United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)

ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended July 31, 2005

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.

Yes

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes

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

Yes

As of August 22, 2005, there were 34,844,285 shares of our $.01 par value common stock outstanding.

SHUFFLE MASTER, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JULY 31, 2005

TABLE OF CONTENTS

		PART I - FINANCIAL INFORMATION

Item	1.	Financial Statements (unaudited):

		Condensed Consolidated Statements of Income Three and nine months ended July 31, 2005 and 2004

		Condensed Consolidated Balance Sheets July 31, 2005 and October 31, 2004

		Condensed Consolidated Statements of Cash Flows Nine months ended July 31, 2005 and 2004

		Notes to Condensed Consolidated Financial Statements

Item	2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item	3.	Quantitative and Qualitative Disclosures About Market Risk

Item	4.	Controls and Procedures

		PART II - OTHER INFORMATION

Item	1.	Legal Proceedings

Item	2.	Unregistered Sales of Equity Securities and Use of Proceeds

Item	6.	Exhibits

Signatures

PART I

ITEM 1. FINANCIAL STATEMENTS

SHUFFLE MASTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited, in thousands, except per share amounts)

	Three Months Ended July 31,						Nine Months Ended July 31,
	2005			2004			2005			2004

Revenue:
Utility products leases	$	6,252		$	4,966		$	17,437		$	14,318
Utility products sales and service	10,282			7,079			29,842			16,188
Entertainment products leases and royalties	6,266			6,343			18,557			17,498
Entertainment products sales and service	4,391			4,687			13,802			10,767
Other	81			8			132			77
Total revenue	27,272			23,083			79,770			58,848

Costs and expenses:
Cost of leases and royalties	2,501			2,311			7,105			5,739
Cost of sales and service	4,496			3,266			12,527			6,677
Selling, general and administrative	6,474			5,674			22,253			16,187
Research and development	1,796			1,722			5,770			4,652
Total costs and expenses	15,267			12,973			47,655			33,255

Income from operations	12,005			10,110			32,115			25,593
Other expense	(291		)	(514		)	(485		)	(1,006		)
Income from continuing operations before tax	11,714			9,596			31,630			24,587
Provision for income taxes	3,663			3,359			10,671			8,606
Income from continuing operations	8,051			6,237			20,959			15,981
Discontinued operations, net of tax	8			13			67			1,625
Net income	$	8,059		$	6,250		$	21,026		$	17,606

Basic earnings per share:
Continuing operations	$	0.23		$	0.18		$	0.60		$	0.44
Discontinued operations	—			—			—			0.04
Net income	$	0.23		$	0.18		$	0.60		$	0.48

Diluted earnings per share:
Continuing operations	$	0.22		$	0.17		$	0.57		$	0.42
Discontinued operations	—			—			—			0.05
Net income	$	0.22		$	0.17		$	0.57		$	0.47

Weighted average shares outstanding:
Basic	35,048			34,614			35,093			36,359
Diluted	36,317			36,048			36,658			37,719

See notes to unaudited condensed consolidated financial statements

SHUFFLE MASTER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands)

	July 31, 2005			October 31, 2004
ASSETS
Current assets:
Cash and cash equivalents	$	25,111		$	20,580
Investments	26,947			26,458
Accounts receivable, net	13,864			11,205
Investment in sales-type leases, net	7,850			4,739
Inventories, net	8,453			5,853
Prepaid income taxes	—			6,373
Deferred income taxes	4,089			2,195
Other current assets	2,156			851
Total current assets	88,470			78,254
Investment in sales-type leases, net	11,265			7,068
Products leased and held for lease, net	8,988			5,461
Property and equipment, net	4,423			3,507
Intangible assets, net	47,229			47,812
Goodwill, net	36,045			37,556
Other assets	8,248			5,634
Total assets	$	204,668		$	185,292
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	4,389		$	3,304
Accrued liabilities	5,882			5,497
Customer deposits and unearned revenue	3,612			3,532
Income taxes payable	2,062			—
Note payable and current portion of long-term liabilities	3,103			250
Total current liabilities	19,048			12,583
Long-term liabilities, net of current portion	162,735			157,648
Deferred income taxes	101			332
Total liabilities	181,884			170,563
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; 35,059 and 34,958 shares issued and outstanding	351			233
Additional paid-in capital	1,359			9,593
Deferred compensation	(3,257		)	(1,765		)
Retained earnings	21,724			698
Cumulative currency translation adjustment	2,607			5,970
Total shareholders’ equity	22,784			14,729
Total liabilities and shareholders’ equity	$	204,668		$	185,292

See notes to unaudited condensed consolidated financial statements

SHUFFLE MASTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

	Nine Months Ended July 31,
	2005			2004
Cash flows from operating activities:
Net income	$	21,026		$	17,606
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	8,901			5,400
Stock based compensation	486			—
Provision for bad debts	167			386
Provision for inventory obsolescence	(165		)	500
Tax benefit from stock option exercises	4,773			4,381
Gain before tax on slot disposition	—			(2,495		)
Changes in operating assets and liabilities:
Accounts receivable	(2,629		)	983
Notes receivable	—			648
Investment in sales-type leases	(7,615		)	(3,718		)
Inventories	(2,496		)	(1,682		)
Accounts payable and accrued liabilities	1,910			(2,810		)
Customer deposits and unearned revenue	81			861
Prepaid income taxes	8,479			(4,239		)
Deferred income taxes	(2,123		)	2,212
Other	(1,719		)	214
Net cash provided by operating activities	29,076			18,247
Cash flows from investing activities:
Purchases of investments	(7,311		)	(32,036		)
Proceeds from sale and maturities of investments	6,822			8,000
Payments for products leased and held for lease	(6,212		)	(2,543		)
Purchases of property and equipment	(2,110		)	(1,831		)
Acquisition of businesses	—			(38,437		)
Purchases of intangible assets	(4,413		)	(930		)
Net proceeds from patent sale	9,039			—
Proceeds from disposition of slot assets	—			8,858
Other	(3,402		)	(935		)
Net cash used by investing activities	(7,587		)	(59,854		)
Cash flows from financing activities:
Proceeds from issuance of convertible Notes	—			150,000
Repurchases of common stock	(20,821		)	(99,112		)
Debt issuance costs	—			(4,781		)
Proceeds from issuances of common stock, net	5,954			5,761
Payments of long-term liabilities	(2,091		)	—
Other	—			(138		)
Net cash (used) provided by financing activities	(16,958		)	51,730
Net increase in cash and cash equivalents	4,531			10,123
Cash and cash equivalents, beginning of period	20,580			2,674
Cash and cash equivalents, end of period	$	25,111		$	12,797
Cash paid for:
Income taxes, net of refunds	$	(675	)	$	707
Interest	$	1,002		$	—
Non-cash transactions:
Note payable for patent purchase	$	9,666		$	—
Issuance of restricted stock	$	1,978		$	1,956
Common stock issued for acquisition of CARD	$	—		$	24,557
Note payable and contingent consideration issued in connection with the acquisition of a business or assets	$	560		$	11,616

See notes to unaudited condensed consolidated financial statements

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. 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 players, 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 Productions™, 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 June 2005, we announced details related to our Three Card Poker National Championship™ with a grand prize of one million dollars. 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 and a longer-term sales-type lease. 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, both in the United States, Europe and Asia Pacific.

Basis of presentation. The condensed consolidated financial statements of Shuffle Master, Inc. as of July 31, 2005, and for the three and nine months ended July 31, 2005 and 2004, are unaudited, but, in the opinion of management, include all adjustments (consisting only of normal adjustments) necessary for a fair presentation of the financial results for the interim periods. Our results of operations for the three and nine months ended July 31, 2005, are not necessarily indicative of the results to be expected for the year ending October 31, 2005. 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, 2004.

Effective May 1, 2004, we acquired CARD Casinos Austria Research & Development GmbH & Co KG and its wholly-owned subsidiaries (“CARD”). Effective February 24, 2004, we acquired certain assets of BET Technology, Inc. (“BTI”). Effective June 30, 2005, we acquired certain assets of Magnum Gaming, Inc. Each of these acquisitions and/or agreements are included in our condensed consolidated financial statements beginning on the effective date of the transactions; see note 2.

Pro forma stock based compensation expense. We account for stock options and restricted stock granted to our employees and directors using the intrinsic value method. Intrinsic value represents the excess, if any, of the market value of the underlying common stock at the date of grant over the exercise price of the stock option or purchase price, if any, of the restricted stock.

Restricted stock – During the three and nine months ended July 31, 2005, we issued 23 and 73 shares of restricted stock, respectively, with an aggregate fair value of $625 and $1,978, respectively. During the three and nine months ended July 31, 2004, we issued 60 shares of restricted stock with an aggregate value of $1,956. The total value of each restricted stock grant, based on the fair market value of the stock on the date of grant, is initially reported as deferred compensation under shareholders’ equity. This deferred compensation is then amortized to compensation expense over the related vesting period. Net income, as reported, for the three and nine months ended July 31, 2005, reflects $124 and $322, respectively, net of tax, of amortization of restricted stock compensation.

Stock options – No compensation expense was recorded for stock options in any period presented because all stock options were granted at an exercise price equal to the market value of our stock on the date of grant. If compensation expense for our stock option grants had been determined based on their estimated fair value at the grant dates, our net income and earnings per share would have been as follows:

	Three Months Ended July 31,						Nine Months Ended July 31,
	2005			2004			2005			2004
Net income, as reported	$	8,059		$	6,250		$	21,026		$	17,606
Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards, net of related tax benefits	(1,136		)	(1,623		)	(9,905		)	(7,297		)
Pro forma net income	$	6,923		$	4,627		$	11,121		$	10,309

Earnings per common share, basic:
As reported	$	0.23		$	0.18		$	0.60		$	0.48
Pro forma	0.20			0.13			0.32			0.28

Earnings per common share, diluted:
As reported	$	0.22		$	0.17		$	0.57		$	0.47
Pro forma	0.19			0.13			0.30			0.27

Weighted average fair value of options granted during the period	$	13.42		$	13.12		$	14.80		$	10.83

The fair value of options granted was estimated on the date of grant using the Black-Scholes option-pricing model. Actual compensation, if any, ultimately realized by optionees may differ significantly from the amount estimated using an option valuation model.

