause 5.7, the sole remedy of Stargames:

(i)with respect to a Relevant Gaming Machine, shall be the payment by the Representative of a [***] earned by the Representative or [***] which would have been earned by Supplier; and

(ii)with respect to a Relevant Table Gaming Product, shall be the payment by the Representative of the [***] on sale of said Table Gaming Product or [***] which would have been received by Supplier from its sale of said Table Gaming Product.

(b)If a customer of the Representative subsequently resells any Relevant Gaming Machines or Table Gaming Products (unless such Product was sold to said customer more than 3 years prior to such resale) outside the Exclusive Territory in violation of clause 5.7, the sole remedy of Stargames:

(i)with respect to a Relevant Gaming Machine,  shall be the payment by the Representative of [***] which had been previously earned by the Representative on the sale of said Relevant Gaming Machine to the customer; and

(ii)with respect to a Relevant Table Gaming Product, shall be the payment by the Representative of [***] of said Table Gaming Product which had been sold by the Representative to said customer.

5.10Stargames’ remedy

If it is expressly agreed in writing by the Parties that the Representative may sell Relevant Gaming Machines or Relevant Table Gaming Products to persons outside the Exclusive Territory, the obligations of the Representative to pay to Stargames a royalty under clause 14 in respect of the Relevant Gaming Machines sold or to pay for the Relevant Table Gaming Products under clause 15 will extend to this sale.

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5.11Termination by [***]

(a)[***], the Parties will co-operate to attempt to ensure that the Representative is able to sell [***] Gaming Machines under this Agreement, under the same conditions, limitations, [***] as set forth in clause 5.8(a) as applies to [***] Gaming Machines.

(b)If the Parties are able to arrange for the Representative to be able to sell [***] Gaming Machines under this Agreement then from that time on, the [***] Gaming Machines will be deemed for the purposes of this Agreement to be “Relevant Gaming Machines” and to come within the meaning of that term in clause 1.1.

(c)Stargames will ensure that no Supplier enters into or alters any arrangements with any other person that would permit [***] Gaming Machines to be distributed or sold in the Exclusive Territory other than in the circumstances contemplated in this clause 5.11.

6Joint Co-operation

6.1Right of refusal over new opportunities

The Parties agree that they will consult with each other on any merger or acquisition or business development opportunities expressly intended to apply solely to persons in the Exclusive Territory [***] in respect of Gaming Machines or gaming technologies and provide the other with a first right of refusal to match such opportunities on terms no less favourable to either Shuffle Master or Stargames or the Representative (as applicable) as those of any such opportunity.

6.2Originating Party may pursue

Any Party may pursue any such opportunity without prejudice if the other Parties decline to match the terms of that opportunity provided that the pursuit of such opportunity by that Party will not constitute a breach by that Party of the terms of this Agreement.

6.3Related Party sales

The Parties agree that the purpose of this Agreement is to maximise the profitability of the promotion, sale and distribution of the Products. Accordingly, any Product sold by a Party to any member of that Party’s Group will be sold on arms length commercial terms.

6.4Access to information

Shuffle Master and Stargames each agree and confirm that during the Term it will:

(a)keep the Representative informed of any changes to Products and Services (including but not limited to any revision of the specifications or release of new models) or new Products or Services;

(b)keep the Representative informed of any change to the Gaming Machine Costs (in respect of Relevant Gaming Machines) and/or the Table Gaming Product Prices (in respect of Relevant Table Gaming Products), provided that in the case of any material changes to the specifications of the existing Products and Services, any cessation of production or support of any existing Products and Services, the Supplier shall give at least 60 days prior written notice to the Representative informing the same;

(c)reasonably consider any request by the Representative for Shuffle Master or Stargames, as the case may be, to provide the Representative with access to all of its and any of its Group’s Confidential Information (to the extent not covered by clause 6.5) and personnel and answer any queries that the Representative may have regarding the matters related to the Products, which include but without limitation to, the design, delivery, installation, operation and maintenance of the

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Products being undertaken anywhere by Shuffle Master or Stargames. In determining whether to give its consent, Shuffle Master and Stargames will consider the extent that the requested information is relevant and relates to the business of the Representative; and

(d)on request from the Representative permit the Representative to reasonably audit (at its sole cost), no more than once every 12 months, the Gaming Machine Costs and the Relevant Table Gaming Distribution Prices charged to it by any Supplier.

6.5Access to Technology and Improvements

(a)Subject to each of the terms and conditions of this Agreement and provided that there is no Actioned Material Breach on the part of the Representative, Stargames will provide the Representative [***] with access to and a right to use, adapt. alter and modify the Technology and to any Improvements that belong to any Supplier (whether developed by the Supplier itself or any of its agents, contractors or otherwise) including updates to the existing Suppliers’ products and/or to the existing software and the PC3 and PC4 hardware platforms and new products, new software or hardware platforms developed by any Supplier, as and when they are released by the relevant Supplier. Until such time as the Joint Ownership Period commences, Stargames agrees to reasonably assist the Representative in securing the necessary resources to effectively establish and operate the R & D Centre on its own account.

(b)Stargames will ensure that no Supplier will exercise any rights that it might have to prevent the Representative from having access to, using, adapting, altering or modifying any Improvements that have been developed during the Joint Ownership Period and that are jointly owned by the Representative and a Supplier.

(c)The Representative will provide Stargames [***] with access to and a right to use, adapt, alter and modify any alteration or modification to any Technology or any Supplier’s Improvements that were made by the Representative in exercising the rights granted to it under clause 3.4.

(d)The Representative will not exercise any rights that it might have to prevent any Supplier from having access to, using, adapting, altering or modifying any Improvements that have been developed during the Joint Ownership Period and that are jointly owned by the Representative and a Supplier.

7Obligations of the Representative

7.1Representative’s Obligations

Subject to any rights previously granted by any Supplier to [***] in respect of the [***] being consistent with clause 3.6, the Representative shall use its best efforts to further the promotion, marketing and distribution of each of the Products in each of the countries or to each Designated Client within the Exclusive Territory. Without limiting the generality of the foregoing, the Representative shall have each of the following obligations with respect to marketing and distribution of each of the Products:

(a)to promote, market and distribute each of the Products strictly limited to (unless otherwise expressly agreed to in a prior writing signed by both parties) in each country of and to each Designated Client within the Exclusive Territory;

(b)to participate actively in sales or merchandising programs prepared by Supplier that are appropriate for the Exclusive Territory and to promote and demonstrate the Products in all major fairs and exhibitions in the Exclusive Territory and to develop and implement distribution programs for the promotion of the Products, at a minimum, to promote, show and demonstrate Products during the most

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important trade shows in the Exclusive Territory. The Representative is solely responsible for costs of such shows including but not limited to transportation and importation costs;

(c)to respond as promptly as is reasonable in the circumstances to all inquiries from customers, including complaints, to process all orders and to effect or request the Supplier to effect all shipments of Products;

(d)to investigate diligently all leads, which it considers to be worthwhile, with respect to potential customers referred to it by the Supplier;

(e)to keep the Supplier fully informed of all inquiries and orders received by the Representative from customers located outside the Exclusive Territory on a timely basis;

(f)to provide the Supplier not later than thirty (30) days from the end of each calendar month with a report of its marketing, distribution, service and installation activities with respect to the Products sold or leased in the Exclusive Territory during such month, which report shall be in such form and in such detail as the Supplier may reasonably require;

(g)to notify the Supplier of all installations including customer’s name and installation address as soon as possible but in any event within thirty (30) days of such installations;

(h)to use its best efforts (as may be reasonable in the circumstances) to obtain and maintain in good standing, at the Representative’s sole expense, all necessary licenses to allow the Representative to market, sell, store and distribute the Products in each country of the Exclusive Territory and to each country in which any Designated Client is located provided that if the Representative is not able to obtain or maintain a necessary licence in any such country, the Representative may request that that country or Designated Client be removed from the Exclusive Territory and if this occurs during the [***] of the Term, the Parties will negotiate in good faith an appropriate [***] having regard to such factors as any additional cost to Stargames in supplying that country directly:

(i)upon the Supplier’s request, to obtain copies of all gaming licenses possessed by any customer to whom the Representative sells a Product;

(j)to notify the Supplier of any apparent infringement of the Supplier’s Intellectual Property rights related to the Products. The Supplier maintains the exclusive right to prosecute any infringement of its Intellectual Property, which right the Supplier shall exercise or elect not to exercise at its sole and final discretion, but, in connection therewith, the Supplier shall reasonably consult with the Representative;

(k)to refrain from making any false or misleading representations or statements about any Supplier or any of the Products;

(l)to adhere to all legal requirements with respect to its activities pursuant to the rights granted to it under this Agreement.  Directors, officers, or employees of the Representative or of any member of the Representative’s Group shall not, directly or indirectly, offer, promise or pay any bribes or other improper payments for the purposes of promoting the Products to any individual, corporation, government official or agency, or other entity. No gift, benefit or contribution in any way related to the Parties or the sale of the Products shall be made to political or public officials or candidates for public office or to political organisations, regardless of whether such contributions are permitted by local laws;

(m)to abide by all of Stargames’ policies and standards regarding conflicts of interest and ethics as may be communicated to the Representative by Stargames from time to time (the receipt of the policies and standards in force on the date of this

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Agreement is hereby acknowledged by the Representative), such policies and standards being incorporated herein by written notification.  The terms of the policies and standards will not imply or impose any interference with the lawful commercial use of the Products;

(n)both prior to and at any time after the execution of this Agreement, to promptly respond to the Compliance Committees of Stargames or Shuffle Master as either may reasonably request information related to the Distributor (including its officers, directors, and controlling shareholders), financial condition, litigation, indictments, criminal proceedings, and the like in which they are or may have been involved, if any, in order to determine that the information does not disclose any fact which would jeopardise, in any manner, any gaming licence, permit or approval held by Stargames, Shuffle Master or any of its Group entities with any gaming regulators;

(o)ensuring that the details of the financial arrangements with the Supplier are kept strictly confidential and are not disclosed to any of the Supplier’s customers or competitors;

(p)providing the Supplier with full access to the Representative’s data and technical and other information that relates to sales made by the Representative of the entire Product range in the Exclusive Territory, which information shall be kept current by the Representative at the Representative’s cost throughout the Term, and to the extent that it is and continues to be confidential shall be Confidential Information of the Representative;

(q)keeping the Supplier informed of any changes made by the Representative to the technical or content specifications of any existing Product;

(r)obtaining all approvals required for all Products solely developed by the Representative at the Representative’s sole cost;

(s)contributing to [***] in obtaining all approvals in a country in the Exclusive Territory that are necessary to enable the Products solely developed by the Supplier to be sold and distributed in that country provided that such approval is not also required in a jurisdiction outside the Exclusive Territory in which the Supplier operates;

(t)ensuring that no written communication is initiated with any owner, operator or management company of a Casino outside the Exclusive Territory regarding the sale of Products unless Stargames is copied on that correspondence and invited on reasonable notice to be present at any meeting (whether conducted in person or by means of any telecommunication facility); and

(u)diligently providing Stargames with all leads of which it is aware and which it considers to be worthwhile, with respect to potential customers outside the Exclusive Territory to be referred to Stargames.

