United States
Securities And Exchange Commission

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

	For the quarterly period ended April 30, 2004

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 ý

No o

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

Yes ý

No o

As of May 14, 2004, there were 23,197,442 shares of our $.01 par value common stock outstanding.

SHUFFLE MASTER, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED APRIL 30, 2004

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item	1.	Financial Statements (unaudited):

			Condensed Consolidated Statements of Income Three and six months ended April 30, 2004 and 2003

			Condensed Consolidated Balance Sheets April 30, 2004 and October 31, 2003

			Condensed Consolidated Statements of Cash Flows Six months ended April 30, 2004 and 2003

			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	4.	Submission of Matters to a Vote of Securities Holders

Item	6.	Exhibits and Reports on Form 8-K

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 April 30,					Six Months Ended April 30,
	2004			2003		2004			2003

Revenue:
Utility products leases	$	4,755		$	4,337	$	9,352		$	8,560
Utility products sales and service	5,541			3,705		9,109			5,949
Entertainment products leases and royalties	6,016			5,241		11,155			10,404
Entertainment products sales and service	3,799			118		6,080			409
Other	45			62		69			68
Total revenue	20,156			13,463		35,765			25,390

Costs and expenses:
Cost of leases and royalties	1,726			1,604		3,428			3,254
Cost of sales and service	2,115			982		3,411			1,784
Selling, general and administrative	5,732			3,840		10,513			7,250
Research and development	1,770			880		2,930			1,594
Total costs and expenses	11,343			7,306		20,282			13,882

Income from operations	8,813			6,157		15,483			11,508
Other income (expense)	(607		)	46		(492		)	105
Income from continuing operations before tax	8,206			6,203		14,991			11,613
Provision for income taxes	2,872			2,234		5,247			4,184
Income from continuing operations	5,334			3,969		9,744			7,429
Discontinued operations, net of tax	168			63		1,612			(80		)
Net income	$	5,502		$	4,032	$	11,356		$	7,349

Basic earnings per share:
Continuing operations	$	0.21		$	0.16	$	0.39		$	0.29
Discontinued operations	0.01			—		0.07			—
Net income	$	0.22		$	0.16	$	0.46		$	0.29

Diluted earnings per share:
Continuing operations	$	0.21		$	0.16	$	0.38		$	0.29
Discontinued operations	—			—		0.06			(0.01		)
Net income	$	0.21		$	0.16	$	0.44		$	0.28

Weighted average shares outstanding:
Basic	24,856			24,840		24,827			25,274
Diluted	25,761			25,412		25,710			25,873

See notes to unaudited condensed consolidated financial statements

SHUFFLE MASTER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands)

	April 30, 2004			October 31, 2003

ASSETS

Current assets:
Cash and cash equivalents	$	57,472		$	2,674
Investments	27,214			7,751
Accounts receivable, net	8,989			10,007
Notes receivable	—			648
Investment in sales-type leases, net	3,110			2,075
Inventories	5,465			7,365
Prepaid income taxes	10,361			5,659
Deferred income taxes	781			833
Other current assets	829			242
Total current assets	114,221			37,254
Investment in sales-type leases, net	5,123			3,314
Products leased and held for lease, net	4,907			5,777
Property and equipment, net	1,644			2,047
Intangible assets, net	21,948			5,482
Goodwill, net	3,664			3,664
Deferred income taxes	—			1,551
Other assets	7,548			329
Total assets	$	159,055		$	59,418

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	3,001		$	5,477
Accrued liabilities	3,549			3,368
Customer deposits and unearned revenue	2,255			2,425
Note payable and current portion of long-term liabilities	4,105			175
Total current liabilities	12,910			11,445
Long-term liabilities, net of current portion	157,866			250
Deferred income taxes	141			—
Total liabilities	170,917			11,695
Contingencies
Shareholders’ equity:
Preferred stock, no par value; 338 shares authorized; none outstanding	—			—
Common stock, $0.01 par value; 101,250 shares authorized; 22,850 and 24,715 shares issued and outstanding	229			165
Additional paid-in capital	—			—
Retained earnings (deficit)	(12,091		)	47,558
Total shareholders’ equity (deficit)	(11,862		)	47,723
Total liabilities and shareholders’ equity	$	159,055		$	59,418