On March 9, 2005, our board of directors accelerated the vesting of certain unvested stock options awarded to employees under our 2004 Equity Incentive Plan. As a result of the acceleration, options to acquire approximately 461 shares of our common stock (representing approximately 12% of the total outstanding options), which otherwise would have vested over the next 60 months, vested immediately. The exercise price and number of shares subject to the accelerated options were unchanged.

The board’s decision to accelerate the vesting of these options was based upon the issuance by the Financial Accounting Standards Board (“FASB”) of Statement of Financial Accounting Standard No. 123 (revised 2004) (“SFAS 123R”), “Share-Based Payment.” By accelerating the vesting of these options, we believe that we will not be required to recognize compensation expense in future periods associated with these options. Compensation expense associated with the accelerated option vesting totaled $6,700. Such expense reduced diluted earnings per share by $0.13, for the nine months ended July 31, 2005, and is reflected in the table above.

Beginning with our quarterly period that begins November 1, 2005, we will be required to expense the fair value of director and employee stock options and similar awards then outstanding or thereafter granted.

All share and per share amounts presented herein have been adjusted to reflect our stock splits discussed in note 6.

Recently issued or adopted accounting standards. In September 2004, the FASB reached unanimous consensus on Emerging Issues Task Force (“EITF”) 04-08, “The Effect of Contingently Convertible Debt on Diluted Earnings Per Share.” EITF 04-08 requires us to include the dilutive effect of our outstanding contingent convertible 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. EITF 04-08 also requires restatement of all prior periods. Because the average fair value of our common stock did not exceed the initial conversion price in any period prior to the three and nine months ended July 31, 2005, no restatement of prior periods was required. For the nine months ended July 31, 2005, the average fair value of our common stock exceeded $28.07, and accordingly, the dilutive effect is included in our diluted shares calculation. There was no dilutive effect of our outstanding contingent convertible notes shares for the three months ended July 31, 2005. See note 7.

SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. On April 14, 2005, the Securities and Exchange Commission (“SEC”) announced the adoption of a rule that defers the required effective date of SFAS 123R. The SEC rule provides that SFAS 123R is now effective for registrants as of the beginning of the first fiscal year beginning after June 15, 2005, instead of at the beginning of the first quarter after June 15, 2005 (as prescribed by SFAS 123R). Therefore, beginning with our quarterly period that begins November 1, 2005, we will be required to expense the fair value of stock options and similar awards. We are allowed to select from two alternative transition methods, each having different reporting implications. While we have not yet completed our evaluation of this statement, we expect that the adoption of this statement will have a material impact on our results of operations. However, due to the “non-cash” nature of stock option expense, we do not expect the adoption of this statement to have an impact on our financial position.

In May 2005, the FASB issued SFAS No. 154 (“SFAS 154”), “Accounting Changes and Error Corrections”, a replacement of Accounting Principles Board (“APB”) Opinion No. 20 and SFAS No. 3. SFAS 154 changes the requirement for the accounting for and reporting of a change in accounting principles. SFAS 154 applies to all voluntary changes in accounting principles. It also applies to changes required by an accounting pronouncement if the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. The provisions of SFAS 154 will be effective for accounting changes made in fiscal years beginning after December 15, 2005. We have not yet completed our evaluation, or determined the impact to our results of operations, of adoption of SFAS 154.

In December 2004, the FASB issued SFAS No. 153 (“SFAS 153”), “Exchanges of Nonmonetary Assets”, amending APB Opinion No. 29, which treated nonmonetary exchanges of similar productive assets as an exception from fair value measurement. SFAS 153 replaces this exception with a general exception from fair value measurement for exchanges of nonmonetary assets that do not have commercial substance. Nonmonetary exchanges have commercial substance if the future cash flows of an entity are expected to change significantly as a result of the exchange. This statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005, which will be our fourth quarter of fiscal year 2005. We anticipate no material impact on our results of operations or on our financial position as a result of adopting this statement.

2. ACQUISITIONS, DISPOSITIONS AND OTHER SIGNIFICANT TRANSACTIONS

CARD. Effective May 1, 2004, we acquired a 100% ownership interest in CARD from Casinos Austria AG. CARD, which is now a subsidiary of our Shuffle Master International subsidiary, provides us with a headquarters and direct sales force for international business centrally located in Vienna with a satellite office in New Zealand. CARD develops, manufactures and supplies innovative casino products including the one2six™shuffler which accommodates up to six decks of cards and can be used for almost every casino card game. In addition, CARD’s recently introduced products include the Easy Chipper®, a next-generation roulette chip sorting machine.

The acquisition was accounted for using the purchase method of accounting. Consideration to the seller consisted of $30,520 and the issuance of 767 shares of our common stock. The common stock issued was valued based on the market value of our common stock at the acquisition date. In addition, total direct acquisition costs, consisting primarily of legal and due diligence fees, were $1,999. The total purchase price was comprised of the following:

Cash, net of cash acquired of $268	$	30,520
Common stock of Shuffle Master, Inc.	24,557
Other direct acquisition costs	1,999
Total purchase price	$	57,076

The allocation of the purchase price, which is based on a valuation of the intangible assets acquired and liabilities assumed, was comprised of the following:

Historical book value of CARD net assets, excluding cash acquired, as of May 1, 2004	$	1,309
Estimated fair value adjustments relating to:
Deferred income taxes	181
Intangible assets, average life of 7 years	25,298
Trademark	886
Goodwill	30,173
Accrued liabilities	(771		)
	$	57,076

Intangible assets relate primarily to acquired products and their related intellectual property, primarily the one2six shuffler and the Easy Chipper roulette chip sorting machine. The values assigned to acquired products are being amortized over their estimated useful lives on a pro rata basis to the projected revenues. The trademark is not subject to amortization and is tested periodically for impairment. We have assigned the goodwill from our CARD acquisition to our Utility Products segment, based on our valuation analysis.

Accrued liabilities were comprised of vendor-related obligations of $412 and an obligation to the seller to provide up to $359 of product at no charge. The deferred income tax asset reflects the timing difference for book and tax purposes of these accrued liabilities.

BTI. On February 24, 2004, we acquired certain assets of BTI, a privately held corporation that develops and distributes table games to casinos throughout North America.

The acquired assets and operations, which have been assigned to our Entertainment Products segment, include the Fortune Pai Gow Poker^®, Royal Match 21™ and Casino War^® table games and related patents, trademarks and other intellectual property, as well as the “BET Technology, Inc.” name. The acquired installed base of Fortune Pai Gow Poker, Royal Match 21, and Casino War table games was 1,090 units as of the acquisition date.

The acquisition price includes fixed installments and a promissory note, which is secured as set forth in the acquisition agreement, with contingent installment payments. The fixed installments comprise $6,000 that was paid on the closing date and $4,000 that was paid in August 2004. Subject to other terms and conditions, the contingent installments are based on future revenue performance of Fortune Pai Gow Poker. Beginning November 2004, we pay monthly note installments based on a percentage of such revenue for a period of up to ten years, not to exceed $12,000. We have funded and expect to fund the acquisition price with existing cash and cash flow from operations.

The acquisition was accounted for under the purchase method of accounting and, accordingly, the acquired assets were recorded at their estimated fair values. All acquired intangible assets have definite lives and are being amortized over their estimated useful lives on a pro rata basis to the projected revenues. The cash purchase price of $6,144 includes the initial installment payment to the sellers of $6,000 and other direct costs in the amount of $144. As of the acquisition date, we recorded an 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. Future amounts paid in excess of this estimate of contingent consideration, if any, will be recorded as goodwill. If future amounts paid are less than estimated contingent consideration, the remaining carrying value of the acquired assets will be reduced.

Patent Purchase Agreement. On June 13, 2005, we entered into a patent purchase agreement (the “Two-Party Agreement”) with International Game Technology (“IGT”). Based on the terms of the Two-Party Agreement, IGT paid us a non-refundable initial cash payment of $10,510. If IGT desires to continue its rights under the Two-Party Agreement, IGT is required to make a $4,875 payment in June 2007. Under the terms of the Two-Party Agreement, we sold to IGT an equal ownership interest in our recently acquired radio frequency identification (“RFID”) patents from ENPAT Inc. (“ENPAT”), U.S. patent numbers 5,735,742 and 5,651,548, which relate to the use of RFID at gaming tables and throughout a casino. Previously granted licenses to Progressive Gaming International Corporation (“PGIC”) and Gaming Partners International for the use of these RFID patents will remain in effect. In addition, we sold IGT an equal ownership interest in our Schubert and Fishbine patents, U.S. patent numbers 6,313,871, 5,781,647 and 6,532,297, which relate to the use of optical bet recognition and chip tracking at gaming tables. As part of the equal ownership in the optical patents, IGT may become a plaintiff in the MP Games I lawsuit (see note 11). Further, and as part of the initial $10,510 payment, IGT reimbursed us for certain legal fees incurred on the MP Games I lawsuit, for the period prior to May 23, 2005, totaling $1,471. This fee reimbursement was recorded as a reduction of legal fees in the three months end July 31, 2005. IGT will bear 50% of the legal fees related to the MP Games I lawsuit going forward and share in any results. Additionally, the Two-Party Agreement contains certain non-

compete provisions related to our ability to market any new optical and/or RFID product for periods of three and six years, respectively, (subject to shortening, based on certain future events), as discussed in the agreement. As co-owners of the patents, we share with IGT in future royalties associated with third party licensing of the purchased RFID patents. Finally, if IGT elects not to make the $4,875 payment in June 2007, IGT would lose its ownership rights to the RFID patents, and our non-compete obligations would be substantially eliminated.