8Obligations of each Supplier

8.1Supplier’s Obligations

Subject to each of the terms and conditions of this Agreement and further provided that there is no Actioned Material Breach on the part of the Representative, Stargames shall be responsible for procuring that each Supplier provides all reasonable assistance, relevant to the Exclusive Territory, but at no out-of-pocket cost to any Supplier (except as where provided for below), requested by the Representative, which assistance must be provided in a professional and timely manner as follows:

(a)contributing to [***] in obtaining all approvals in a country in the Exclusive Territory that are necessary to enable the Products solely developed by a Supplier to be sold and distributed in that country provided that such approval is

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not also required in a jurisdiction outside of the Exclusive Territory in which the Supplier operates in which case such approval shall be at the Suppliers sole cost;

(b)abiding by all policies and standards of the Representative regarding conflicts of interest and ethics as may be communicated in writing to Stargames by the Representative from time to time such policies and standards being incorporated herein by written notification. The terms of the policies and standards will not imply or impose any interference with the lawful commercial use of the Products;

(c)providing, at the [***] of each Product intended for sale in the Exclusive Territory for display in the showroom which the Representative is planning to open, at the Representative’s sole cost, in Macau;

(d)the provision of reasonably adequate training to employees of the Representative so as to reasonably enable them to be able to understand the functionalities and/or components of the Products and Services and the correct operation and/or maintenance of the same to the extent relevant to the Exclusive Territory;

(e)the preparation and provision, at Supplier’s sole cost, to the Representative of artwork for relevant marketing materials, to be produced at the Representative’s sole cost and the Representative shall have absolute discretion to determine whether to adopt the same or not;

(f)providing the Representative with full access to each Supplier’s data and technical and other information relating to the entire Product range to the extent relevant to the Exclusive Territory, which shall be kept current by the Supplier [***] throughout the Term, and to the extent that it is and continues to be confidential shall be Confidential Information of the Supplier;

(g)keeping the Representative informed of new Product releases and any changes to the technical or content specifications of any existing Product

(h)diligently providing the Representative with all leads of which it is aware and which it considers to be worthwhile, with respect to potential customers in the Exclusive Territory to be referred to the Representative;

(i)supplying the Products for the Exclusive Territory on a timely basis and in particular, but subject to every other applicable term or provision of this Agreement, including without limitation, clause 12, using all reasonable endeavours to accept every order placed by the Representative (which for the avoidance of doubt will not include [***] except if the relevant Supplier and the Representative mutually agree that there is a valid commercial reason);

(j)providing the Representative with not less than 30 days’ prior written notice of any change that is proposed to come into effect in respect of the Gaming Machine Cost or the Relevant Table Gaming Product Distribution Price, to the extent that the same relates to the Exclusive Territory;

(k)ensuring that the prices at which it supplies Products and Spare Parts to the Representative for the Exclusive Territory is [***] to the Representative than the prices at which it supplies Products and Spare Parts to any comparable distributor, which orders the same or a substantially similar quantity of comparable Products or Spare Parts;

(l)maintaining its existing (or substantially similar) Product range (both in terms of equipment and content) and in particular with respect to Relevant Gaming Machines (both multi-terminal and single player Gaming Machines) and Relevant Table Gaming Products that are suitable and approved for the Asian market, provided however that Stargames shall have the right to discontinue any specific Product in its sole and final discretion, after the [***] of the Commencement Date and if Stargames decides to do so:

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(i)it must provide the Representative with not less than 60 days’ prior written notice of its intention to discontinue that specific Product;

(ii)Stargames and the Representative shall enter into good faith negotiations with regard to the continuation of the supply of sufficient quantities of Spare Parts for that Product and/or any second level support from Stargames as contemplated in clause 4.2 as are necessary to enable the Representative to continue to service all of its customers that have acquired that specific Product;

(m)maintaining the operational protocols and other platforms and technology (or substantially similar versions) on which the Products operate that are consistent (or substantially consistent) with earlier models;

(n)informing the Representative of its manufacturing capability and in particular, regularly providing the Representative with estimates of the duration of time required to meet all potential and accepted Product orders;

(o)ensuring that the details of the [***] with the Representative are kept strictly confidential and are not disclosed to any of the Representative’s customers or competitors and are [***];

(p)ensuring that no written communication is initiated with any owner, operator or management company of a Casino in the Exclusive Territory regarding the sale of Products unless the Representative is copied on that correspondence and invited on reasonable notice to be present at any meeting (whether conducted in person or by means of any telecommunication facility);

(q)until such time as the Representative commences manufacturing under clause 13 all of the Products required by it, ensuring that Stargames and each other Supplier has the capability, in a reasonable manner, to supply those Products so as to fulfil in a timely manner the Representative’s accepted orders for the Products;

(r)for the earlier of the Term or until such time as both the Joint Ownership Period commences and the manufacturing agreement contemplated in clause 13.4(b) has been entered into, each Supplier will continue as a material obligation under this agreement to meet its obligations to the Representative under clauses 3.4, 6.5;

(s)for the earlier of the Term or until such time as the manufacturing agreement contemplated in clause 13.4(b) has been entered into, each Supplier will continue as a material obligation under this agreement to meet its obligations to the Representative under clause 13.2; and

(t)using reasonable efforts to obtain, but with respect to regulatory issues at Stargames’ sole and final discretion and at Stargames’ sole cost the necessary regulatory consents or approvals:

(i)in relation to the co-investment and joint operation of the R & D Centre between Stargames and Shuffle Master on the one hand and the Representative on the other; and

(ii)as contemplated under clause 13.4(c).

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9Obligations of all Parties

9.1Costs and Expenses

Unless otherwise stated in this Agreement or agreed by the Parties in writing, the Parties acknowledge and agree that:

(a)each Party shall bear its own costs and expenses and provide all staff or labour for performing its obligations under this Agreement;

(b)the respective representatives of the Parties shall meet at regular intervals (whether in person or by telephone conference) to discuss the market conditions and requirements for the Products and Services offered to persons in the Exclusive Territory;

(c)unless required by any applicable law or regulation, or by any gaming regulatory authority, neither Stargames nor any Supplier shall make any public announcement regarding any purchase order secured by the Representative or details of work covered by such purchase order without the Representative’s prior written approval (such approval not to be unreasonably withheld); and

(d)each Party shall promptly inform the other if it comes to its attention that the Products or Services may have infringed the Intellectual Property Rights of any third party.

9.2R & D Centre Agreement

Each of Shuffle Master, Stargames and the Representative shall continue to negotiate in good faith with a view to finalising the terms of and executing the R & D Centre Agreement as soon as practicable after the Commencement Date and in any case on or before [***].

10Warranties

10.1Warranties of Stargames

Stargames represents and warrants to the Representative that:

(a)it possesses the requisite authority to enter into and perform its obligations under this Agreement and it has the full, free and unrestricted rights to appoint, subject to each of the provisions of this Agreement, the Representative as the sole and exclusive distributor and systems integrator of Products in the Exclusive Territory for each Supplier under this Agreement and that all the rights granted to the Representative under this Agreement will not infringe any rights, claims or authorisations of any third party;

(b)provided that Representative makes no changes or modifications thereto (other than changes or modifications which have been authorised in writing by a Supplier), and to the best knowledge of each Supplier, the Products developed solely or manufactured by a Supplier, and the promotion, sale and distribution of the same by the Representative and/or any of its Representatives under the terms of this Agreement will not, in the Exclusive Territory, infringe any Intellectual Property Rights or other proprietary rights of any third party;

(c)no Supplier is a party to any legal action or proceedings applicable to the Exclusive Territory concerning the Intellectual Property Rights of any Supplier in the Products or any part thereof, which Intellectual Property Rights are material to the sale, distribution, use or operation of a Product or are material to enable it to perform its obligations under this Agreement, and to the best knowledge of each Supplier, no such claim has been made nor is there any such threatened action or proceedings;

(d)to the best knowledge of each Supplier, the Intellectual Property utilised or embedded in the Technology, in any Improvement that belongs to a Supplier and the Products may be used by the Representative and its customers in the Exclusive Territory free of any third party claims or interests, and without limiting the generality of the foregoing, no Supplier has assigned or conveyed any

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interest in any such Intellectual Property which may be inconsistent with the rights granted under this Agreement;