See notes to unaudited condensed consolidated financial statements

SHUFFLE MASTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

	Six Months Ended April 30,
	2004			2003
Cash flows from operating activities:
Net income	$	11,356		$	7,349
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	3,012			4,035
Provision for bad debts	155			47
Provision for inventory obsolescence	180			222
Deferred income taxes	1,744			(715		)
Tax benefit from stock option exercises	3,281			661
Net gain on slot disposition	(2,495		)	—
Changes in operating assets and liabilities:
Accounts receivable	988			(418		)
Notes receivable	648			573
Investment in sales-type leases	(2,969		)	(1,818		)
Inventories	(988		)	(1,478		)
Other current assets	(587		)	(368		)
Accounts payable and accrued liabilities	(3,510		)	757
Customer deposits and unearned revenue	(170		)	609
Prepaid income taxes	(4,702		)	181
Net cash provided by operating activities	5,943			9,637
Cash flows from investing activities:
Purchases of investments	(24,787		)	(7,397		)
Proceeds from sale and maturities of investments	5,324			15,432
Payments for products leased and held for lease	(1,895		)	(1,746		)
Purchases of property and equipment	(356		)	(270		)
Purchases of intangible assets	(612		)	(825		)
Acquisition of businesses	(6,144		)	(1,730		)
Proceeds from sale of slot assets	8,858			—
Other	(2,745		)	(6		)
Net cash provided (used) by investing activities	(22,357		)	3,458
Cash flows from financing activities:
Proceeds from issuance of convertible Notes	150,000			—
Repurchases of common stock	(78,661		)	(15,642		)
Debt issuance costs	(4,566		)	—
Proceeds from issuances of common stock	4,439			1,772
Net cash provided (used) by financing activities	71,212			(13,870		)
Net increase (decrease) in cash and cash equivalents	54,798			(775		)
Cash and cash equivalents, beginning of period	2,674			3,604
Cash and cash equivalents, end of period	$	57,472		$	2,829

Cash paid for:
Income taxes	$	5,792		$	3,826
Interest	$	6		$	6
Non-cash transaction:
Note payable and contingent consideration issued in connection with the acquisition of a business	$	11,616		$	—

See notes to unaudited condensed consolidated financial statements

SHUFFLE MASTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except per share amounts)

1. DESCRIPTION OF BUSINESS AND INTERIM BASIS OF PRESENTATION

Description of Business. Shuffle Master, Inc. develops, manufactures and markets technology-based products for the gaming industry. Our products primarily relate to our casino customers’ table game activities and are focused on increasing their profitability, productivity and security. These products include a full line of automatic card shufflers for use with the vast majority of card table games placed in casinos and other locations. We also market a line of live proprietary poker, blackjack, baccarat, and pai gow poker based table games.

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. We are also re-engineering our multi-player video platform, Table Master™ (acquired in April 2003), to cost-effectively deliver to casinos and others our popular branded table game content on the choice of either a live table or a multi-player video platform. We expect to complete initial development or re-engineering of and to begin marketing certain of these products in late fiscal 2004.

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 or a longer-term sales-type lease. We sell our products worldwide in markets that are significantly regulated and manufacture our products at our headquarters and manufacturing facility in Las Vegas, Nevada.

Our internet address is www.shufflemaster.com. Through the “Investors” page at 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.

Basis of Presentation. The condensed consolidated financial statements of Shuffle Master, Inc. as of April 30, 2004, and for the three and six month periods ended April 30, 2004 and 2003, 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 six month periods ended April 30, 2004, are not necessarily indicative of the results to be expected for the year ending October 31, 2004. 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, 2003.

In July 2000, we entered into multi-year agreements (the “IGT Alliance”) that granted licenses to International Game Technology (“IGT”) to develop and manufacture slot games. We purchased the games from IGT and recorded them at cost as products leased and held for lease. The agreements provided that revenues and specified expenses associated with the games were split equally and between us and IGT. Our consolidated statements of income include our share of these revenues and expenses through December 31, 2003. In January 2004, we terminated the IGT Alliance in connection with the sale of substantially all of our slot products assets to IGT. See Note 3.