Additionally, in conjunction with the Two-Party Agreement, we entered into a separate worldwide product integration agreement (the “Three-Party Agreement”) with IGT and PGIC to create a comprehensive, automated table management solution using complementary capabilities, technologies, and resources of the three companies. Under the terms of the Three-Party Agreement, we will be the provider of automatic card shufflers, card reading intelligent shoes, card and chip sorters and verifiers. IGT will be the provider of back-end table gaming management systems, including player tracking, patron loyalty and rewards, as well as bonusing applications. PGIC will be the provider of RFID bet recognition, automated gaming chip tracking and payoff recognition. Each company will cooperatively interface their respective products into a combined product offering to be known as the Intelligent Table System (“ITS”). The Three-Party Agreement also provides a framework for the cooperative development of new technologies and products that build on automated table management and real-time monitoring of table game player activity.

We will also continue to separately market and sell our products which are a part of the projects which are the subject of the Two-Party Agreement and the Three-Party Agreement.

Bet the Set “21”. Effective June 29, 2005, we acquired certain assets from Magnum Gaming, Inc. The acquired assets, which have been assigned to our Entertainment Products segment, included the Bet the Set “21” side bet table game and related pending patent and trademark applications, game marks, license and sub-license rights, and other intellectual property, as well as the “Bet the Set” name. The acquired installed base of the Bet the Set “21” side bet table game was 205 units as of the acquisition date.

The acquisition price included an initial cash payment of $540 paid in July 2005, and 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 game up to a maximum of $560.

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 July 31,						Nine Months Ended July 31,
	2005			2004			2005			2004
Revenues	$	31		$	248		$	191		$	2,195

Income from operations before tax	$	12		$	92		$	100		$	77
Income tax expense	(4		)	(32		)	(34		)	(27		)
Net income from operations	8			60			66			50

Gain (loss) on sale of slot assets	—			(67		)	2			3,306
One-time termination benefits, contract termination costs and other	—			(6		)	—			(883		)
Income tax (expense) benefit	—			26			(1		)	(848		)
Gain (loss) on sale of slot assets, net	—			(47		)	1			1,575
Discontinued operations, net	$	8		$	13		$	67		$	1,625

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

	July 31,			October 31,
	2005			2004
Accounts receivable, net:
Trade receivables	$	14,168		$	11,945
Less: allowance for bad debts	(304		)	(740		)
	$	13,864		$	11,205

The decrease in the allowance for bad debts from October 31, 2004, is primarily attributed to a $314 bad debt write-off in the three months ended July 31, 2005. This amount was 100% reserved as of October 31, 2004.

	July 31,			October 31,
	2005			2004
Investment in sales-type leases, net:
Minimum lease payments	$	21,292		$	13,350
Less: interest	(1,569		)	(1,053		)
Less: allowance for bad debts	(608		)	(490		)
Investment in sales-type leases, net	19,115			11,807
Less: current portion	(7,850		)	(4,739		)
Long-term portion	$	11,265		$	7,068

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

Investment in sales-type leases includes amounts receivable under capital lease arrangements. Sales-type leases are interest bearing, require monthly installment payments over periods ranging from 30 to 60 months and contain bargain purchase options.

	July 31,			October 31,
	2005			2004
Inventories:
Raw materials and component parts	$	4,684		$	3,912
Work-in-process	732			415
Finished goods	4,789			3,227
	10,205			7,554
Less: allowance for inventory obsolescence	(1,752		)	(1,701		)
	$	8,453		$	5,853
Products leased and held for lease, net:
Utility products	$	17,924		$	13,959
Less: accumulated depreciation	(10,510		)	(9,012		)
	7,414			4,947
Entertainment products	3,112			2,398
Less: accumulated depreciation	(1,538		)	(1,884		)
	1,574			514
	$	8,988		$	5,461

4. INTANGIBLE ASSETS AND GOODWILL

Amortized intangible assets. Substantially all of our recorded intangible assets are subject to amortization. Amortization expense was $1,514 for the three months ended July 31, 2005 and $4,472 for the nine months ended July 31, 2005. Amortized intangible assets are comprised of the following:

	July 31,			October 31,
	2005			2004
Amortized intangible assets:
Patents, games and products	$	53,083		$	50,589
Less: accumulated amortization	(8,157		)	(4,862		)
	44,926			45,727
Licenses and other	3,116			2,733
Less: accumulated amortization	(1,710		)	(1,534		)
	1,406			1,199
Total	$	46,332		$	46,926

Trademark. Changes in the carrying amount of our unamortized intangibles for the nine months ended July 31, 2005, are as follows:

Balance at October 31, 2004	$	886
Foreign currency translation adjustment	11
Balance at July 31, 2005	$	897

Goodwill. Changes in the carrying amount of goodwill for the nine months ended July 31, 2005, are as follows:

Balance at October 31, 2004	$	37,556
CARD purchase accounting adjustment	68
Foreign currency translation adjustment	(1,579		)
Balance at July 31, 2005	$	36,045

All of our goodwill originated from the acquisitions of foreign subsidiaries. For foreign income tax purposes, goodwill is amortized using the straight-line method and deducted over its statutory fifteen year life.

5. NOTES PAYABLE AND LONG-TERM LIABILITIES

Notes payable and long-term liabilities are summarized as follows:

	July 31,			October 31,
	2005			2004

Contingent convertible senior notes, fixed rate interest at 1.25%, due 2024	$	150,000		$	150,000
BTI liabilities (see note 2)	6,588			7,616
ENPAT note payable, non interest bearing, due in installments through 2007	8,410			—
Magnum Gaming, Inc., contingent consideration	560			—
Note payable, fixed rate interest at 2.00%, due in installments through 2005	250			250
Other	30			32
	165,838			157,898
Less: current portion	(3,103		)	(250		)
	$	162,735		$	157,648

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. We made an interest payment on April 14, 2005 in the amount of $938.

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;

• 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 (defined below) 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.

Debt issuance costs incurred with the issuance of long-term debt are capitalized and amortized as interest expense using the effective interest method over the initial call period ending April 15, 2009. Amortization of debt issuance costs were $239 and $60 for the three months ended July 31, 2005 and 2004, respectively, and $721 and $66 for the nine months ended July 31, 2005 and 2004, respectively. Unamortized debt issuance costs of $3,567 as of July 31, 2005, are included in other assets on the condensed consolidated balance sheets.

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 July 31, 2005, was $6,588.

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 July 31, 2005, of $8,410 represents the discounted present value of the future payments, including imputed interest of approximately $244. Principal and interest payments of $3,000 each are due in December 2005, 2006, and 2007.

Note payable. In August 2002, we purchased a patent and the Bloodhound product from Casino Software and Services, LLC for cash of $300 and a note payable for $600. The note bore interest at 2.0% annually and had a remaining principal balance of $250 at July 31, 2005. This note was paid in full in August 2005.

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.

6. SHAREHOLDERS’ EQUITY

The following table reconciles the changes in our shareholders’ equity during the nine months ended July 31, 2005:

																	Total
						Additional			Deferred			Retained		Cumulative			Share-
	Common Stock					Paid-in			Compen-			Earnings		Currency			holders’
	Shares		Amount			Capital			sation			(Deficit)		Translation			Equity

Balance, October 31, 2004	34,958		$	233		$	9,593		$	(1,765	)	$	698	$	5,970		$	14,729

Comprehensive Income:
Net Income	—		—			—			—			21,026		—			21,026
Currency translation	—		—			—			—			—		(3,363		)	(3,363		)
Total comprehensive income																	17,663

Stock repurchased	(758	)	(7		)	(20,814		)	—			—		—			(20,821		)
Options exercised, net	788		9			5,724			—			—		—			5,733
Accelerated vesting of options	—		—			60			—			—		—			60
Tax benefit from stock options	—		—			4,773			—			—		—			4,773
FY 2004 tax (true-up)	—		—			229			—			—		—			229
Issuance of restricted stock	73		—			1,978			(1,492		)	—		—			486
January 2005 stock split	(2	)	116			(184		)	—			—		—			(68		)

Balance, July 31, 2005	35,059		$	351		$	1,359		$	(3,257	)	$	21,724	$	2,607		$	22,784

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.

In March 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 three and nine months ended July 31, 2005, we repurchased 200 and 758 shares of our common stock, respectively, for a total cost of $5,565 and $20,821, respectively, at an average price of $27.83 and $27.49, respectively. As of July 31, 2005, $26,653 remained outstanding under our board authorizations. During our fourth quarter through September 2, 2005, we have repurchased an additional 625 shares of our common stock for approximately $15,565 at an average price of $24.90 per share. As of September 2, 2005, $11,088 remains outstanding under our board authorizations. We cancel shares that we repurchase.

Tax benefit from stock option exercises. During the nine months ended July 31, 2005 and 2004, we realized income tax benefits of $4,773 and $4,381, 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. Additionally, as part of the fiscal 2004 income tax provision to tax return true-up, we recorded a $229 tax benefit related to employee stock option exercises which reduced income taxes payable and increased additional paid-in capital by an equal amount.

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. EARNINGS PER SHARE

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

	Three Months Ended				Nine Months Ended
	July 31,				July 31,
	2005		2004		2005		2004

Income from continuing operations	$	8,051	$	6,237	$	20,959	$	15,981

Basic:
Weighted average shares	35,048		34,614		35,093		36,359

Diluted:
Weighted average shares, basic	35,048		34,614		35,093		36,359
Dilutive effect of options and restricted stock	1,269		1,434		1,417		1,360
Dilutive effect of contingent convertible notes	—		—		148		—
Weighted average shares, diluted	36,317		36,048		36,658		37,719

Basic earnings per share	$	0.23	$	0.18	$	0.60	$	0.44
Diluted earnings per share	$	0.22	$	0.17	$	0.57	$	0.42

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 nine months ended July 31, 2005, the average fair value of our common stock exceeded $28.07, resulting in additional dilutive shares. Because the average fair value of our common stock did not exceed the initial conversion price in any prior period, this statement had no effect on our historically reported diluted earnings per share.