(e)save for the appointment of the Representative under this Agreement and as contemplated under clause 3.6 and in Schedule 4, neither it nor any Supplier has appointed any distributor or agent, whether in the Exclusive Territory or elsewhere, to promote, sell or distribute the Products and Services to any persons in the Exclusive Territory, which appointment shall remain in effect as of the Commencement Date;

(f)before signing this Agreement and at all times during the Term, it obtained and maintains or will after the date of this Agreement obtain and maintain all necessary licences, permissions, approvals and consents required to enter into this Agreement and perform its obligations hereunder in the Exclusive Territory;

(g)neither the execution of this Agreement nor the performance by it of its obligations under this Agreement will cause it to be in breach of any agreement or undertaking to which it is a party or is subject;

(h)no Supplier shall take any action or omission which jeopardizes or puts at risk any of the Representative’s licenses or permits, and

10.2Warranties of the Representative

The Representative represents and warrants to Stargames that:

(a)it possesses the requisite authority to enter into and perform its obligations under this Agreement and it has the full, free and unrestricted rights to accept its appointment as the sole and exclusive distributor and systems integrator of Products in the Exclusive Territory for each Supplier under this Agreement, and that Representative’s exercise of its rights and obligations under this Agreement will not infringe any rights, claims or authorisations granted by the Representative to any third party;

(b)before signing this Agreement and at all times during the Term, it obtained and maintains, or will after the date of this Agreement obtain and maintain, all necessary licences, permissions, approvals and consents required for the purposes of this Agreement;

(c)neither the execution of this Agreement nor the performance by it of its obligations under this Agreement will cause it to be in breach of any agreement or undertaking to which it is a party or is subject;

(d)it has made full disclosure of all information within its reasonable and actual knowledge which would be material to the decision of Stargames to enter into this Agreement;

(e)the information given by it or on its behalf to Stargames with respect to this Agreement is true, complete and accurate in all material respects and none of that information is misleading, whether by inclusion of misleading information or omission of material information or both;

(f)provided that the Supplier makes no changes or modifications thereto (other than changes or modifications which have been authorised in writing by the Representative), and to the best knowledge of the Representative, the Products developed solely or manufactured by the Representative or which are material to enable it to perform its obligations under this Agreement, and the promotion, sale and distribution of the same by the Representative or any of its Distributors under the terms of this Agreement will not, in the Exclusive Territory, infringe any Intellectual Property Rights or other proprietary rights of any third party;

(g)the Representative is not a party to any legal action or proceedings applicable to the Exclusive Territory concerning any of its Intellectual Property Rights or any part thereof which are material to enable it to perform its obligations under this

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Agreement and to the best knowledge of the Representative, no claim has been made nor is there any such threatened action or proceedings;

(h)the Representative shall take no action or omission which knowingly or with reckless disregard jeopardizes or puts at risk, or a reasonable person in the Representative’s circumstances would (without any duty of inquiry or diligence) consider it more probable than not, will jeopardize or put at risk, any of the Supplier’s licenses or permits;

(i)the Representative will comply with all laws, statutes and regulations applicable to it, including without limitation, all relevant provisions of the United States Foreign Corrupt Practices Act;

(j)for the Term, the Representative will continue as a material obligation under this Agreement, to operate the business of distributing Products as a core business activity, it being the intent of the Parties that the maximum profitable sales will be achieved for the benefit of the Parties; and

(k)[***]

10.3Status of warranties

All representations and warranties in this Agreement survive the execution, delivery and termination of this Agreement and are repeated on each day during the Term and are given with the intent that liability under those representations and warranties will not be confined to breaches discovered prior to the date of this Agreement.

11Products warranty

11.1Factory Warranty

All Products manufactured and supplied by each Supplier or manufactured by Representative, shall carry a [***] warranty against faulty parts manufacture and workmanship. Such warranty period shall commence following acknowledgement of satisfactory installation from the end user.

11.2Product Liability

The liability of each Supplier or the Representative in respect of any Product manufactured by it, if any, for damages relating to any defective Products or any breach of warranty or condition in relation to the Products will be limited to the replacement of those defective Products.

11.3Limited Warranty

The warranties set forth in this clause 11 are intended solely for the benefit of the party for whom the Product is manufactured (“Buyer”). All claims hereunder shall be made by the Buyer and may not be made by Buyer’s customers. The limited warranties set forth above are in lieu of all other warranties, express or implied, by statute or otherwise, all of which are, to the extent permitted by law, hereby disclaimed and excluded by the party manufacturing the Product (“Manufacturer”), including without limitation any warranty of merchantability or fitness for a particular purpose or use and all obligations or liabilities on the part of the Manufacturer for damages arising out of or in connection with the use, repair or performance of the Products.

11.4Excluded Claims

The Manufacturer shall have no obligation under any warranty in the event that:

(a)repair or replacement of any Products shall have been required by normal wear and tear or necessitated in whole or in part by events attributable to force majeure or the negligence of the Buyer or its customers;

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(b)the Product shall have been modified in any manner without prior written consent of the Manufacturer;

(c)the Product shall not have been maintained or used in accordance with the Manufacturer’s or Supplier’s applicable operating and/or maintenance manuals, whether by the Buyer or its customer;

(d)claims are made for shuffling Products and the customer of the Buyer has not used cards approved by the Manufacturer or the Supplier; or

(e)damages or defects resulting from improper handling and/or non-usage of the original packing and the applicable packing instruction.

11.5Limitation of Liabilities

(a)Save and except for the agreed remedies as stated in clauses 5.5 and 5.9, in no event shall a party (the “Defaulting Party”), its directors, employees or agents be liable for any indirect or consequential loss, damage, cost or expense of any kind whatever and however caused whether arising under contract, tort (including negligence) or statute including but without limitation to loss of production, loss of or corruption to data, loss of profits or contracts, loss of operational time and/ or loss of goodwill or anticipated savings (collectively “Consequential Loss”), suffered or incurred by the other party or the other party’s customers (even if the Defaulting Party shall have been advised of the possibility of such potential loss or damage) arising from performance or non-performance of the Product or breach of any warranties, representations or terms or conditions under this Agreement provided that the exclusion of Consequential Loss in this clause shall not be applied if the breach relates to an unlawful termination of this Agreement by the Defaulting Party.

(b)Nothing in this Agreement shall exclude or limit liability for death or personal injury resulting from the negligence of any of the parties or its employees while acting in the course of their employment.

12Orders and deliveries

12.1Order Forms

Unless otherwise agreed in writing by the Parties:

(a)all orders for the Products and Services by the Representative shall be in writing using the format prescribed by the Supplier (the “Order Form(s)”) and shall be communicated to the Supplier by facsimile or email;

(b)the Order Forms shall contain details of the descriptions and quantities of the Products, scope of works of the Services, time line required for delivery and the designated port of delivery, but each Order Form shall indicate that delivery is EX WORKS (as defined in clause 12.2), Supplier’s manufacturing facility;

(c)each Order Form from the Representative is subject to acceptance in writing by Supplier at its principal office in Milperra, Australia, which acceptance shall be delivered by registered mail, e-mail or facsimile. Each Order Form shall be deemed to be an offer by the Representative to purchase Products pursuant to the terms of this Agreement and, when accepted by the Supplier as hereinabove provided, shall give rise to a contract under the terms of this Agreement to the exclusion of any additional or contrary terms set forth in the Representative’s Order Form or any other document not signed by the parties; and

(d)time shall be of the essence in respect of the required delivery time set out in each accepted Order Form (which delivery time shall not be less than the minimum delivery time agreed in advance by the Parties) and the Representative shall be entitled to demand from Stargames, as its sole remedy, [***] under the

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relevant accepted Order Form from the date the relevant Products are due for delivery until the date of shipment of the same provided that the Supplier shall not be liable to pay such [***] for any delay in delivery of any Products due to a cause for such delay that is beyond its reasonable control.

12.2Deliveries

All deliveries of Products shall be EX WORKS Supplier’s manufacturing facility. For the purposes of this Agreement, EX WORKS shall be construed in accordance with INCOTERMS 2000 of the International Chamber of Commerce (save that notwithstanding that definition the Supplier shall be responsible for organising the transport of the Products, including insurance costs, but all at the Representative’s cost and for the Representative’s account. The Supplier shall be responsible for organising shipment and shall have no further responsibility for the Products and all risk of damage, loss or delay in the Products shall pass to the Representative upon their delivery, at the EX WORKS manufacturing facility by the common carrier selected by the Supplier, which shall be for the Representative’s account. Legal ownership and title to a Product shall pass to the Representative upon shipment of the Product, but the Supplier shall retain a security interest in the Product until the Representative shall have paid the Product’s purchase price in full (including transportation and insurance costs to the location nominated by the Representative) and in connection therewith Stargames reserves the right whilst any delinquency in payment is continuing to require the Representative to execute any documents to legally validate, create or perfect a Supplier’s security interest. The Representative is obliged to state the retention of title in its books. The Supplier shall procure that the common carrier ensures that all Products are fully insured by the common carrier from the EX WORKS manufacturing facility. In the event of an extended delivery time, the Supplier shall notify the Representative of the delay as soon as practicable and in any event within 2 weeks of receiving the order. The Representative shall be responsible for all import/export taxes and costs. The Supplier reserves all rights with respect to shipped or delivered Products permitted by applicable law including, without limitation, the rights of rescission, repossession, resale and stoppage in transit until the full amount due from the Representative has been paid.

12.3[***] Adjustment

For the avoidance of doubt, whilst all transportation and insurance costs and import and export duties and import and export taxes are for the Representative’s account, they nonetheless constitute a [***].

12.4Accepted Order Forms

An accepted Order Form shall become binding and shall not be subject to cancellation or change by the Representative, either in whole or in part, unless the request for cancellation or change is made in writing not less than 21 days prior to the expected shipment date stated in that Order Form. The Supplier shall deliver the Products to the shipping port or flight terminal of the manufacturing place of the Products on or before the shipping date set out in the Order Form, all consistent with the above EX WORKS delivery terms.