Pro Forma Stock Based Compensation Expense. We account for employee and director stock options using the intrinsic value method. Under this method, no compensation expense was recorded 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 April 30,						Six Months Ended April 30,
	2004			2003			2004			2003

Net income, as reported	$	5,502		$	4,032		$	11,356		$	7,349
Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards, net of related tax benefits	(4,380		)	(1,357		)	(5,674		)	(2,265		)
Pro forma net income	$	1,122		$	2,675		$	5,682		$	5,084

Earnings per common share, basic:
As reported	$	0.22		$	0.16		$	0.46		$	0.29
Pro forma	0.05			0.11			0.23			0.20

Earnings per common share, diluted:
As reported	$	0.21		$	0.16		$	0.44		$	0.28
Pro forma	0.04			0.11			0.22			0.20

Weighted average fair value of options granted during the period	$	15.33		$	11.62		$	15.27		$	12.62

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.

In February 2004, we renewed our Chief Executive Officer’s employment agreement, extending his employment through October 2007. The agreement provided for the grant of 247 options, of which 165 options cliff vest on October 31, 2005 and 82 options which cliff vest on October 31, 2006. The option grants also provided for a vesting acceleration if our common stock prices exceed prices ranging from 30% to 50% over our common stock price on the date of grant. During April 2004, our common stock price exceeded the 50% increase threshold, and accordingly, the 247 options granted became fully vested. This resulted in the full Black-Scholes value of the grant of $3,441 being reflected as pro forma compensation expense during the three months ended April 30, 2004.

Reclassifications. Certain prior period amounts have been reclassified to conform to the current period presentation, including the following for all periods presented:

• We realigned our reportable segments; see Note 11.

• We have reclassified our slot products operations as discontinued; see Note 3.

• Our board of directors approved a three-for-two stock split, with new shares distributed in the form of a dividend on April 16, 2004, to shareholders of record on April 5, 2004. Share and per share amounts have been adjusted to reflect the three-for-two stock split; see Note 7.

2. ACQUISITIONS

CARD. On May 13, 2004, two of our Austrian subsidiaries acquired a 100% ownership interest in CARD Casinos Austria Research & Development GmbH & Co KG and its wholly-owned subsidiaries (“CARD”) from Casinos Austria AG.

The purchase price, paid at closing, consisted of a Euro-denominated cash payment of €25,931 and the issuance of 767 shares of our common stock. The cash payment was funded with a partial use of proceeds from $150,000 issuance, in April 2004, of contingent convertible senior notes. We are required to register the shares by November 17, 2004. Prior to the effective registration of the stock, Casinos Austria has the right to require us to purchase back the 767 shares at an aggregate price of €15,813.

The CARD acquisition will be accounted for as a business combination, and accordingly, we are in the process of valuing the purchase price and determining its allocation to the fair value of the acquired assets and liabilities. Although we have not yet completed its accounting for the acquisition, management estimates that the U.S. dollar equivalent of the combined cash and share payments will be approximately $50,000. CARD’s products have been assigned to our Utility products segment. Beginning May 1, 2004, CARD’s operating results will be included in our consolidated financial statements.

CARD, which is now a subsidiary of our newly formed Shuffle Master International subsidiary, provides us with a headquarters and direct sales force for European business centrally located in Vienna and a satellite office in New Zealand. CARD develops, manufactures and supplies innovative casino products including one2six^(R), a continuous shuffler that accommodates up to six decks of cards and can be used for almost every casino card game. In addition, CARD’s products under development include the Easy Chipper, a next-generation chip sorting device.

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^®, 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, Royal Match 21, and Casino War table games was 1090 units.