8. EQUITY INCENTIVE PLANS

Restricted stock. During the three and nine months ended July 31, 2005, we issued 23 and 73 shares of restricted stock, respectively, with an aggregate fair value of $625 and $1,978, respectively. During the three and nine months ended July 31, 2004, we issued 60 shares of restricted stock with an aggregate value of $1,956. The total value of each restricted stock grant, based on the fair market value of the stock on the date of grant, is initially reported as deferred compensation under shareholders’ equity. This deferred compensation is then amortized to compensation expense over the related vesting period. Net income, as reported, for the three and nine months ended July 31, 2005, reflects $124 and $322, respectively, net of tax, of amortization of restricted stock compensation.

Stock options. During the nine months ended July 31, 2005, our stock option activity and weighted average exercise prices were as follows:

			Weighted
			Average
			Exercise
	Shares		Price

Outstanding, October 31, 2004	3,789		$	11.77
Granted	718		29.95
Exercised	(788	)	7.15
Forfeited	(92	)	20.53
Outstanding, July 31, 2005	3,627		16.15

Exercisable, July 31, 2005	1,981		$	17.37

9. OTHER INCOME (EXPENSE)

Other income (expense) is comprised of the following:

	Three Months Ended						Nine Months Ended
	July 31,						July 31,
	2005			2004			2005			2004

Interest income	$	512		$	318		$	1,846		$	600
Interest expense	(664		)	(531		)	(1,761		)	(589		)
Amortization of debt issue costs	(239		)	—			(721		)	—
Foreign currency gain (loss)	138			(301		)	190			(1,017		)
Other	(38		)	—			(39		)	—
Total Other expense	$	(291	)	$	(514	)	$	(485	)	$	(1,006	)

For the nine months ended July 31, 2005, interest income includes $502 related to Federal income tax refunds for years ended October 31, 2001, 2000 and 1999.

During the nine months ended July 31, 2004, we entered into foreign currency exchange contracts to fix the U.S. dollars estimated to be required to fund the Euro-denominated cash component of the CARD purchase price which resulted in a foreign currency exchange loss of $703.

The increase in interest expense is primarily due to the issuance of $150,000 of contingent convertible senior notes due in April 2024 (the “Notes”).

10. 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 lines. Entertainment Products includes our Proprietary Table Games, Table Master products and Shuffle Up. 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 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.

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

	Three Months Ended						Nine Months Ended
	July 31,						July 31,
	2005			2004			2005			2004
Revenue:
Utility Products	$	16,534		$	12,045		$	47,279		$	30,506
Entertainment Products	10,657			11,030			32,359			28,265
Corporate	81			8			132			77
	$	27,272		$	23,083		$	79,770		$	58,848
Operating Income (Loss):
Utility Products	$	9,358		$	5,395		$	21,902		$	13,763
Entertainment Products	8,101			8,657			25,257			22,012
Corporate	(5,454		)	(3,942		)	(15,044		)	(10,182		)
	$	12,005		$	10,110		$	32,115		$	25,593
Depreciation and Amortization:
Utility Products	$	1,899		$	1,279		$	5,275		$	2,382
Entertainment Products	592			593			1,681			1,247
Corporate	653			453			1,945			994
	$	3,144		$	2,325		$	8,901		$	4,623
Capital Expenditures:
Utility Products	$	2,484		$	817		$	8,386		$	2,617
Entertainment Products	1,668			146			2,431			756
Corporate	780			1,552			1,918			1,908
	$	4,932		$	2,515		$	12,735		$	5,281

11. 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 July 31, 2005, our significant inventory purchase commitments totaled $8,736 which are primarily related to our Table Master products, Rapid Roulette®, 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 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 July 31, 2005, minimum aggregate severance benefits totaled $3,492.

Legal proceedings. Our current material litigation and our current assessments are described below. Litigation is inherently unpredictable. Our current 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 is paying us $800, one-half of which was received on July 14, 2005, and the other half which is payable in ten months. VendingData signed a Confession of Judgment related to the second payment of $400 which was filed and entered by the Court. 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), the patents which were 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 Poker-1 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 PokerOne™ 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 United States District Court for the District of Nevada 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 counterclaims that allege that our patent is invalid.

On November 29, 2004, the Court granted our motion for a preliminary 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 condensed consolidated balance sheet and included in cash flows from investing activities in our condensed consolidated statement of cash flows. On December 17, 2004, the Court denied VendingData’s two emergency motions to modify the preliminary injunction.

In March 2005, the Court of Appeals for the Federal Circuit stayed the injunction based on a technical defect in the language in the injunction and not on its merits. In May 2005, the Court held a Markman hearing for construction of the claims. The Markman decision is now pending. If we prevail in our claim construction at the Markman hearing, we intend to file a motion for a new preliminary injunction, or other appropriate motion.

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 Poker™ 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.

Awada - On April 25th and April 26th, 2005, our rescission trial was held in the District Court in Clark County, Nevada in the Awada and Gaming Entertainment, Inc. case. 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 which we paid, under Nevada law, on account of its successful rescission of the Game Option Agreement, was $130 including all interest. We had fully reserved for this amount.

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 infringement, misappropriation or wrongdoing. In May 2005, the Court dismissed defendants’ breach of contract counter-claim. The case is currently in the discovery phase. In the recent transaction with IGT, IGT purchased a 50% ownership interest in the two patents which are the subject of this lawsuit, and thus IGT may become a party 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.

MP Games II - 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. We have not yet been served with this complaint but it appears that all three claims relate to the same subject matter as the MP Games I litigation discussed above. The complaint seeks a permanent injunction against our MD2 shuffler with card recognition, an unspecified amount of damages and other relief. We have not yet responded to the complaint, but we intend to deny the plaintiff’s allegations and file appropriate counter-claims for, at the minimum, patent invalidity.

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 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.

12. SUBSEQUENT EVENTS

Effective August 2005, we purchased certain assets from Spur Gaming Systems (“SGS”), including the side bet proprietary games, Jackpot Pai Gow Poker™ and Progressive Jackpot Pai Gow Poker™. At the time of this transaction there were approximately 53 SGS tables licensed throughout North America.

In August 2005, we entered into a strategic alliance with Ameranth Wireless, Inc. to promote and distribute Ameranth’s poker-room management products throughout the world. Under the terms of the agreement, Ameranth will develop a software interface between our Deck Mate^® poker shuffler and Ameranth’s poker-room products to provide poker-room operators broader functionality and a more robust total solution.

In August 2005, we purchased VIP Gaming Solutions of Sydney, Australia. As a result of this acquisition, we strengthened our direct sales presence in the Asia-Pacific region.

In August 2005, we entered into a distribution agreement with Casino Solutions S.A.C. (“Casino Solutions), a corporation with offices in Lima, Peru and Buenos Aires, Argentina. Under the terms of the agreement, Casino Solutions will be our exclusive distributor throughout South America and will be responsible for promoting, marketing, distributing and servicing our products within the region.

On September 2, 2005, pursuant to the terms of the previously-entered into distribution agreement between CARD, a Shuffle Master International Company, and Machines Games Automatics, S.A. (“MGA”), we received approval of our Table Master™ product by the responsible gaming lab in Barcelona. Additionally, pursuant to the terms of the distribution agreement with MGA, the agreement will become effective fourteen (14) days upon receipt of such approval, or September 16, 2005 (the “MGA Commencement Date”). The distribution agreement with MGA includes minimum annual purchase commitments to distribute our Table Master product to arcades throughout Spain. We expect the distribution agreement with MGA to contribute over $5,000 in revenue during the first twelve (12) month period following the MGA Commencement Date.

In early September 2005, we received an order for over 125 units of our Easy Chipper roulette chip sorting machine. This order was placed by Genting Highlands in Malaysia through RGB, Limited, our Asia Pacific distributor.

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 players, 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 Productions™, 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 June 2005, we announced details related to our Three Card Poker National Championship™ with a grand prize of one million dollars. 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 lease or license our products, we generally negotiate a month-to-month operating lease. When we sell our products, we offer our customers a choice between a sale and a longer-term sales-type 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, both 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.

ACQUISITIONS, DISPOSITIONS AND OTHER SIGNIFICANT TRANSACTIONS

CARD. Effective May 1, 2004, we acquired a 100% ownership interest in CARD Casinos Austria Research & Development GmbH & Co KG and its wholly-owned subsidiaries (“CARD”) from Casinos Austria AG. CARD, which is now a subsidiary of our Shuffle Master International subsidiary, provides us with a headquarters and direct sales force for international business centrally located in Vienna with a satellite office in New Zealand. CARD develops, manufactures and supplies innovative casino products including the one2six™ shuffler which accommodates up to six decks of cards and can be used for almost every casino card game. In addition, CARD’s recently introduced products include the Easy Chipper^®, a next-generation roulette chip sorting machine.

BTI. On February 24, 2004, we acquired certain assets of BET Technology, Inc. (“BTI”), a privately held corporation that develops and distributes table games to casinos throughout North America. The acquired assets and operations, which have been assigned to our Entertainment Products segment, include the Fortune Pai Gow Poker^®, Royal Match 21™ and Casino War^® table games and related patents, trademarks and other intellectual property, as well as the “BET Technology, Inc.” name. The acquired installed base of Fortune Pai Gow Poker, Royal Match 21, and Casino War table games was 1,090 units at the acquisition date.

sold IGT an equal ownership interest in our Schubert and Fishbine patents, U.S. patent numbers 6,313,871, 5,781,647 and 6,532,297, which relate to the use of optical bet recognition and chip tracking at gaming tables. As part of the equal ownership in the optical patents, IGT may become a plaintiff in the MP Games I lawsuit (see note 11). Further, and as part of the initial $10,510 payment, IGT reimbursed us for certain legal fees incurred on the MP Games I lawsuit, for the period prior to May 23, 2005, totaling $1,471. This fee reimbursement was recorded as a reduction of legal fees in the three months end July 31, 2005. IGT will bear 50% of the legal fees related to the MP Games I lawsuit going forward and share in any results. Additionally, the Two-Party Agreement contains certain non-compete provisions related to our ability to market any new optical and/or RFID product for periods of three and six years, respectively, (subject to shortening, based on certain future events), as discussed in the agreement. As co-owners of the patents, we share with IGT in future royalties associated with third party licensing of the purchased RFID patents. Finally, if IGT elects not to make the $4,875 payment in June 2007, IGT would lose its ownership rights to the RFID patents, and our non-compete obligations would be substantially eliminated.