12.5Products manufactured in Australia

All Products sold to the Representative which are manufactured or shipped from Australia shall be exported from Australia [***] of such Products; if this does not occur as a consequence of any action taken by the Representative or omission on the part of the Representative intended or which is reasonably foreseeable to delay the export of such Products, the Representative shall pay all GST which is or becomes due on such Products.

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12.6Stargames’ rights

Notwithstanding the foregoing, Stargames may refuse to accept any purchase orders or cancel or delay shipment of any order for Products previously accepted by Stargames if:

(a)the Representative is overdue in its payments to Stargames;

(b)the Representative is deemed to be insolvent, has an administrator or liquidator appointed, or is otherwise unable to pay its debts;

(c)the Representative is in breach of any material provision of this Agreement;

(d)the Representative does not meet, at the time of each order, Stargames’ or any Associated Companies’ credit worthiness policies or review;

(e)Stargames believes (acting reasonably and in good faith), but in its sole and final discretion, it is at risk of not being timely paid in full by the Representative for any Products,

provided that if the refusal is based on any of the grounds set out in sub-clauses (d) or (e) of this clause 12.6, Stargames shall provide details of such grounds and the basis of such belief in writing at the time that it notifies the Representative of the refusal of the relevant order and shall consider in good faith, but in its sole and final discretion, any response provided by the Representative.

12.7Advance payment or credit

Notwithstanding the foregoing, Stargames shall have the right in its sole and final discretion, to require either payment in advance or an irrevocable letter of credit or bank guaranty for any Product ordered, and before said Product is supplied, if Stargames reasonably believes it is at risk of not being promptly paid in full by the Representative. In connection therewith, Stargames agrees to give reasonable written notice to the Representative of Stargames’ belief (which shall contain details of the basis of its belief) and will consider in good faith, but in its sole and final discretion, any response provided by the Representative.

13Manufacture of Relevant Gaming Machines

13.1Stargames to initially manufacture Relevant Gaming Machines

Until such time as the Representative has built or acquired a manufacturing plant which satisfies each of the conditions, obligations, limitations and/or requirements of clause 13.4, Stargames and/or another Supplier will supply to and manufacture or procure the manufacturing of Relevant Gaming Machines for sale by the Representative. Each such Relevant Gaming Machine [***] the Gaming Machine Cost.

13.2Representative to be able to monitor manufacturing

Stargames will ensure that at all times that it is manufacturing Relevant Gaming Machines for supply to and sale by the Representative, the Representative will have reasonable access at its cost (provided that no Supplier will charge the Representative a fee for providing the Representative with such reasonable access),to all of the necessary technical and other staff of Stargames and/or any Supplier to enable it to reasonably monitor all material aspects of the manufacturing of those Relevant Gaming Machines reasonably sufficient to enable it to build a manufacturing plant.

13.3No Obligation

Notwithstanding any other clause of this Agreement that refers to the manufacturing arrangements, the Representative is not obliged to manufacture any Product until suitable arrangements have been agreed by both Stargames and the Representative, and until such time, each Supplier shall continue to have the exclusive right to

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manufacture its Products and the Representative shall have no manufacturing rights to the Products.

13.4Representative’s ability to commence manufacturing

The Representative intends at a future point in time to build or acquire a manufacturing plant [***] that will manufacture Gaming Machines. The Representative will keep Stargames fully informed about the construction or acquisition of the manufacturing plant. Subject to:

(a)to Stargames’ reasonable satisfaction, the manufacturing plant becoming fully operational and capable of manufacturing sufficient quantities of Relevant Gaming Machines at a competitive cost and of appropriate quality (in accordance with pre-determined specifications set out in any separate manufacturing agreement entered into by the Parties);

(b)the Representative and Stargames entering into a written manufacturing agreement consistent with the applicable terms of this Agreement;

(c)all necessary regulatory consents being obtained;

(d)the manufacturing relationship between the Representative and Stargames not causing any jeopardy or risk to any gaming License or approval held (at any time) by any Supplier;

(e)Stargames or Shuffle Master (as the case may be) having completed such additional due diligence on the Representative as it elects;

(f)the Representative having fully cooperated with any regulatory due diligence needed to be done by Stargames or Shuffle Master (as the case may be) for regulatory compliance; and

(g)the Representative not being in material breach of this Agreement:

(i)the Representative will manufacture [***] intended for Casinos in the Exclusive Territory at that manufacturing plant;

(ii)subject to any existing legal obligations of Stargames and Stargames not being put in breach of any existing legal obligations, Stargames will [***] intended for persons in the Exclusive Territory that it has in place in the Asian region and will appoint the Representative [***] for persons in the Exclusive Territory; and

(iii)thereafter, the Parties will negotiate in good faith regarding the appointment of the Representative if appropriate [***]. Before making this appointment, Supplier will need to be reasonably satisfied, in its sole and final discretion, that, among other things, the plant is capable of manufacturing sufficient quantities of Relevant Gaming Machines at a competitive cost and of appropriate quality and in a manner so as to timely deliver same as Stargames require and as Stargames is currently doing.

13.5Ownership of Manufacturing Plant

The parties recognise that the manufacturing plant may not be wholly owned by the Representative and that the manufacturing plant may be co-owned with third parties, but the Representative will always have control and majority equity interests in the ownership of the manufacturing plant. This provision shall not be deemed to modify or reduce any of the Representative’s obligations respecting the manufacturing of Gaming Machines.

13.6Limitation on Representative’s ability to manufacture

Without the prior written express consent of Stargames, the Representative will not manufacture any Gaming Machines or Table Gaming Products (other than Relevant

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Gaming Machines or Relevant Table Gaming Products) either for its own account or for any other Gaming Machine or Table Gaming Product supplier in the manufacturing plant as contemplated in clause 13.3, nor will Representative, without the prior written consent of Stargames, assist any other entity in doing any of the activities which it is not permitted by this clause 13.6 to do.

13.7Products warranty

Subject to clause 13.3 above:

(a)all Relevant Gaming Machines manufactured by the Representative in its manufacturing plant shall carry a return to factory warranty against faulty parts, manufacture and workmanship. The length and starting date of such warranty period shall be agreed by the parties prior to the Representative commencing to manufacture any Relevant Gaming Machines.

(b)The liability of the Representative, if any, for damages relating to any allegedly defective Gaming Machines manufactured by the Representative or any breach of warranty or condition in relation to the Gaming Machines manufactured by the Representative will be limited to replacement of the Gaming Machines or the refund of the actual price paid for such Gaming Machines.

13.8Manufacture of Relevant Table Gaming Products

If during the Term the Representative desires to also manufacture the Relevant Table Gaming Products it will notify Stargames of this intention and upon doing so the Representative and Stargames will meet and negotiate in good faith regarding the merits of the Representative also manufacturing the Relevant Table Gaming Products, with Stargames having the final decision, in its sole and final discretion, as to whether to have Representative so manufacture.

14Payments for Relevant Gaming Machines

14.1Royalties

The Representative will pay to Stargames a royalty of [***] earned or received by either the Representative or any Distributor on all Relevant Gaming Machines sold to Casinos in the Exclusive Territory by the Representative or any Distributor.

14.2Payment of Cost and Royalty

(a)[***] to the Representative:

(i)all Gaming Machine Costs will be paid based on the number of Relevant Gaming Machines that the Representative or any Distributor of the Representative has ordered from Supplier and which has been shipped to the Representative and has not been lawfully returned due to defects therein pursuant to the provisions of clause 12 hereof;

(ii)the Representative will also pay the royalty on all Relevant Gaming Machines shipped to Designated Clients that have not been lawfully returned by the Representative due to defects therein; and

(iii)the royalty on all other Gaming Machines shipped in the Exclusive Territory (or, if applicable, outside the Exclusive Territory) will be [***].

(b)At the end of each month or on another date in each month mutually agreed to by the Parties for this purpose (“Statement Date”), the Representative shall send to Stargames a truthful and accurate written statement (“Statement”) of the Representative’s invoices issued to its customers for the previous monthly period, listing the names and addresses of each of the Representative’s customers

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(end-users), the invoiced amount of each sale, and the amount already settled and paid by such customers.

14.3Minimum Royalty

(a)During the Term, subject to clause 3.6 (if applicable), and provided that neither Stargames nor Shuffle Master is in material breach (which breach has not been remedied as provided in clause 22.1(b) in a manner that has not materially affected the Representative’s ability to sell and distribute Relevant Gaming Machines to Casinos in the Exclusive Territory) of any of its obligations under this Agreement which breach adversely and directly affects in any material manner the Representative’s ability to sell and distribute any Relevant Gaming Machines to Casinos in the Exclusive Territory,  then the Representative will ensure that the royalty paid to Stargames, for each of the first three (3) contract years, in respect of the distribution of the Relevant Gaming Machines to Casinos in the Exclusive Territory will be at least the following amounts in each contract year:

A$	First Contract Year from Commencement Date	Second Contract Year from Commencement Date	Third Contract Year from Commencement Date
Minimum Royalty ("Minimum Royalty")	[***]	[***]	[***]

(b)Any Royalty paid to Stargames [***] payable in a contract year may be [***]. In any contract year [***].

(c)The [***] only relates to sales of Relevant Gaming Machines to Casinos in the Exclusive Territory.

(d)[***].

14.4Audit Rights

Stargames shall have full audit rights (at its sole cost) regarding all sales or other distributions of Relevant Gaming Machines or otherwise in order to verify the royalties due.

14.5Stargames [***]

(a)Stargames will pay or will procure each Supplier to pay [***] that are sold, after the Commencement Date,  which Products incorporate any of the Intellectual Property that is developed, after the Commencement Date, by the Representative either solely or jointly with a Supplier.