The acquisition price includes fixed installments and a promissory note, which is secured as set forth in the acquisition agreement (the “Agreement”), with contingent installment payments. The fixed installments comprise $6,000 that was paid on the closing date and, subject to the terms of the Agreement, $4,000 that is payable on August 24, 2004. Subject to other terms and conditions, the contingent installments are based on future revenue performance of Fortune Pai Gow. Beginning November 2004, we will 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 on a straight-line basis over their estimated useful lives. 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. We have 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. A summary of the preliminary allocation of the acquisition cost follows:

Fair value of acquired assets:
Patents and games, average life of 11 years	$	17,500
Trademark and other, average life of 14 years	260
Total fair value of acquired assets, average life of 11 years	17,760
Fixed installment to seller due August 2004	(4,000		)
Contingent consideration	(7,616		)
Cash purchase price	$	6,144

Sega. In April 2003, we acquired certain product inventory and product intellectual property rights from Sega Corporation of Japan and its wholly owned subsidiary, Sega Gaming Technology (“Sega”), for $1,730 in cash. The intellectual property comprises worldwide rights (excluding Japan) to Sega’s multi-player games, including Royal Ascot, Royal Derby, Sega Blackjack, Bingo Party and Roulette Club (collectively, “Games License”), and a five year non-compete covenant covering certain games in North America. The Games License is exclusive in North America for ten years and non-exclusive thereafter. The acquired products were assigned to our Entertainment Products segment and are now marketed under the product name Table Master. We are in the process of expanding these products by incorporating our existing proprietary table game titles such as Let It Ride^®and Three Card Poker^® into the multi-player games.

3. 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 to IGT. Significant terms of the agreements include:

• We sold our share of the IGT Alliance slot operations, related inventory and leased assets to IGT.

• We conveyed to IGT certain intellectual property rights, principally our slot operating system, patents and licenses.

• The IGT Alliance agreements were terminated and all amounts due to IGT under the IGT Alliance agreements were paid in full.

• We terminated our initiative to develop retrofit games based on IGT’s S+ game platform.

• Net proceeds from the disposition of slot products assets to IGT were $8,447.

These transactions with IGT substantially completed our divestiture of slot products assets. During the three month period ended April 30, 2004, we liquidated additional slot products inventories, resulting in net proceeds of $411. Remaining slot products assets, including inventory, leased assets, and intangible assets, which do not meet the accounting criteria to classify these assets as “held for sale,” are recorded at their estimated net realizable value, and are not material.

Discontinued operations consisted of the following:

	Three Months Ended April 30,						Six Months Ended April 30,
	2004			2003			2004			2003

Revenues	$	426		$	2,782		$	1,947		$	5,052

Gain (loss) from operations before tax	$	259		$	(1	)	$	(15	)	$	(307	)
Income tax (expense) benefit	(91		)	64			5			227
Net income (loss) from operations	168			63			(10		)	(80		)

Gain on sale of slot assets	—			—			3,373			—
One-time termination benefits, contract termination costs, and other	—			—			(877		)	—
Income tax expense	—			—			(874		)	—
Gain on sale of slot assets, net	—			—			1,622			—

Discontinued operations, net	$	168		$	63		$	1,612		$	(80	)

The gain on sale of slot assets includes charges totaling $3,107 to adjust the carrying value of remaining slot products inventory, leased and available products, property and equipment and intangible assets to their estimated net realizable value.

In connection with the discontinuation of our slot products operations, we accrued expenses of $877 for termination of slot-related contracts, closure of our leased slot products research and development facility in Colorado, and termination of slot products personnel (collectively, “Exit Costs”). The charge for Exit Costs is included in discontinued operations, net of tax, on our consolidated statements of income. The following table summarizes the activity for our accrued Exit Costs during the six month period ended April 30, 2004:

	Contract Terminations			Facility Closure			Severance			Total

Exit costs accrued, initial balance	$	366		$	324		$	187		$	877
Cash payments	(51		)	(22		)	(95		)	(168		)
Balance, April 30, 2004	$	315		$	302		$	92		$	709

4. RECEIVABLES, INVENTORIES, AND LEASED PRODUCTS

	April 30, 2004			October 31, 2003
Accounts receivable, net:
Trade receivables	$	9,342		$	9,326
Accrued revenue	17			1,021
Less: allowance for bad debts	(370		)	(340		)
	$	8,989		$	10,007

Notes receivable	$	—		$	648

Accrued revenue represents estimated unbilled participation revenue from slot leases. The notes receivable related to sales to a foreign distributor, bore interest at 3% and were paid in full as of January 31, 2004.