We will also continue to separately market and sell our products which are a part of the projects which are the subject of the Two-Party Agreement and the Three-Party Agreement.

Discontinued slot operations. In December 2003, our board of directors approved and we committed to a plan to divest our 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. A more detailed discussion is included under the heading “Discontinued Operations.”

CONSOLIDATED RESULTS OF OPERATIONS

(In thousands, except per share amounts)

	Three Months Ended July 31,				Nine Months Ended July 31,
	2005		2004		2005		2004
Revenue
Utility products	60.6	%	52.2	%	59.3	%	51.8	%
Entertainment products	39.1	%	47.8	%	40.6	%	48.0	%
Other	0.3	%	0.0	%	0.1	%	0.2	%
Total revenue	100.0	%	100.0	%	100.0	%	100.0	%
Cost of revenue	25.7	%	24.2	%	24.6	%	21.1	%
Gross margin	74.3	%	75.8	%	75.4	%	78.9	%
Selling, general and administrative	23.7	%	24.6	%	27.9	%	27.5	%
Research and development	6.6	%	7.5	%	7.2	%	7.9	%
Income from operations	44.0	%	43.7	%	40.3	%	43.5	%
Other expense, net	(1.1	)%	(2.2	)%	(0.6	)%	(1.7	)%
Income from continuing operations before tax	42.9	%	41.5	%	39.7	%	41.8	%
Provision for income taxes	13.4	%	14.6	%	13.4	%	14.6	%
Income from continuing operations	29.5	%	26.9	%	26.3	%	27.2	%
Discontinued operations, net of tax	0.0	%	0.1	%	0.1	%	2.8	%
Net income	29.5	%	27.0	%	26.4	%	30.0	%

REVENUE AND GROSS MARGIN

	Three Months Ended July 31,						%		Nine Months Ended July 31,						%
	2005			2004			Change		2005			2004			Change
Revenue:
Leases and royalties	$	12,518		$	11,309		10.7	%	$	35,994		$	31,816		13.1	%
Sales and service	14,673			11,766			24.7	%	43,644			26,955			61.9	%
Other	81			8			912.5	%	132			77			71.4	%
Total	$	27,272		$	23,083		18.1	%	$	79,770		$	58,848		35.6	%
Cost of revenue:
Leases and royalties	$	2,501		$	2,311		8.2	%	$	7,105		$	5,739		23.8	%
Sales and service	4,496			3,266			37.7	%	12,527			6,677			87.6	%
Other	—			—			—		—			—			—
Total	$	6,997		$	5,577		25.5	%	$	19,632		$	12,416		58.1	%
Gross margin:
Leases and royalties	$	10,017		$	8,998		11.3	%	$	28,889		$	26,077		10.8	%
Sales and service	10,177			8,500			19.7	%	31,117			20,278			53.5	%
Other	81			8			912.5	%	132			77			71.4	%
Total	$	20,275		$	17,506		15.8	%	$	60,138		$	46,432		29.5	%
Gross margin percentage:
Leases and royalties	80.0		%	79.6		%			80.3		%	82.0		%
Sales and service	69.4		%	72.2		%			71.3		%	75.2		%
Total	74.3		%	75.8		%			75.4		%	78.9		%

Overall, total revenue and gross margins increased for both the three and nine months ended July 31, 2005. 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 nine months ended July 31, 2005. However, as a percentage of revenue, our gross margin percentage decreased slightly for the three months ended July 31, 2005, compared to the same prior year period and decreased 3.5% for the nine months ended July 31, 2005, compared to the same prior year period. Intellectual property amortization expense associated with products related to our CARD and BTI acquisitions is recorded as cost of sales which reduces our gross margin percentage. Amortization expense related to these products was $2,979 and $987 for the nine months ended July 31, 2005 and 2004, respectively, which resulted in a 2.5% decrease in gross margin percentage for the nine months ended July 31, 2005, compared to the same prior year period. Due to the timing of the CARD and BTI acquisitions, the overall impact of amortization expense on our third quarter was comparable to the same prior year period.

OPERATING EXPENSES

	Three Months Ended July 31,						%		Nine Months Ended July 31,						%
	2005			2004			Change		2005			2004			Change
Selling, general and administrative	$	6,474		$	5,674		14.1	%	$	22,253		$	16,187		37.5	%
Percentage of revenue	23.7		%	24.6		%			27.9		%	27.5		%

Research and development	$	1,796		$	1,722		4.3	%	$	5,770		$	4,652		24.0	%
Percentage of revenue	6.6		%	7.5		%			7.2		%	7.9		%

Total Operating expenses	$	8,270		$	7,396		11.8	%	$	28,023		$	20,839		34.5	%
Percentage of revenue	30.3		%	32.0		%			35.1		%	35.4		%

Selling, General and Administrative Expenses (“SG&A”). SG&A dollars increased for the three and nine months ended July 31, 2005. However, as a percentage of revenue, SG&A varied only slightly from the prior year periods. The dollar increase was due primarily to the following factors:

• Legal fees were ($426) and $360 for the three months ended July 31, 2005 and 2004, respectively, and $2,947 and $2,627 for the nine months ended July 31, 2005 and 2004, respectively. The overall decrease for the three months ended July 31, 2005, compared to the same prior year period is primarily attributed to an $800 legal settlement related to the VendingData I litigation and a $1,471 reimbursement of certain legal fees pursuant to the terms of the patent purchase agreement with IGT. This reimbursement was recorded as a reduction in legal fees. See notes 2 and 11 for more details. 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. However, as a result of recent settlements of litigation, and in the absence of any new litigation, legal fees are expected to trend lower over the next few quarters.

• Fees related to our Sarbanes-Oxley 404 compliance project were $550 and $706 for the three and nine months ended July 31, 2005, respectively, compared to no expense in the same prior year periods.

• SG&A related to CARD were $882 and $2,687 for the three and nine months ended July 31, 2005, respectively, compared to $493 for the three and nine months ended July 31, 2004.

• SG&A related to Shuffle Up were $140 and $198 for the three and nine months ended July 31, 2005, respectively, compared to no expense in the same prior year periods.

• Amortization of restricted stock compensation was $180 and $486 for the three and nine months ended July 31, 2005, respectively, compared to $92 for both the three and nine months ended July 31, 2004.

• Payroll and related expenses, excluding CARD, increased approximately $760 and $1,728 for the three and nine months ended July 31, 2005, respectively, due to an increase in the number of employees.

Other SG&A increased proportionate to our business volume increase.

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 both the three and nine months

ended July 31, 2005, R&D increased primarily due to ITS product development. Additionally, CARD products under development contributed $140 and $508 to the increase during the three and nine months ended July 31, 2005, respectively.

R&D includes amortization of our patents for products still under development. Amortization related to the RFID patents was $153 and $651 for the three and nine months ended July 31, 2005, respectively. In accordance with the Two-Party Agreement with IGT and the related sale of a 50% ownership interest in these RFID patents, the three and nine months ended July 31, 2005, were favorably impacted by an approximate $145 reduction in amortization expense. This reduction will continue to have a favorable impact on future periods over the life of the RFID patents.

Going forward, we expect R&D to be in the range of approximately 6% to 7% of revenues.

OTHER INCOME (EXPENSE)

Other income (expense) is comprised of the following:

	Three Months Ended July 31,						%		Nine Months Ended July 31,						%
	2005			2004			Change		2005			2004			Change

Interest income	$	512		$	318		61.0	%	$	1,846		$	600		207.7	%
Interest expense	(664		)	(531		)	25.0	%	(1,761		)	(589		)	199.0	%
Amortization of debt issue costs	(239		)	—				**	(721		)	—				**
Foreign currency gain (loss)	138			(301		)		**	190			(1,017		)		**
Other	(38		)	—				**	(39		)	—				**
Total Other expense	$	(291	)	$	(514	)	(43.4	)%	$	(485	)	$	(1,006	)	(51.8	)%

**Not Meaningful.

For the nine months ended July 31, 2005, interest income includes $502 related to Federal income tax refunds for the years ended October 31, 2001, 2000 and 1999. See “Income Taxes” below for a more detailed discussion. Additionally, interest income increased as a result of a greater investment in interest bearing sales-type leases as of July 31, 2005. For the three months ended July 31, 2005 and 2004, interest income related to sales-type leases was $249 and $136, respectively, and $672 and $332 for the nine months ended July 31, 2005 and 2004, respectively.

The increase in interest expense is primarily due to the issuance of $150,000 of contingent convertible senior notes due in April 2024 (the “Notes”). A more detailed discussion of these Notes is included below under the heading “Liquidity and Capital Resources.”

INCOME TAXES

Our effective tax rates for continuing operations were 31.27% and 33.74% for the three and nine months ended July 31, 2005, respectively, compared to 35.0% for the three and nine months ended July 31, 2004. The decline in our effective tax rate from the prior year periods is primarily attributed to a $386 fiscal 2004 tax provision to tax return true-up related to differences in estimated versus actual State income tax rates and Federal tax credits. For the three and nine months ended July 31, 2005, the tax true-up resulted in declines in our effective tax rate of 3.3% and 1.2%, 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. We estimate that our annual effective tax rate will be approximately 34.0% to 34.5%.

During the nine months ended July 31, 2005 and 2004, we realized income tax benefits of $4,773 and $4,381, 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. Additionally, as part of the fiscal 2004 income tax provision to tax return true-up, we recorded a $229 tax benefit related to employee stock option exercises which reduced income taxes payable and increased additional paid-in capital by an equal amount.