(b)The amount of the [***] will be determined from time to time by agreement between the Parties at the time that any Intellectual Property that is developed, after the Commencement Date, by the Representative either solely or jointly with a Supplier is incorporated into any Gaming Machine or Table Gaming Products which is sold by any Supplier.

(c)To the extent that any Gaming Machines or Table Gaming Products that incorporate any of the Intellectual Property that is developed by the Representative either solely or jointly with a Supplier are sold to persons in the Exclusive Territory the amount of the [***] to the Representative pursuant to this clause 14.5 will be [***] by the Representative to Stargames pursuant to clause 14.1. Notwithstanding [***] made pursuant to this clause, the [***] pursuant to clause 14.1 will be taken into account when calculating whether the Representative has satisfied its obligation to pay the [***] as required by clause 14.3.

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(d)If any sales of such Gaming Machines or Table Gaming Products containing Intellectual Property that is developed, after the Commencement Date, by the Representative either solely or jointly with a Supplier are made by any Supplier outside the Exclusive Territory, Stargames will provide the Representative with monthly reports within 30 days of the end of each month detailing the number of such Gaming Machines and such Table Gaming Products sold in that month in respect of which [***] pursuant to this clause and will [***] within 30 days of the end of that month.

(e)Nothing in this clause requires Stargames to utilise any Intellectual Property that is developed, after the Commencement Date, by the Representative either solely or jointly with a Supplier in any Gaming Machines or Table Gaming Products that are sold by any Supplier.

14.6Changes to the Gaming Machine Cost

Any changes to the Gaming Machine Cost must only be effected by a Supplier in accordance with any other applicable provisions of this Agreement and such change will not be capable of being applied to any unfilled order placed by the Representative prior to the date on which any notice of a change in the Gaming Machine Cost becomes effective.

15Payments for Relevant Table Gaming Products

15.1Table Gaming Product Prices

The Representative will pay to Stargames, or if it so directs to the relevant Supplier, the Relevant Table Gaming Product Distribution Price for the Relevant Table Gaming Products ordered by the Representative, [***] to the Representative by Stargames or the applicable Supplier.

15.2[***] Table Gaming Products

(a)During the Term, and provided that neither Stargames nor Shuffle Master is in material breach (which breach has not been remedied as provided in clause 22.1(ii) in a manner that has not materially affected the Representative’s ability to sell and distribute Relevant Table Gaming Products to Casinos in the Exclusive Territory) of any of its obligations under this Agreement which breach adversely and directly affects in any material manner the Representative’s ability to sell and distribute any Relevant Table Gaming Products to Casinos in the Exclusive Territory, then the Representative will ensure that [***] Casinos in the Exclusive Territory [***] agreed by the parties in respect of each such year.

(b)The Representative and Stargames will use all reasonable endeavours to agree on the [***]:

(i)shufflers;

(ii)easy chippers; and

(iii)intelligent shoes,

within three (3) months of the Commencement Date. If the Representative and Stargames are not able to reach agreement within that time then the Representative shall have no distribution or other rights in respect of Relevant Table Gaming Products and clause 3.2 shall have no further force or effect, in which case any Supplier shall be entitled to sell, distribute or market Relevant Table Gaming Products in the Exclusive Territory, in such Supplier’s sole and final discretion.

(c)Any Relevant Table Gaming Products ordered by the Representative in the [***] for that year may be [***], but the [***] of Relevant Table Gaming Products that [***] required to be ordered in that year.

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(d)[***]

(e)The [***] only relates to sales of Relevant Table Gaming Products to Casinos in the Exclusive Territory.

15.3Changes to the Relevant Table Gaming Product Distribution Price

Any changes to the Relevant Table Gaming Product Distribution Price must only be effected by a Supplier in accordance with any other applicable provisions of this Agreement and such change will not be capable of being applied to any unfilled order placed by the Representative prior to the date on which any notice of a change in the Relevant Table Gaming Product Distribution Price becomes effective.

15.4Audit Rights

Stargames shall have full audit rights (at its sole cost) regarding all sales or other distributions of Relevant Table Gaming Products or otherwise in order to verify the amounts due for the Relevant Table Gaming Products ordered.

16Ownership and protection of Intellectual Property

16.1Pre-Existing Intellectual Property

The Parties agree that all right, title and interest, in and to, the Pre-existing Representative Intellectual Property and the Pre-Existing Shuffle Master Intellectual Property will, at all times, remain the sole and exclusive property of the Representative and Stargames, respectively.

16.2Improvements

The Parties agree that, subject to the foregoing provisions of this Agreement, each Party will own all Intellectual Property in, and to, any and all Improvements and/or any other gaming technologies, which are developed or created by such Party prior to the commencement of the Joint Ownership Period, including any Improvements which have been developed as a consequence of any involvement or assistance received from any other Party.

17Confidentiality

17.1Confidential Information

Each Party agrees and undertakes to every other Party that during the Term and [***], it will (and it will ensure that the members of its Group will):

(a)maintain the confidential and secret nature of all Confidential Information received by it from any other Party and will not disclose such Confidential Information to any third party otherwise than in the performance of its obligations under this Agreement; and

(b)not directly or indirectly use or attempt to use any such Confidential Information in a manner that may injure or cause loss either directly or indirectly to any other Party or contravene the provisions of this clause.

17.2Exclusions

Clause 17.1 shall not however apply to:

(a)disclosures required by law, statutory bodies or regulatory authorities;

(b)disclosures to employees, agents or contractors who have a need to know and only to the extent necessary for each of them to perform his or her duties;

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(c)disclosure or use of any information which was, is in or enters the public domain other than by breach of this Agreement;

(d)disclosure or use of any information which is independently developed by the relevant Party as evidenced by written records; or

(e)disclosure or use of any information which is received in good faith by one Party from a third party not subject to a duty of confidentiality.

17.3Compliance by employees, agents and sub-contractors

Each Party undertakes to every other party that it will take all reasonable steps as shall from time to time be necessary to ensure compliance with the provisions of this clause by its (and/or its Designated Clients’) employees, agents and sub-contractors.

18Gaming Machine branding

18.1Branding of Relevant Gaming Machines

Subject to clause 18.2, the Parties agree that any Relevant Gaming Machines sold by the Representative will bear, such branding, name and trademarks as the Parties may consider as being the most attractive to its customers.

18.2Stargames’ Name

Each Relevant Gaming Machine will bear Stargames’ name in such reasonable position as may be acceptable to all parties.

18.3Trademark

(a)During the Term and subject to each of the terms and conditions in this Agreement and provided there is no Actioned Material Breach on the part of the Representative, the Representative shall have the non-exclusive right to use each Supplier’s trademarks in promoting the sale of Products and Services to persons in the Exclusive Territory.

(b)The Representative agrees to comply with the instructions issued by each Supplier relating to the form and manner in which that Supplier’s trade name and trademarks are used.

(c)The Representative agrees to discontinue upon notice from Stargames any practice or use of the trademarks that might adversely affect the rights or interest of a Supplier in its trademarks.

18.4Branding of Relevant Gaming Machines

The Parties jointly agree that any Relevant Gaming Machines sold by the Representative will bear, such branding, name and trademarks as the Parties may consider as being the most attractive to the Representative’s customers and in doing so the Supplier will licence the Representative to use its trade marks.

18.5Joint Logo

The Parties agree to work in good faith to develop a joint logo for the Relevant Gaming Machines.

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19Escrow

19.1Escrow of Stargames’ Intellectual Property

Subject to any regulatory requirements, limitations or prohibitions, Stargames must ensure that during the Term all Intellectual Property in tangible form including all source code and all Improvements that are used by a Supplier:

(a)in any Relevant Gaming Machine; and

(b)where the Parties have otherwise, in writing, agreed, in any Relevant Table Gaming Product,

are deposited with and are held by an independent escrow agent acceptable to all Parties.

19.2Release from Escrow of Stargames’ Intellectual Property

The terms of the escrow referred to in clause 19.1 shall permit the deposited materials to be released to the Representative for unconditional use (in any manner permitted under this Agreement or the R & D Centre Agreement) if this Agreement is terminated due to the insolvency or material uncured breach, after written notice and a 30 day cure period, of Stargames or any applicable member of the Stargames Group of any of its obligations under this Agreement. If the deposited materials are released to the Representative otherwise than as a consequence of the insolvency of Stargames then the Representative shall only be permitted to use the deposited materials for the balance of the twenty years that the Term would have continued.

19.3Escrow of the Representative’s Intellectual Property

The Representative must ensure that during the Term all Intellectual Property of the Representative in tangible form including all source code and all Improvements that are used by a Supplier in any Product are deposited with and are held by an independent escrow agent acceptable to all Parties.

19.4Release from Escrow of the Representative’s Intellectual Property

The terms of the escrow referred to in clause 19.3 shall permit the deposited materials to be released to Stargames for unconditional use (in any manner permitted under this Agreement or the R & D Centre Agreement) if this Agreement is terminated due to the insolvency or material breach of the Representative of any of its obligations under this Agreement. If the deposited materials are released to Stargames otherwise than as a consequence of the insolvency of the Representative then Stargames shall only be permitted to use the deposited materials for the balance of the twenty years that the Term would have continued.

20[***] of the Representative

20.1[***]

 [***]

20.2Participation by Shuffle Master

[***] Shuffle Master will be [***].