	April 30, 2004			October 31, 2003
Investment in sales-type leases, net:
Minimum lease payments	$	9,365		$	6,155
Less: interest	(782		)	(541		)
Less: allowance for bad debts	(350		)	(225		)
Investment in sales-type leases, net	8,233			5,389
Less: current portion	(3,110		)	(2,075		)
Long-term portion	$	5,123		$	3,314

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. At April 30, 2004, one group of properties with some common ownership accounted for approximately 14% of our outstanding investment in sales-type leases.

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

	April 30, 2004			October 31, 2003
Inventories:
Raw materials and component parts	$	4,592		$	3,263
Work-in-process	418			374
Finished goods	1,316			1,727
	6,326			5,364
Less: allowance for inventory obsolescence	(861		)	(705		)
	5,465			4,659
Discontinued slot products, net	—			2,706
	$	5,465		$	7,365
Products leased and held for lease, net:
Utility products	$	12,495		$	11,241
Entertainment products	2,365			2,350
	14,860			13,591
Less: accumulated depreciation	(10,133		)	(9,595		)
	4,727			3,996
Discontinued slot products, net	180			1,781
	$	4,907		$	5,777

5. INTANGIBLE ASSETS AND GOODWILL

Intangible Assets. All of our recorded intangible assets are subject to amortization. Amortization expense was $513 and $536 for the three month periods ended April 30, 2004 and 2003, respectively, and $905 and $1,031 for the six month periods ended April 30, 2004 and 2003, respectively. Intangible assets are comprised of the following:

	April 30, 2004			October 31, 2003

Patents, games and products	$	23,342		$	5,642
Less: accumulated amortization	(2,686		)	(2,118		)
	20,656			3,524

Licenses and other	3,151			3,723
Less: accumulated amortization	(1,859		)	(1,897		)
	1,292			1,826

Slot products	—			3,370
Less: accumulated amortization	—			(3,238		)
	—			132
Intangible assets, net	$	21,948		$	5,482

Intangible assets include $17,760 of patents, games and trademark acquired from BTI in February 2004. The acquired intangible assets have definite lives. Estimated amortization expense for the year ending October 31, 2004, is $875 and $1,458 annually for each of the four fiscal years thereafter. See Note 2.

Goodwill. Goodwill originated from our acquisition of the QuickDraw^® shuffler product line, certain assets, liabilities and stock of a group of Australian companies in fiscal year 2001. There were no changes in the carrying amount of goodwill for the three and six month periods ended April 30, 2004 and 2003.

6. NOTE PAYABLE AND LONG-TERM LIABILITIES

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

	April 30, 2004			October 31, 2003

Contingent Convertible Senior Notes, fixed interest at 1.25%, due 2024	$	150,000		$	—
Note Payable, fixed rate interest at 2.00%, due in installments through 2005	425			425
BTI Acquisition (see Note 2)
Fixed installment, non-interest bearing, due 2004	3,930
Contingent consideration	7,616			—
	161,971			425
Less: current portion	(4,105		)	(175		)
	$	157,866		$	250

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.

The Notes are convertible, at the holders’ option, into cash and shares of our common stock, under 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.