During the nine months ended July 31, 2005, we received payment of Federal income tax refunds totaling $6,064 related to the years ended October 31, 2001, 2000 and 1999 which had been reflected as “Prepaid Income Taxes” on our fiscal year 2004 condensed consolidated balance sheet and as a result had no affect on our current provision for income taxes.

EARNINGS PER SHARE

	Three Months Ended July 31,						Nine Months Ended July 31,
	2005			2004			2005			2004

Income from continuing operations	$	8,051		$	6,237		$	20,959		$	15,981
Basic earnings per share	$	0.23		$	0.18		$	0.60		$	0.44
Diluted earnings per share	$	0.22		$	0.17		$	0.57		$	0.42

Weighted average shares data:
Basic	35,048			34,614			35,093			36,359
Dilutive effect of options and restricted stock	1,269			1,434			1,417			1,360
Dilutive effect of contingent convertible notes	—			—			148			—
Diluted	36,317			36,048			36,658			37,719

Outstanding shares data:
Shares outstanding, beginning of period	35,171			34,275			34,958			37,073
Options exercised	65			198			788			1,218
Shares repurchased	(200		)	(945		)	(758		)	(4,761		)
CARD acquisition	—			1,151			—			1,151
Restricted stock issued	23			90			73			90
Other	—			—			(2		)	(2		)
Shares outstanding, end of period	35,059			34,769			35,059			34,769

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.

SEGMENT OPERATING RESULTS

(Dollars in thousands, except per unit amounts)

SEGMENT OVERVIEW

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 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 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 and manufacturing overhead. Corporate general and administrative expenses are not allocated to segments.

UTILITY PRODUCTS SEGMENT OPERATING RESULTS

	Three Months Ended July 31,						Increase			Percentage
	2005			2004			(Decrease)			Change
Utility Products segment revenue
Lease	$	6,252		$	4,966		$	1,286		25.9	%
Sales and service	10,282			7,079			3,203			45.2	%
Total	$	16,534		$	12,045		$	4,489		37.3	%

Utility Products segment operating income	$	9,358		$	5,395		$	3,963		73.5	%
Utility Products segment operating margin	56.6		%	44.8		%

Shufflers installed base (end of quarter)
Lease units	4,944			3,941			1,003			25.5	%

Sold units, inception-to-date
Beginning of quarter (includes CARD)	12,280			9,860			2,420			24.5	%
Sold during quarter	731			582			149			25.6	%
Less trade-ins and exchanges	(122		)	(41		)	(81		)	197.6	%
End of quarter	12,889			10,401			2,488			23.9	%
Total installed base	17,833			14,342			3,491			24.3	%

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 provides 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 July 31, 2005 our shuffler installed base totaled 17,833 units, a 24.3% increase from 14,342 as of July 31, 2004. 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, increase 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 three months ended July 31, 2005, we sold an additional 14 Easy Chipper units, which contributed approximately $375 in revenue. Additionally, during the current quarter, we placed 8 Easy Chipper units on lease.

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.

For the three months ended July 31, 2005, Utility Products segment revenue increased 37.3%, compared to the same prior year period, primarily due to a 45.2% increase in Utility Products sales and service revenue. Additionally, Utility Products lease revenue increased 25.9%, compared to the same prior year period.

The increase in Utility Products lease revenue for the three months ended July 31, 2005, compared to the same prior year period, primarily reflects:

• An increase of 1,003 shuffler units on lease.

• Net shuffler lease additions, defined as installations less units removed or converted, totaled 176 units in the current quarter compared to 57 units in the same prior year period.

• Net shuffler lease additions were comprised primarily of additional placements of Deck Mate®, one2six and MD2™ shufflers. Net shuffler lease additions include the conversion of 324 leased units to sold units in the current quarter and 162 leased units to sold units in the prior year quarter. Current quarter shuffler conversions were comprised primarily of ACE® and MD-1 shufflers. Prior year quarter shuffler conversions were comprised primarily of MD-1 shufflers.

The increase in Utility Products sales and service revenue for the three months ended July 31, 2005, compared to the same prior year period, primarily reflects:

• An increase of 149 shuffler units sold from 582 to 731 and a 13.6% increase in the average shuffler sales price from $10,300 to $11,700.

• The increase in sold shuffler units was comprised primarily of additional sales of ACE, Deck Mate and MD2 shufflers of 114, 239 and 96, respectively, in the current quarter compared to 66, 68 and 17, respectively, in the prior year quarter.

• The percentage increase in shuffler sales and service revenue was greater than the percentage increase in shuffler units sold due to our product mix. The three months ended July 31, 2005, included a greater percentage of sales of our higher-priced models, including the Deck Mate and MD2 shufflers.

Utility Products segment operating income for the three months ended July 31, 2005, increased 73.5% compared to the same prior year period, primarily due to greater volume. Additionally, operating margin increased 11.8% from the same prior year period, primarily due to a reduction in legal fees related to the VendingData I legal settlement and the reimbursement of certain legal fees pursuant to the IGT patent purchase agreement. The reduction in legal fees resulted in a 13.7% increase in operating margin for the current quarter. As a percentage of revenue, the Utility Products operating margin increased primarily as a result of these legal items. This increase was partially offset due to a larger percentage of one2six shuffler sales and Easy Chipper sales, which carry a lower gross margin due to amortization expense related to the acquired CARD products. Amortization expense associated with the one2six shuffler and Easy Chipper was $768 for the three months ended July 31, 2005, compared to $619 for the same prior year period.

	Nine Months Ended July 31,						Increase			Percentage
	2005			2004			(Decrease)			Change
Utility Products segment revenue
Lease	$	17,437		$	14,318		$	3,119		21.8	%
Sales and service	29,842			16,188			13,654			84.3	%
Total	$	47,279		$	30,506		$	16,773		55.0	%

Utility Products segment operating income	$	21,902		$	13,763		$	8,139		59.1	%
Utility Products segment operating margin	46.3		%	45.1		%

Shufflers installed base (end of period)
Lease units	4,944			3,941			1,003			25.5	%

Sold units, inception-to-date
Beginning of period (includes CARD)	11,151			9,108			2,043			22.4	%
Sold during period	2,066			1,369			697			50.9	%
Less trade-ins and exchanges	(328		)	(76		)	(252		)	331.6	%
End of period	12,889			10,401			2,488			23.9	%
Total installed base	17,833			14,342			3,491			24.3	%

For the nine months ended July 31, 2005, Utility Products segment revenue increased 55.0%, compared to the same prior year period, primarily due to a 84.3% increase in Utility Products sales and service revenue. Additionally, Utility Products lease revenue increased 21.8%, compared to the same prior year period. Additionally, during the nine months ended July 31, 2005, we sold 45 units of our Easy Chipper, which contributed approximately $1,188 in sales and service revenue, and we had net lease additions of 10 Easy Chipper units.

The increase in Utility Products lease revenue for the nine months ended July 31, 2005, compared to the same prior year period, primarily reflects:

• An increase of 1,003 shuffler units on lease.

• Net shuffler lease additions totaled 806 units in the current period, compared to 357 units in the same prior year period.

• The increase in net shuffler lease additions was comprised primarily of additional placements of Deck Mate, one2six and MD2 shufflers. Due to the timing of the CARD acquisition in May 2004, there were no placements of the one2six shuffler until the third quarter of fiscal 2004. Net shuffler lease additions include the conversion of 704 leased units to sold units in the current period and 415 leased units to sold units in the prior year period. Shuffler conversions for the current period were comprised primarily of ACE and Deck Mate shufflers and shuffler conversions for the same prior year period were comprised primarily of ACE and MD-1 shufflers.

The increase in Utility Products sales and service revenue for the nine months ended July 31, 2005, compared to the same prior year period, primarily reflects:

• An increase of 697 shuffler units sold from 1,369 to 2,066 and a 16.8% increase in the average shuffler sales price from $10,100 to $11,800.

• The increase in sold shuffler units was comprised primarily of additional sales of ACE, Deck Mate, one2six and MD2 shufflers of 419, 568, 556 and 282, respectively, in the current period compared to 290, 223, 255 and 50, respectively, in the prior year period.

• The percentage increase in shuffler sales and service revenue was greater than the percentage increase in shuffler units sold due to our product mix. The nine months ended July 31, 2005, included a greater percentage of sales of our higher-priced models, including the ACE, one2six, Deck Mate and MD2 shufflers.

Utility Products segment operating income for the nine months ended July 31, 2005, increased 59.1% compared to the same prior year period, primarily due to greater volume. Additionally, operating margin increased 1.2% from the

same prior year period, primarily due to a reduction in legal fees related to the VendingData I legal settlement and the reimbursement of certain legal fees pursuant to the IGT patent purchase agreement. The reduction in legal fees resulted in a 4.8% increase in operating margin for the current nine month period. This increase was partially offset by amortization expense related to the acquired CARD products. Amortization expense associated with the one2six shuffler and the Easy Chipper was $2,001 for the nine months ended July 31, 2005, compared to $619 for the same prior year period.