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21Indemnity

21.1Indemnity by Each Party

Subject to clause 11.5, each Party (“Indemnifying Party”) releases and indemnifies each other Party (each an “Indemnitee”), its directors, officers, servants and agents against all Claims (including the cost of defending or settling any Claim) which may be instituted against any Indemnitee arising out of:

(a)a breach by the Indemnifying Party (or any sub-contractor, agent or employee of the Indemnifying Party) of any of the Indemnifying Party’s material obligations or warranties under this Agreement; or

(b)any claim made against an Indemnitee in relation to workers’ compensation or by any taxation authority in connection with the employees or activities of the Indemnifying Party,

and the amount of all claims, damages, costs and expenses which may be paid, suffered or incurred by an Indemnitee in respect of any such loss, damage or injury shall be made good at the Indemnifying Party’s expense and may be deducted from any monies due or becoming due to the Indemnifying Party.

21.2Indemnity by Stargames

Subject to clause 11.5, Stargames shall indemnify, defend and save and hold harmless the Representative, its Group and their Associated Companies, and the directors, officers, employees, representatives and agents (either of the Representative’s or of any member of its Group) from and against all claims, lawsuits, losses and expenses arising out of or resulting from:

(a)any breach or inaccuracy of any of the representations or warranties set out in clause 10.1; or

(b)any breach of Stargames or Shuffle Master’s or any Supplier’s obligations or agreements under this Agreement,

provided that Stargames’ liability under this clause shall be reduced proportionately if the Representative’s negligence, wilful default or breach of the Agreement has contributed to the relevant claims, lawsuits, losses or expenses incurred by the Representative, its Group entities, and its and their Associated Companies, or their directors, officers, employees, representatives or agents.

21.3Indemnity by Representative

Subject to clause 11.5, the Representative shall indemnify, defend and save and hold harmless Shuffle Master, any Supplier, its and their Group entities, and its and their Associated Companies, and the directors, officers, employees, representatives and agents, of any of the foregoing from and against all claims, lawsuits, losses and expenses arising out of or resulting from:

(a)any breach or inaccuracy of any of the representations or warranties set for in clause 10.2; or

(b)any breach of any of the Representative’s or Melco’s obligations or agreements under this Agreement,

provided that the Representative’s liability under this clause shall be reduced proportionately if a Supplier’s negligence, wilful default or breach of the Agreement has contributed to the relevant claims, lawsuits, losses or expenses incurred by Shuffle Master, any Supplier, its and their Group entities, and its and their Associated Companies, and their directors, officers, employees, representatives and agents.

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21.4Regulatory compliance

Throughout the continuance of this Agreement, the Indemnifying Party shall conform at its own cost and expense with all laws of any applicable jurisdiction and all regulations, by-laws, ordinances or orders made under them and the lawful requirements of any public, municipal or other authority so far as they may affect or apply to the Indemnifying Party or the performance of its obligations under this Agreement and the Indemnifying Party shall indemnify each Indemnitee from and against any and all actions, costs, charges, claims and demands in respect of them.

21.5Status of indemnities

Each indemnity in this Agreement:

(a)is a continuing obligation;

(b)constitutes a separate and independent obligation of the Party giving the indemnity from its other obligations under this Agreement; and

(c)survives termination of this Agreement.

22Termination

22.1Termination by the Representative

(a)The Representative may terminate this Agreement immediately by notice in writing to Stargames if:

(i)an Insolvency Event occurs in relation to Stargames, Shuffle Master or any Supplier; or

(ii)either Shuffle Master, Stargames or any other Supplier commits a material breach of any of its obligations, representations or warranties under this Agreement which:

(A)if capable of being remedied, is not remedied within [***] of notice from the Representative specifying the breach and requiring it to be remedied, except that the period for remedying a breach of any financial obligation or obligation to make a payment shall be [***] from said notice; or

(B)is not capable of remedy; or

(b)After the [***], the Representative may terminate this Agreement on [***] in writing to Stargames (or such shorter period as Stargames may specify) if:

(i)Stargames has decided to [***] in its sole and final discretion in accordance with clause 8.1(l) that the Representative has been selling in the Exclusive Territory; and

(ii)Stargames has [***]; and

(iii)such discontinuation will, in the sole and final opinion of the Representative, render it [***]; and

(iv)the Representative has given notice of this to Stargames and the Parties [***] have not been able to come up with mutually acceptable arrangement that will render it [***].

22.2Termination by Stargames

Stargames may terminate this Agreement immediately by notice in writing to the Representative if:

(a)an Insolvency Event occurs in relation to the Representative or Melco; or

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(b)either the Representative or Melco commits a material breach of any of its obligations, representations or warranties under this Agreement which:

(i)if capable of being remedied, is not remedied within [***] of notice from Stargames specifying the breach and requiring it to be remedied, except that the period for remedying a breach of any financial obligation or obligation to make a payment shall be [***] from said notice; or

(ii)is not capable of remedy;

(c)the Representative, any Associated Company or any Group entity of the Representative takes any action or fails to take any action which jeopardizes or puts at risk any corporate, gaming or other regulatory licence, permit and/or approval (existing or pending) (each a “Licence”) of either Stargames or Shuffle Master in any jurisdiction;

(d)any governmental agency takes any action against the Representative, any Associated Company, or any Group entity of the Representative which governmental action jeopardizes any Licence of Shuffle Master or Stargames in any jurisdiction;

(e)any regulatory or governmental agency indicates that Shuffle Master’s or Stargames’ relationship or transaction of business with the Representative or Associated Company or Group entity of the Representative puts at jeopardy or risk any Licence of Shuffle Master or Stargames;

(f)If there is a change in the ownership of the controlling shareholder of the Representative or Melco and such material change is made in a manner that jeopardizes or puts at risk any Licence of Shuffle Master or Stargames; or

(g)any failure by Representative to pay any royalties, costs, Minimum Royalties or other payments due under clauses 14 or 15, within 10 days after written notice of such payments being due.

For the avoidance of doubt but without modifying or limiting Stargames rights under this clause 22.2, Stargames shall not use any regulatory issues as a subterfuge to improperly terminate this Agreement. Stargames shall also not be entitled to terminate this Agreement solely because it is of the view that on termination of this Agreement it or any Supplier or any other person would be able to perform the obligations of the Representative under this Agreement in a manner that is superior to the manner in which the Representative has performed its obligations, provided that nothing contained in this clause shall prevent, delay or hinder any Supplier from terminating this Agreement in the event of a material breach by the Representative of its obligations under this Agreement which is not rectified within any applicable cure period.

22.3Termination by either Party

A Party may terminate this Agreement if permitted to do so by clause 29.12(b).

22.4Interest

If any payment is not made by a Party when due, interest accrues on such payment at the penalty interest rate fixed by the Attorney-General under the Penalty Interest Rates Act (Vic) 1983 on a daily basis from the due date for payment up to the date of actual payment and is compounded monthly, both before and after judgment (as a separate and independent obligation).

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23Obligations and rights following termination

23.1Confidential Information, Products and Services

Upon termination of this Agreement for any reason, or expiration of the Term:

(a)subject to clause 19, each Party shall return all Confidential Information which belongs to any other Party; and

(b)the Representative shall cease promoting, selling and distributing the Products and Services and shall cease using each Supplier’s trade name and trade marks.

23.2Rights and liabilities of Parties

(a)Any termination or expiration of this Agreement shall be without prejudice to any rights or liabilities of any Party to or against any other Party accrued at the date of termination or expiration or in respect of any breach of any other Party of any of its obligations under this Agreement or any amount owing, due or payable under this Agreement. Further, and subject to clause 11.5 the terminating Party shall be entitled to pursue all rights, remedies and damages against the non-terminating Party as may exist under applicable law.

(b)If this Agreement is lawfully terminated by the Representative pursuant to clause 22.1, the Representative shall cease to be liable to pay nor remain committed to pay any portion of the [***] referred to in clause 14.3 or any amount committed to be paid pursuant to clause 15.2 on account of the [***] in respect of the contract year in which this Agreement is terminated nor in respect of any subsequent contract year.

(c)If this Agreement is terminated by Stargames pursuant to clause 22.2(c) (provided that the action or inaction on the part of the Representative referred to in that clause does not, in and of itself, constitute a breach by the Representative of its obligations under this Agreement), 22.2(e) or clause 22.2(f):

(i)within [***] of the Commencement Date then the Representative shall not be liable to pay or remain committed to pay any amount on account of the [***] or any amount committed to be paid pursuant to clause 15.2 on account of the in respect of the [***]; and

(ii)at any other time during the [***] after the Commencement Date, then the Representative shall only be liable for the proportion of the [***] for that contract year or the proportion of the payment in respect of the [***] for that contract year that the number of days elapsed in that contract year prior to the termination date bears to the three hundred and sixty five days of that contract year.

(d)In no event, shall the Representative be relieved of its obligation to fully pay any royalties or other amounts in connection with any Product which, pursuant to clause 12.2, has been shipped to the Representative.

23.3Survival of certain terms and conditions

Any terms or conditions of this Agreement which are capable of having effect after the termination or expiration of this Agreement shall remain in full force and effect following the termination or expiration of this Agreement.

23.4Notice to Stargames

Within [***] after any termination or expiration of this Agreement, the Representative shall by written notice inform Stargames of its stock of the Relevant Gaming Machines and Relevant Table Gaming Products on hand at the time of such termination or expiration.

23.5Election of Stargames

Stargames will have [***] from the date of termination to elect to purchase Representative’s stock of Relevant Gaming Machines and Relevant Table Gaming Products, and if it elects to do so Stargames agrees to repurchase:

(a)the [***]; and

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(b)the [***],

from the Representative and pay the Representative for the same within [***] days from the date of delivery of such Products. All transportation and insurance costs for such repurchase shall be borne by Stargames unless the termination is due to a breach of this Agreement by the Representative and the relevant Products shall be deemed delivered by the Representative to the Supplier at the relevant shipping port or flight terminal as notified by the Representative. If the Supplier does not elect to purchase any or all of such stock of Products from the Representative, the Representative shall have [***] from the end of said [***] period to sell said stock, but such sales shall only be permitted within the countries which were within the Exclusive Territory when this Agreement was in effect.