Holders may convert any outstanding Notes into cash and shares of our common stock at an initial conversion price per share of $42.11. This represents a conversion rate of approximately 23.7473 shares of common stock per $1,000 in principal amount of Notes (the “Conversion Rate”). Subject to certain exceptions described in the indenture covering these Notes, at the time the Notes are tendered for conversion, the value (the “Conversion 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 by multiplying the Conversion Rate by the “Ten Day Average Closing Stock Price,” which equals the average of the closing per share prices of our common stock on the Nasdaq National Market on the ten consecutive trading days beginning on the second trading day following the day the Notes are submitted for conversion. We will deliver the Conversion Value to holders as follows: (1) an amount in cash (the “Principal Return”) equal to the lesser of (a) the aggregate Conversion Value of the Notes to be converted and (b) the aggregate principal amount of the Notes to be converted, and (2) if the aggregate Conversion Value of the Notes to be converted is greater than the Principal Return, an amount in shares (the “Net Shares”) equal to such aggregate Conversion Value less the Principal Return (the “Net Share Amount”). We will pay the Principal Return and deliver the Net Shares, if any, as promptly as practical after determination of the Net Share Amount. The number of Net Shares to be paid will be determined by dividing the Net Share Amount by the Ten Day Average Closing Stock Price.

We may redeem 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 liquidating 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 liquidating 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.

We incurred $4,566 of debt issuance costs in connection with the issuance of the Notes. Debt issuance costs incurred in connection with the issuance of long-term debt are capitalized and amortized as interest expense using the effective interest method over the term of the Notes. Unamortized debt issuance costs are included in other assets on the condensed consolidated balance sheets.

Note Payable. In August 2002, we purchased a patent and the Bloodhound product (formerly, Blackjack Survey VoiceÔ) from Casino Software and Services, LLC for cash of $300 and a note payable for $600. The note bears interest at 2% annually, with principal due in installments of $175 and $250 on August 7, 2004 and 2005, respectively, subject to other terms and conditions.

Credit Facility. In connection with the contingent convertible senior notes issuance mentioned above, on April 13, 2004, we terminated our $15,000 revolving credit agreement that we had maintained with U.S. Bank, N.A.

7. SHAREHOLDERS’ EQUITY

The following table reconciles the changes in our shareholder’s equity during the six month period ending April 30, 2004:

						Additional Paid-in Capital		Retained Earnings			Total Shareholders’ Equity
	Common Stock
	Shares		Amount

Balance, October 31, 2003	24,715		$	165		$	—	$	47,558		$	47,723

Common stock repurchased	(2,543	)	(25		)	—		(78,636		)	(78,661		)
Common stock options exercised	680		7			—		4,570			4,577
Tax benefit from stock options	—		—			—		3,281			3,281
Stock split	(2	)	82			—		(220		)	(138		)
Net income	—		—			—		11,356			11,356

Balance, April 30, 2004	22,850		229			—		(12,091		)	(11,862		)

Common Stock Repurchases. Our board of directors periodically authorizes us to repurchase shares of our common stock. In May 2004, our board of directors authorized the repurchase of up to $30,000 of our common stock. Repurchases under all previous outstanding authorizations have been substantially completed.

Under our board authorizations, during the six month periods ended April 30, 2004 and 2003, we repurchased 672 and 1,272 shares of our common stock, respectively, at total costs of $21,161 and $15,642, respectively.

In addition, in April 2004, our board authorized and we repurchased, in private transactions, an additional 1,871 shares of our common stock at a total cost of $57,500 with funds provided from the issuance of our contingent convertible senior notes. See Note 6.

Tax Benefit from Stock Option Exercises. During the six month periods ended April 30, 2004 and 2003, we recorded income tax benefits of $3,281 and $661, respectively, related to deductions for employee stock option exercises. These tax benefits, which increased prepaid income taxes and additional paid-in capital by equal amounts, had no affect on our provision for income taxes.

Stock Split. On March 16, 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. Share and per share amounts have been adjusted for all periods presented herein to reflect our three-for-two stock split. In connection with our stock split, we paid cash of $138 for fractional shares and reclassified to common stock the par value of $0.01 per newly issued share.