ENTERTAINMENT PRODUCTS SEGMENT OPERATING RESULTS

	Three Months Ended July 31,						Increase			Percentage
	2005			2004			(Decrease)			Change
Entertainment Products segment revenue
Royalties and leases - Table games	$	6,049		$	6,289		$	(240	)	(3.8	)%
Royalties and leases - Table Master	205			47			158			336.2	%
Other	12			7			5			71.4	%
Total royalties and leases	6,266			6,343			(77		)	(1.2	)%

Sales - Table games	3,562			4,538			(976		)	(21.5	)%
Sales - Table Master	766			65			701			1,078.5	%
Service and other	63			84			(21		)	(25.0	)%
Total sales and service revenue	4,391			4,687			(296		)	(6.3	)%

Total Entertainment Products segment revenue	$	10,657		$	11,030		$	(373	)	(3.4	)%

Entertainment Products segment operating income	$	8,101		$	8,657		$	(556	)	(6.4	)%
Entertainment Products segment operating margin	76.0		%	78.5		%

Table games installed base (end of quarter)
Royalty units	2,863			2,875			(12		)	(0.4	)%

Sold units, inception-to-date
Beginning of quarter	633			178			455			255.6	%
Sold during quarter	80			110			(30		)	(27.3	)%
Subtotal	713			288			425			147.6	%
Total installed base	3,576			3,163			413			13.1	%

Table Master installed base (end of quarter)
Lease units	31			5			26			520.0	%

Sold units, inception-to-date
Beginning of quarter	25			17			8			47.1	%
Sold during quarter	9			1			8			800.0	%
Subtotal	34			18			16			88.9	%
Total installed base	65			23			42			182.6	%

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 certain of our proprietary table games. As of July 31, 2005 our proprietary table game installed base totaled 3,576 games, a 13.1% increase from 3,163 games as of July 31, 2004. 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 creating a longer-term replacement opportunity.

In late fiscal 2004, we expanded on the distribution of our proprietary table game content with the introduction of our Table Master product. Table Master is a 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. As of July 31, 2005 our Table Master installed base totaled approximately 65 units, a 182.6% increase from 23 units as of July 31, 2004. 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.

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 and more recently, Table Master, 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 Championship^TM offering participants the chance to compete for a one million dollar grand prize. The tournament will consist of a series of regional tournaments, with the finals to be held in Las Vegas, NV in late November 2005. Additionally, we have contracted with LMNO Productions to develop and produce a television program based on the tournament, which we expect will air in early calendar 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.

For the three months ended July 31, 2005, Entertainment Products segment revenue decreased 3.4%, compared to the same prior year period, primarily due to declines in table games royalty and lease revenue, and table games sales revenue, partially offset by increases in revenue related to our Table Master products.

The decrease in Entertainment Products royalty and lease revenue for the three months ended July 31, 2005, compared to the same prior year period, primarily reflects:

• The conversion of Let It Ride® and Three Card Poker® royalty units to lifetime license sales, which both currently yield higher average monthly royalty rates than our more recent game introductions.

• A slight decrease in table game royalty units due to the conversion activity noted above, partially offset by increases in Four Card Poker^TM and Fortune Pai Gow Poker, and the acquisition, in late June 2005, of 205 Bet the Set “21” table game royalty units.

• Additionally, the decrease in Entertainment Products royalty and lease revenue was partially offset by higher average monthly royalty rates for Three Card Poker, Four Card Poker and Fortune Pai Gow Poker, and 16 net lease additions of our Table Master products.

The decrease in Entertainment Products sales and service revenue for the three months ended July 31, 2005, compared to the same prior year period is primarily due to a decline in lifetime license sales of Let It Ride and Three Card Poker, partially offset by additional sales of our Table Master products which were 9 in the current quarter compared to 1 in the prior year period.

Entertainment Products segment operating income and operating margin for the three months ended July 31, 2005, decreased compared to the same prior year period. The decreases were primarily attributed to lower lifetime license sales, in the current period, which typically have higher margins than our other Entertainment Products. Additionally, our margins in the third quarter were impacted by introductory pricing discounts on some of our newer products. Finally, our Table Master products have overall lower margins than our other table game products.

The declines in operating income and margin were partially offset by re-engineering and improvement costs related to the Table Master platform, which were incurred during fiscal 2004.

	Nine Months Ended July 31,						Increase			Percentage
	2005			2004			(Decrease)			Change
Entertainment Products segment revenue
Royalties and leases -Table games	$	18,158		$	17,401		$	757		4.4	%
Royalties and leases -Table Master	345			77			268			348.1	%
Other	54			20			34			170.0	%
Total royalties and leases	18,557			17,498			1,059			6.1	%

Sales -Table games	11,893			9,681			2,212			22.8	%
Sales -Table Master	1,692			272			1,420			522.1	%
Service and other	217			814			(597		)	(73.3	)%
Total sales and service revenue	13,802			10,767			3,035			28.2	%

Total Entertainment Products segment revenue	$	32,359		$	28,265		$	4,094		14.5	%

Entertainment Products segment operating income	$	25,257		$	22,012		$	3,245		14.7	%
Entertainment Products segment operating margin	78.1		%	77.9		%

Table games installed base (end of period)
Royalty units	2,863			2,875			(12		)	(0.4	)%

Sold units, inception-to-date
Beginning of period	365			72			293			406.9	%
Sold during period	348			216			132			61.1	%
Subtotal	713			288			425			147.6	%
Total installed base	3,576			3,163			413			13.1	%

Table Master installed base (end of period)
Lease units	31			5			26			520.0	%

Sold units, inception-to-date
Beginning of period	15			6			9			150.0	%
Sold during period	19			12			7			58.3	%
Subtotal	34			18			16			88.9	%
Total installed base	65			23			42			182.6	%

For the nine months ended July 31, 2005, Entertainment Products segment revenue increased 14.5%, compared to the same prior year period, primarily due to a 28.2% increase in sales revenue related to both our table games and Table Master products. Additionally, royalty and lease revenue increased 6.1%, compared to the same prior year period.

The increase in Entertainment Products royalty and lease revenue for the nine months ended July 31, 2005, compared to the same prior year period, primarily reflects:

• A full nine months of royalty revenue from the table games acquired from BTI in late February 2004.

• A higher average monthly royalty rate for Three Card Poker, Four Card Poker and Fortune Pai Gow Poker.

• Net lease additions of our Table Master products were 26 for the nine months ended July 31, 2005, compared to 3 in the prior year period.

• Table game royalty unit increases in Four Card Poker and Fortune Pai Gow Poker, and the acquisition, in late June 2005, of 205 Bet the Set “21” table game royalty units.

• The table game royalty unit increases noted above were offset by conversions of Let It Ride and Three Card Poker royalty units to lifetime license sales, which both currently yield higher average monthly royalty rates than our more recent game introductions.

The increase in Entertainment Products sales and service revenue for the nine months ended July 31, 2005, compared to same prior year period is primarily due to:

• 348 lifetime license sales during the nine months ended July 31, 2005, compared to 216 lifetime license sales in the prior year period.

• Additional sales of our Table Master products which totaled 19 in the current period compared to 12 in the prior year period.

Entertainment Products segment operating income increased for the nine months ended July 31, 2005, compared to the same prior year period. However, as a percentage of Entertainment Products segment revenue, operating margin remained consistent with the prior year period. Operating margin was unfavorably impacted by amortization expense related to the BTI games which was $978 for the nine months ended July 31, 2005, compared to $368 for the same prior year period. This unfavorable impact was partially offset by lower allocated manufacturing overhead and sales expenses in the current period, as these allocated expenses did not increase at the same rate as revenue. Additionally, re-engineering and improvement costs related to the Table Master platform, which were incurred during fiscal 2004.

DISCONTINUED OPERATIONS

In December 2003, our board of directors approved and we committed to a plan to divest our 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 July 31,						Nine Months Ended July 31,
	2005			2004			2005			2004
Revenues	$	31		$	248		$	191		$	2,195

Income from operations before tax	$	12		$	92		$	100		$	77
Income tax expense	(4		)	(32		)	(34		)	(27		)
Net income from operations	8			60			66			50

Gain (loss) on sale of slot assets	—			(67		)	2			3,306
One-time termination benefits, contract termination costs and other	—			(6		)	—			(883		)
Income tax (expense) benefit	—			26			(1		)	(848		)
Gain (loss) on sale of slot assets, net	—			(47		)	1			1,575

Discontinued operations, net	$	8		$	13		$	67		$	1,625

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, and sales-type leases 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.

LIQUIDITY

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

	July 31,		October 31,		Increase			Percentage
	2005		2004		(Decrease)			Change

Cash, cash equivalents, and investments	$	52,058	$	47,038	$	5,020		10.7	%
Working capital	$	69,422	$	65,671	$	3,751		5.7	%
Current ratio	4.6		6.2		(1.6		)	(25.8	)%

Cash flows.

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

	Nine Months Ended
	July 31,						Increase			Percentage
	2005			2004			(Decrease)			Change

Income from continuing operations	$	20,959		$	15,981		$	4,978		31.1	%
Non-cash items	9,389			6,286			3,103			49.4	%
Income tax related items	11,129			2,354			8,775			372.8	%
Investment in sales-type leases	(7,615		)	(3,718		)	(3,897		)	104.8	%
Other changes in operating assets and liabilities	(4,853		)	398			(5,251		)	(1,319.3	)%
Slot-sale related items:
Discontinued operations, net of tax	67			1,625			(1,558		)	(95.9	)%
Gain from disposition of slot assets	—			(2,495		)	2,495			(100.0	)%
IGT accounts payable	—			(2,184		)	2,184			(100.0	)%
Cash flow provided by operating activities	$	29,076		$	18,247		$	10,829		59.3	%

• Non-cash items are comprised of depreciation and amortization, stock based compensation, provision for bad debts, and provision for inventory obsolescence. The increase in non-cash items for the nine months ended July 31, 2005, is substantially due to amortization of intangible assets acquired from BTI and CARD in February and May 2004, respectively. Amortization expense related to these products was $2,979 and $987 for the nine months ended July 31, 2005 and 2004, respectively.

• Income tax related items include deferred income taxes, tax benefit from stock option exercises, and prepaid income taxes. During the nine months ended July 31, 2005, we received payment of Federal income tax refunds totaling $6,064 related to the years ended October 31, 2001, 2000 and 1999 which had been reflected as “Prepaid Income Taxes” on our fiscal year 2004 condensed consolidated balance sheet and as a result had no effect on our current provision for income taxes.

• We utilize sales-type leases 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 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 as their preferred method of purchasing our products. The volume of sales-type leases 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. The increase in operating assets and liabilities for the nine months ended July 31, 2005, is primarily due to increased purchases of inventory for Easy Chipper and Table Master products.