24Relationship of Parties

24.1Position of Stargames

(a)Shuffle Master confirms and agrees that Stargames has been duly authorised and empowered by Shuffle Master to represent Shuffle Master and each Supplier under this Agreement in relation to the supply, sale and if applicable, manufacture of Relevant Table Gaming Products but only as same relate to the Exclusive Territory. Accordingly, all commitments and decisions made by Stargames and all rights conferred by Stargames under or in respect of this Agreement are made with the express consent and support of Shuffle Master and to the extent that they require any action on the part of Shuffle Master or any Supplier to be performed will be binding on Shuffle Master and each relevant Supplier. Shuffle Master will not take any action that conflicts with any commitments or decisions made or rights conferred on the Representative by Stargames under this Agreement. Shuffle Master understands and agrees that the Representative is entering into this Agreement in reliance on this clause 24.1(a).

(b)Melco confirms and agrees that the Representative has been duly authorised and empowered by Melco to enter into and perform all of its obligations under this Agreement. Accordingly, all commitments and decisions made by the Representative and all rights conferred by the Representative under or in respect of this Agreement are made with the express consent and support of Melco and to the extent that they require any action on the part of Melco to be performed will be binding on Melco. Melco will not take any action that conflicts with any commitments or decisions made or rights conferred on Stargames by the Representative under this Agreement. Melco understands and agrees that the Representative is entering into this Agreement in reliance on this clause 24.1(b).

(c)Shuffle Master shall indemnify, defend and save harmless the Representative, its Group and the directors, officers, employees, representatives and agents (either of the Representative or of any member of its Group) from and against all claims, lawsuits, losses and expenses arising out of or resulting from any breach by Stargames of any of its obligations under this Agreement or any breach by Shuffle Master of its obligations pursuant to clause 24.1(a) provided that Shuffle Master’s liability under this clause shall be reduced proportionately if the Representative’s negligence, wilful default or breach of the Agreement has contributed to the relevant claims, lawsuits, losses or expenses incurred by the Representative; however, this indemnity will cease to apply on the first date on which both of the following are true:

(i)Stargames is listed on any recognised stock exchange; and

(ii)Shuffle Master no longer owns or controls more than 50% of the voting shares of or economic interests in Stargames.

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(d)The Representative’s parent company, Melco, shall indemnify, defend and save harmless Stargames, its Group and the directors, officers, employees, representatives and agents (either of Stargames or of any member of its Group) from and against all claims, lawsuits, losses and expenses arising out of or resulting from any breach by the Representative of any of its obligations under this Agreement (other than the Representative’s obligations to pay the [***] or acquire the [***] or any breach by Melco of its obligations pursuant to clause 24.1(b) provided that Melco’s liability under this clause shall be reduced proportionately if a Supplier’s negligence, wilful default or breach of the Agreement has contributed to the relevant claims, lawsuits, losses or expenses incurred by the Supplier, and further provided that Melco’s indemnity shall include Representative’s obligations to order sufficient Relevant Gaming Machines to cover the [***] and to acquire the [***] and to pay for those Relevant Gaming Machines and Relevant Table Gaming Products. This indemnity will cease to apply on the first date on which both of the following are true:

(i)the Representative is listed on any recognised stock exchange; and

(ii)Melco no longer owns or controls more than 50% of the voting shares of or the economic interests in the Representative.

24.2Relationship of Parties

The relationship between the Parties is contractual only and this Agreement does not create a partnership, employment, joint venture, fiduciary or any other legal relationship.

24.3No power to bind

No Party has (and will not represent that it has) any power, right or authority to bind any other or to assume or create any obligation or responsibility, express or implied, on behalf of any other Party or in any other Party’s name.

24.4Responsible for sub-contractors

Any sub-contractor, Distributor, or agent engaged by a Party with the consent of each other Party will be the commercial and contractual responsibility of the Party engaging that sub-contractor and will be subject to the terms and conditions of this Agreement.

24.5No relief from obligations

A Party will not be relieved of any of its obligations under this Agreement as a result of entering into any sub-contracts.

24.6No liability for tax

It is expressly agreed between the Parties that the other party will not be liable for any income, withholding, or other tax which may be levied by any jurisdiction on the royalties paid by a Party.

25Publicity

Unless required by law, regulation or gaming authority, each Party agrees that it will not, issue any news release, public announcement, or advertisement relating to this Agreement or its subject matter, nor will it otherwise publicise this Agreement or its subject matter, without first obtaining the written approval of all other Parties.

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26Non-solicitation

26.1Non-solicitation

Subject to clauses 26.2 and 26.3, except with the express written consent of the other Parties, each Party covenants with every other Party that it will not and will ensure that none of the members of its Group will, during the Term and for a period of [***] thereafter, on its own behalf or on behalf of any person, firm or company, directly or indirectly endeavour to entice away or hire from any other Party and/or employ any person who is or was any other Party’s employee or who has at any time during the [***] period immediately preceding the termination or expiration of this Agreement, been employed or engaged by any other Party.

26.2Exceptions to non-solicitation

Clause 26.1 does not apply where an employee of a Party seeks employment with another Party in response to an advertisement placed into the public domain for that position unless that other Party has solicited, directly or indirectly, the application from that employee for that position.

26.3Employment

Stargames hereby consents to the employment by the Representative of Mr Damien Huang, Software Team Leader.

27Dispute Resolution

27.1No court proceedings

If a dispute arises out of or in relation to this Agreement (“Dispute”) no Party to the Dispute (“Disputant”) will start court proceedings (except proceedings seeking interlocutory relief) unless it has complied with this clause 27.

27.2Notice

A Party claiming that a Dispute has arisen must notify each other Disputant in writing giving details of the Dispute and its proposal for a resolution.

27.3Initial Period

For a [***] period after a notice is given (“Initial Period”) each Disputant must use all reasonable endeavours to resolve the Dispute and the chief executive officer, or his designee, of each Disputant will meet within the first [***] of that period with that aim.

27.4Appointment of mediator

(a)If the Dispute remains unresolved at the end of the Initial Period, it must be referred for mediation at the request of any Disputant to:

(i)a person mutually agreed on by the Disputants; or

(ii)if agreement is not reached within [***] of the end of the Initial Period, a mediator nominated pursuant to the rules of the ICC.

(b)The mediation process will cease if the dispute has not been settled within [***] after the mediator being appointed, or any longer time agreed by the parties (Mediation Period).

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27.5Role of mediator

The role of any mediator is to assist in negotiating a resolution of the Dispute. A mediator may not make a decision that is binding on a Disputant unless that Disputant has agreed to this in writing.

27.6Referral if no resolution

If the Disputants are unable to resolve the Dispute within the Initial Period and the Mediation Period, each Disputant agrees that the Dispute must be referred to ICC arbitration before 1 arbitrator, who shall be experienced in commercial and intellectual property disputes, at the written request of either Disputant. The rules of the ICC shall govern the arbitration. The arbitration shall be conducted in the English language.

27.7Venue and representation

Unless otherwise mutually agreed between the Disputants, any mediation and, if relevant, arbitration will take place in Melbourne, Australia and the Disputants will be entitled to legal representation.

27.8Timeframe

Each Disputant will use all reasonable endeavours to resolve the Dispute through mediation and, if relevant arbitration as soon as is practical, including, but not limited to, providing the mediator and, if relevant, arbitrator with all information relevant to the Dispute.

27.9Confidentiality

Any information or documents disclosed by a Disputant under this clause must be kept confidential and may not be used except to attempt to resolve the Dispute.

27.10Costs

Each Disputant must bear its own costs of complying with this clause 27. The Disputants must bear equally the mediator’s costs. The Disputants must bear the relevant arbitrator’s costs in such proportions as the arbitrator may determine. The prevailing Disputant, if any, as determined by the arbitrator, shall be entitled in addition to any other award or damages to its attorney fees and arbitration costs against the unsuccessful Disputant.

27.11Litigation

If a party is aggrieved by the decision of the arbitrator it may appeal that decision to the courts of the State of Victoria, Australia and the courts of appeal therefrom.

27.12Limits of Review

(a)Notwithstanding anything contained herein to the contrary, even if a Party’s reasonableness or good faith is required, any consent, approval, disapproval, rejection or decision which may be made in a Party’s sole and final discretion, shall not be capable of being delayed or prevented by any mediation, arbitration or other dispute resolution means.

(b)Notwithstanding the provisions of clause (a), a Party that is aggrieved by the exercise of the discretion of another Party and considers that it is entitled to a legal remedy in respect of the exercise of that discretion (such as where the discretion is exercised in bad faith) shall be entitled to seek damages or any other remedy (other than specific performance) in respect of the exercise of that discretion.

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28Notices

28.1Method

All notices, requests, demands, consents, approvals, offers, agreements or other communications (“notices”) given by a Party under or in connection with this Agreement must be:

(a)in writing;

(b)signed by the Party giving notice or a person duly authorised by that Party;

(c)directed to the recipient’s address (as specified in clause 28.3 or as varied by any notice);

(d)hand delivered, sent by prepaid post or transmitted by facsimile to that address; and

(e)sent to each other Party.

28.2Receipt

A notice given in accordance with this clause is taken as having been given and received:

(a)if hand delivered at or before 4.30 pm, Melbourne time, on a Business Day, on delivery, otherwise at 9.30 am, Melbourne time, on the next Business Day;

(b)if sent by prepaid post:

(i)within Australia, on the second Business Day after the date of posting;

(ii)to or from a place outside Australia, on the seventh Business Day after the date of posting; or

(c)if transmitted by facsimile at or before 4.30 pm on a Business Day, at the time recorded on the transmission report indicating successful transmission of the entire notice, otherwise at 9.30 am on the next Business Day.