• Concurrent with the sale of our fifty-percent interest in the IGT Alliance to IGT in January 2004, we paid IGT $2,184 in full payment of existing accounts payable to IGT. These accounts payable related to our purchase of slot machines from IGT and distribution of IGT’s share of IGT Alliance profits for the months prior to the January sale transaction. Both the payment of $2,184 and the pre-tax gain from the sale of $2,495 are reflected as uses of cash in the operating cash flow section of our consolidated cash flow statement. These uses of cash offset the net proceeds from the sale that we received from IGT of $8,858, which is reflected in the investing activities section of our statement of cash flows.

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

	Nine Months Ended
	July 31,						Increase			Percentage
	2005			2004			(Decrease)			Change

Net purchases of investments	$	(489	)	$	(24,036	)	$	23,547		(98.0	)%
Capital expenditures	(12,735		)	(5,304		)	(7,431		)	140.1	%
Business acquisition	—			(38,437		)	38,437			(100.0	)%
Security bonds posted with courts	(3,000		)	(1,000		)	(2,000		)	200.0	%
Net proceeds from patent sale	9,039			—			9,039			100.0	%
Other	(402		)	65			(467		)	(718.5	)%
Net proceeds from disposition of slot assets	—			8,858			(8,858		)	(100.0	)%
Cash flow used by investing activities	$	(7,587	)	$	(59,854	)	$	52,267		(87.3	)%

• Capital expenditures include purchases of product for lease, property and equipment, and intangible assets. The increase for the nine months ended July 31, 2005, is due primarily to the cash component and related due diligence costs of our purchase of RFID technology patents from ENPAT in December 2004. See discussion of ENPAT note payable, under “Long-Term Liabilities.”

• Cash used for business acquisitions during the nine months ended July 31, 2004, includes $32,293, net of cash acquired, for our acquisition of CARD and $6,144 for our acquisition of BTI. These amounts represent the cash component of each of these acquisitions.

• During the nine months ended July 31, 2005 and 2004, we posted security deposits of $3,000 and $1,000, respectively, related to preliminary injunctions that we were granted by certain judicial courts.

• Net proceeds of $9,039 from patent sale related to the Two-Party Agreement with IGT. IGT paid us a non-refundable initial cash payment of $10,510 of which $1,471 is included as a reduction of legal fees in SG&A.

• Net proceeds from the disposition of slot assets reflect the sale of substantially all of our slot products to IGT in January 2004.

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

	Nine Months Ended
	July 31,						Increase			Percentage
	2005			2004			(Decrease)			Change

Repurchases of common stock	$	(20,821	)	$	(99,112	)	$	78,291		(79.0	)%
Proceeds from stock option exercises, net	5,954			5,761			193			3.4	%
Proceeds from issuance of Notes, net of costs	—			145,219			(145,219		)	(100.0	)%
Payments of long-term liabilities	(2,091		)	—			(2,091		)	100.0	%
Other	—			(138		)	138			(100.0	)%
Cash flow (used) provided by financing activities	$	(16,958	)	$	51,730		$	(68,688	)	(132.8	)%

• During the nine months ended July 31, 2005, we repurchased 758 shares of our common stock at an average cost of $27.49 per share, compared to 4,760 shares of our common stock at an average price of $20.83 for the same prior year period.

• Our employees and directors exercised 788 options during the nine months ended July 31, 2005, at an average exercise price of $7.15 per share, compared to 1,218 options at an average exercise price of $4.82 per share during the same prior year period.

• During the nine months ended July 31, 2005, we made installment payments of $1,063 for the ENPAT note payable and $1,028 for BTI liabilities.

CAPITAL RESOURCES

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 three and nine months ended July 31, 2005, we repurchased 200 and 758 shares of our common stock, respectively, for a total cost of $5,565 and $20,821, respectively, at an average price of $27.83 and $27.49, respectively. As of July 31, 2005, $26,653 remained outstanding under our board authorizations. During our fourth quarter through September 2, 2005, we have repurchased an additional 625 shares of our common stock for approximately $15,565 at an average price of $24.90 per share. As of September 2, 2005, $11,088 remains 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 consider as possible uses of our capital resources include investment in new products, acquisitions, funding of internal growth in working capital, and investments in sales-type leases.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

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, 2004. We do not have material off-balance sheet arrangements.

LONG-TERM LIABILITIES

Contingent convertible senior notes. In April 2004, we issued 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. We made an interest payment on April 14, 2005 in the amount of $938.

The Notes are convertible, at the holders’ option, into cash and shares of our common stock, under any of the following circumstances:

• we have called the Notes for redemption and the redemption has not yet occurred;

• upon the occurrence of specified corporate transactions.

CRITICAL ACCOUNTING POLICIES

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

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

Revenue recognition. In general, 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. Sales-type leases have payment terms ranging from 30 to 60 months and include a bargain purchase option. 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.

Intangible assets and goodwill. We have significant investments in intangible assets and goodwill. Intangible assets primarily include values assigned to acquired products, patents 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.

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, 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 for impairment annually or 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 for impairment annually using a two step impairment test. The reviews are 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 were less than the book value, then we would perform a second step to compare the implied fair value of the reporting unit’s goodwill to its book value. The implied fair value of the goodwill is determined based on the estimated fair value of the reporting unit less the fair value of the reporting unit’s identifiable assets and 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 or market and estimate an allowance 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 written-off inventory is sold.

Allowances for bad debts. Our accounts receivable and investment in sales-type lease balances are exposed to collection risk. To provide for this risk, we record allowances for estimated bad debts or credit losses that could result from the inability of our customers to make required payments. We estimate our bad debt allowances for both our accounts receivable and investment in sales-type leases based on historical experience and specific customer collection issues. However, because we have less historical statistical data regarding loss rates for sales-type leases, and because of the longer-term nature of our sales-type leases, this estimate requires a greater level of judgment. Changes in the financial condition of our customers could result in the adjustment upward or downward in our allowances for bad debts, with a corresponding impact to our operating results.

Stock based compensation. We account for stock options and restricted stock granted to our employees and directors using the intrinsic value method. Intrinsic value represents the excess, if any, of the market value of the underlying common stock at the date of grant over the exercise price of the stock option or purchase price, if any, of the restricted stock.

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 initially reported as deferred compensation under shareholders’ equity. This deferred compensation is then amortized to compensation expense over the related vesting period.

Stock Options – No compensation expense was recorded for stock options in any period presented because all stock options were granted at an exercise price equal to the market value of our stock on the date of grant. The notes to the consolidated financial statements disclose the pro forma impact to our net income and earnings per share as if we had elected the fair value method. Under the fair value method, compensation expense is determined based on the estimated fair value of stock options at the date of grant.

To estimate the fair value of stock options granted, we use the Black-Scholes option-pricing model, which requires management to make assumptions. The most significant assumptions are the expected future volatility of our stock price and the expected period of time an optionee will hold an option (“Option Life”). We base these estimates primarily on our historical volatility and Option Life. If actual future volatility and Option Life differ from our estimates, disclosed amounts for pro forma net income and earnings per share could be significantly different. Further, actual compensation, if any, ultimately realized by optionees may differ significantly from that estimated using an option valuation model.

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 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.

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. 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;

• 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 convertible notes, which will depend on our future performance and other conditions or events and will be subject to many factors that are beyond our control; and

• 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.

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 report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

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 $264.

Contingent convertible senior notes. We estimate that the fair value of our Notes as of July 31, 2005 is $163,875. 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 $9,345. Assuming our stock price remains constant, a 10% increase in interest rates would decrease the fair value of our Notes by $1,050.

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, we expect to increase our volume of business that is denominated in foreign currency. 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.

ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure 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. Any control procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of July 31, 2005. Based upon that evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to accomplish their objectives.

There have been no changes in our internal control over financial reporting that occurred during our fiscal quarter ended July 31, 2005, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Our Chief Executive Officer and Chief Financial Officer do not expect that our disclosure controls or our internal controls will prevent all error and all fraud. The design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be considered relative to their cost. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that we have detected all of our control issues and all instances of fraud, if any. The design of any system of controls also is based partly on certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions.

PART II

ITEM 1. LEGAL PROCEEDINGS

For information on Legal Proceedings, see note 11 to our unaudited 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) Not applicable

(b) Not applicable

(c) The following table provides monthly detail regarding our share repurchases during the three months ended July 31, 2005 (in thousands, except per share amounts):

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs *
May 1 - May 31	—	$	—	—	$	32,219
Jun 1 - Jun 30	—	$	—	—	$	32,219
Jul 1 - Jul 31	200	$	27.83	200	$	26,653
Total	200	$	27.83	200

* In May 2005, our board authorized management to repurchase up to $30,000 of our common stock in the open market under a share repurchase program with no expiration. As of July 31, 2005, $26,653 remained outstanding under the May 2005 authorization. Repurchases under all previous authorizations have been substantially completed. Amounts represent remaining authorizations as of the period end date and do not include later authorizations.

ITEM 6. EXHIBITS

10.1		Patent purchase agreement dated June 13, 2005, by and between International Game Technology and Shuffle Master, Inc. (request for confidential treatment filed with the SEC).
10.2		Product Development and Integration agreement dated June 13, 2005, by and among Shuffle Master, Inc., Progressive Gaming International Corporation and International Game Technology (request for confidential treatment filed with the 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.

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: September 6, 2005


/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)

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. freshman Good

SHFL Entertainment (SHFL) Inactive 10-Q2005 Q3 Quarterly report

Content analysis

PART I

ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Continuing operations –

Discontinued operations –

BUSINESS OVERVIEW

ACQUISITIONS, DISPOSITIONS AND OTHER SIGNIFICANT TRANSACTIONS

OPERATING EXPENSES

OTHER INCOME (EXPENSE)

SEGMENT OVERVIEW

UTILITY PRODUCTS SEGMENT OPERATING RESULTS

LIQUIDITY

CAPITAL RESOURCES

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

LONG-TERM LIABILITIES

FORWARD LOOKING STATEMENTS

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