28.3Address of Parties

Unless varied by notice in accordance with this clause 28, the Parties’ addresses and other details are:

Party:	Elixir Group Limited
Attention:	General Counsel and Managing Director
Address:	19/F., Zhu Kuan Building, Avenida Xian Xing Hai, Macau
Facsimile:	+852 3162 3579 and to +853 755 165
Party:	Stargames Limited
Attention:	General Counsel and Managing Director
Address:	1 Sheridan Close, Milperra, New South Wales, Australia
Facsimile:	+61 2 9773 0828

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Party:	Shuffle Master Inc
Attention:	General Counsel
Address:	1106 Palms Airport Drive, Las Vegas, Nevada, United States of America
Facsimile:	702-270-5326

29General

29.1Entire agreement

This Agreement constitutes the entire agreement between the Parties in relation to its subject matter. All prior discussions, undertakings, agreements, representations, warranties and indemnities in relation to that subject matter are replaced by this Agreement and have no further effect.

No Party shall make any amendment or modification to the terms of this Agreement unless the same is in writing and signed by the other Parties.

29.2Paramountcy of document

If this Agreement conflicts with any other document, agreement or arrangement, this Agreement prevails to the extent of the inconsistency.

29.3No merger

The provisions of this Agreement will not merge on completion of any transaction contemplated in this Agreement and, to the extent any provision has not been fulfilled, will remain in force.

29.4Amendment

This Agreement may not be amended or varied unless the amendment or variation is in writing signed by all Parties.

29.5Assignment

No Party may assign, transfer or otherwise deal with this Agreement or any right or obligation under this Agreement without the prior written consent of every other Party, which must not be unreasonably withheld.

29.6Severability

Part or all of any provision of this Agreement that is illegal or unenforceable will be severed from this Agreement and will not affect the continued operation of the remaining provisions of this Agreement.

29.7Waiver

Waiver of any power or right under this Agreement:

(a)must be in writing signed by the Party entitled to the benefit of that power or right; and

(b)is effective only to the extent set out in that written waiver.

29.8Rights, remedies additional

Any rights and remedies that a person may have under this Agreement are in addition to and do not replace or limit any other rights or remedies that the person may have.

42

29.9Further assurances

Each Party must do or cause to be done all things necessary or reasonably desirable to give full effect to this Agreement and the transactions contemplated by it (including, but not limited to, the execution of documents).

29.10Costs

Each Party must bear its own legal, accounting and other costs for the preparation and execution of this Agreement.

29.11Counterparts

This Agreement may be executed in any number of counterparts and all counterparts taken together will constitute one document.

29.12Force Majeure

(a)No Party will be liable for any failure or delay in performance of its obligation under this Agreement other than to make payment of the amounts due as a result of any contingency beyond its reasonable control (“Force Majeure”) including but not limited to acts of God, fires, floods, wars, sabotage, lockouts, labour disputes or any other labour difficulties, any legislations, government rules or regulations, inability to obtain (other than due to the financial circumstances of the Party seeking to obtain the same) supplies, energy, raw materials, product, equipment or transportation and any other similar or different contingency. The Party suffering the inability to perform will notify each other Party of the existence of such delay within [***] of the first day of such delay that comes to its knowledge and in such event the time for performance hereunder (except to make payment of amounts due) will be extended for a period equalling the total period of such delay.

(b)Should the performance by any Party (“the Affected Party”) of its obligations or any part thereof under this Agreement (other than to make payment of the amount due) be wholly prevented or materially and adversely affected by Force Majeure for a period of not less than [***], the other Party shall be entitled at the expiry of such period of [***] to give to the Affected Party immediate notice in writing terminating this Agreement.

(c)If the termination of this Agreement by reason of Force Majeure occurs at any time during the [***], then the Representative shall only be liable for the proportion of the [***] for that contract year or the proportion of the payment in respect of the [***] for that contract year that the number of days elapsed in that contract year prior to the date of the first occurrence of the relevant Force Majeure bears to the three hundred and sixty five days of that contract year.

29.13Waiver

Any failure by any Party to enforce at any time or for any period of time any of the provisions under this Agreement will not be construed as a waiver of such provisions or of the right of such Party thereafter to enforce each and every provision under this Agreement.

29.14Governing law and jurisdiction

This Agreement will be governed by and construed in accordance with the laws in force in the State of Victoria, Australia and each Party submits to the exclusive jurisdiction of the courts of that State.

29.15Circumvention

Neither Party shall use, form or dissolve any affiliated entity or related body corporate which, in any manner, directly or indirectly, circumvents, avoids or reduces the rights or

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43

obligations of a Party hereunder, or the intent of this Agreement, nor shall either Party transfer or assign any assets or liabilities with the intent, purpose or effect of doing or causing any of same.

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SCHEDULE 1 - COUNTRIES IN THE ASIAN REGION IN WHICH THE SALE OF GAMING MACHINES IS LAWFUL AND ARE WITHIN THE EXCLUSIVE TERRITORY, AS OF THE COMMENCEMENT DATE

Cambodia

Korea (but only with respect to Relevant Table Gaming Machines)

Laos

Malaysia

Mongolia

Myanmar

Nepal

Philippines

Vietnam

Taiwan

Any cruise ship based in any of the foregoing countries

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SCHEDULE 2 - EXISTING ELIXIR AGREEMENTS

Company Name	Agreement type
[***]	Agreement (Exclusive Distributorship)
[***]	Distributor Agreement
[***]	Sales Agent Agreement
[***]	Distributor Agreement
[***]	Sales Representative Agreement
[***]	Agreement (Grant of Sub-Distributorship)
[***]	Distributor Agreement
[***]	Representative Agreement
[***]	The Sale and Purchase of the [***] Product & NDA
[***]	Partnership Agreement

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SCHEDULE 3 – [***]

Relevant Gaming Machines	Table Gaming Product
Cambodia	Malaysia
Laos	Philippines
Mongolia	Cambodia
Singapore	Laos
Vietnam	Mongolia
Malaysia	Singapore
	Vietnam
And Cruise Ships based in these Territories.	And Cruise Ships based in these Territories.

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SCHEDULE 4 - EXISTING AND PROPOSED STARGAMES AND SHUFFLE MASTER AGREEMENTS

Relevant Table Gaming Product

[***]

[***]

[***]

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SCHEDULE 5 - RELEVANT TABLE GAMING PRODUCT DISTRIBUTION PRICES AS OF THE DATE OF THIS AGREEMENT

	Distributor Price (Retail – [***])	Suggested Retail Price
	USD	USD
CARD one2six	[***]	[***]
SM King (refurbished)	[***]	[***]
SM ACE	[***]	[***]
SM MD 1.1	[***]	[***]
SM MD2	[***]	[***]
SM MD2/card recognition	[***]	[***]
SM MD2 workstation	[***]	[***]
SM Deck Mate	[***]	[***]
CARD Easy Chipper	[***]	[***]
Table Games	Monthly Licence Fees	Monthly Licence Fees
Four Card Poker	[***]	[***]
Casino War	[***]	[***]
Crazy 4 Poker	[***]	[***]
Royal Match 21	[***]	[***]
Fortune Pai Gow Poker	[***]	[***]
Dragon Bonus	[***]	[***]
Let It Ride	[***]	[***]
Let It Ride Bonus	[***]	[***]
Three Card Poker	[***]	[***]
Table Master (incl. BJ only)	[***]	[***]
Table Master Upgrade TCP	[***]	[***]
Table Master Upgrade LIRM	[***]	[***]
Bacc-Shoe (ISB)	[***]	[***]
Intelligent Shoe (IST)	[***]	[***]

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EXECUTED as an AGREEMENT
SIGNED on behalf of ELIXIR GROUP LIMITED by its duly authorised representative in the presence of	) ) )
		/s/ Gordon Yuen
Signature of witness		Signature of representative
		Gordon Yuen, CEO
Name of witness (print)		Name of representative (print)
SIGNED on behalf of MELCO INTERNATIONAL DEVELOPMENT LIMITED by its duly authorised representative in the presence of	) ) ) )
		/s/ Lawrence Ho
Signature of witness		Signature of representative
		Lawrence Ho, Chairman & CEO
Name of witness (print)		Name of representative (print)
SIGNED on behalf of STARGAMES CORPORATION by its duly authorised representative in the presence of	) ) ) )
		/s/ John Rouse
Signature of witness		Signature of representative
		John Rouse, President & Managing Director
Name of witness (print)		Name of representative (print)
SIGNED on behalf of SHUFFLE MASTER INC. by its duly authorised representative in the presence of	) ) )
		/s/ Mark Yoseloff
Signature of witness		Signature of representative
		Mark Yoseloff, Chairman & CEO
Name of witness (print)		Name of representative (print)

EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

I, Mark L. Yoseloff, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Shuffle Master, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting  (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 14, 2006

/s/ Mark L. Yoseloff

Mark L. Yoseloff
Chairman of the Board and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

I, Richard L. Baldwin, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Shuffle Master, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting  (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 14, 2006

/s/ Richard L. Baldwin

Richard L. Baldwin
Senior Vice President and Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)

In connection with the Quarterly Report of Shuffle Master, Inc. (the “Company”) on Form 10-Q for the period ended April 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark L. Yoseloff, Chairman of the Board and Chief Executive Officer, certify, pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350), that to the best of my knowledge:

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  June 14, 2006

/s/ Mark L. Yoseloff

Mark L. Yoseloff

Chairman of the Board and Chief Executive Officer

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)

In connection with the Quarterly Report of Shuffle Master, Inc. (the “Company”) on Form 10-Q for the period ended April 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard L. Baldwin, Senior Vice President and Chief Financial Officer, certify, pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350), that to the best of my knowledge:

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  June 14, 2006

/s/ Richard L. Baldwin

Richard L. Baldwin

Senior Vice President and Chief Financial Officer