8. EARNINGS PER SHARE

Shares used to compute basic and diluted earnings per share from continuing operations are as follows (all share and per share amounts have been restated to reflect our three-for-two stock split in April 2004):

	Three Months Ended April 30,				Six Months Ended April 30,
	2004		2003		2004		2003

Income from continuing operations	$	5,334	$	3,969	$	9,744	$	7,429

Basic:
Weighted average shares, basic	24,856		24,840		24,827		25,274

Diluted:
Weighted average shares, basic	24,856		24,840		24,827		25,274
Dilutive impact of options outstanding	905		572		883		599
Weighted average shares, diluted	25,761		25,412		25,710		25,873

Basic earnings per share	$	0.21	$	0.16	$	0.39	$	0.29
Diluted earnings per share	$	0.21	$	0.16	$	0.38	$	0.29

9. EQUITY INCENTIVE PLANS

Stock Options. During the six month period ended April 30, 2004, our stock option activity and weighted average exercise prices were as follows:

	Shares		Weighted- Average Exercise Price

Outstanding, October 31, 2003	3,035		$	11.96
Granted	459		25.07
Exercised	(680	)	6.73
Forfeited	(92	)	15.11
Outstanding, April 30, 2004	2,722		15.37

Exercisable, April 30, 2004	1,170		$	14.03

Equity Incentive Plans. In February 2004, our board of directors adopted and, in March 2004, our shareholders approved the Shuffle Master, Inc. 2004 Equity Incentive Plan (the “2004 Plan”) and the Shuffle Master, Inc. 2004 Equity Incentive Plan for Non-Employee Directors (the “2004 Directors’ Plan”). These approved plans replaced our prior plans and no further options may be granted from the prior plans. Both the 2004 Plan and the 2004 Directors’ Plan provide for the grant of stock options, stock appreciation rights, and restricted stock, individually or in any combination (collectively referred to as “Awards”). Stock options may not be granted at an exercise price less than the fair market value of our stock at the date of grant.

The 2004 Plan provides for the grants of Awards to our officers, other employees and contractors. The maximum number of Awards which may be granted is 1,800, of which no more than 1,260 may be granted as restricted stock. The 2004 Directors’ Plan provides for the grants of Awards to our non-employee directors. The maximum number of Awards which may be granted is 750, of which no more than 525 may be granted as restricted stock. As of April 30, 2004, 1,800 and 678 shares are available for grant under the 2004 Plan and 2004 Directors’ Plan, respectively.

10. OTHER INCOME (EXPENSE)

Other income (expense) is comprised of the following:

	Three Months Ended April 30,						Six Months Ended April 30,
	2004			2003			2004			2003

Interest income	$	151		$	51		$	282		$	130
Interest expense	(55		)	(3		)	(58		)	(6		)
Foreign currency loss	(703		)	(2		)	(716		)	(9		)
Other	—			—			—			(10		)
	$	(607	)	$	46		$	(492	)	$	105

During the three month period ended April 30, 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 contracts do not meet the accounting criteria for hedge accounting, and accordingly, the foreign currency exchange loss is included in our operating results for the three and six month periods ended April 30, 2004. As of April 30, 2004, we had outstanding two Euro - U.S. dollar foreign exchange contracts with exactly offsetting exchange rates and each with an underlying notional amount of €10,000.

11. OPERATING SEGMENTS

We currently have four product lines: Shufflers, Proprietary Table Games, Table Master, and Intelligent Table System (“ITS”). Our Shufflers and Proprietary Table Games are each significant to our operating results. Our Table Master and ITS product lines, while important to our strategic direction, consist primarily of research and development activities to date.

As a result of our redefined product strategy and the divestiture of our slot products, beginning in fiscal year 2004, we have realigned our reportable segments. We have two reportable segments which are classified as continuing operations, Utility Products and Entertainment Products. Utility Products includes our Shufflers and ITS product lines. Entertainment Products includes our Proprietary Table Games and Table Master product lines. 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, 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.

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

	Three Months Ended April 30,						Six Months Ended April 30,
	2004			2003			2004			2003
Revenue:
Utility Products	$	10,296		$	8,042		$	18,461		$	14,509
Entertainment Products	9,815			5,359			17,235			10,813
Corporate	45			62			69			68
	$	20,156		$	13,463		$	35,765		$	25,390
Operating Income (Loss):
Utility Products	4,968			4,324			8,368			7,751
Entertainment Products	7,366			4,469			13,355			8,856
Corporate	(3,521		)	(2,636		)	(6,240		)	(5,099		)
	$	8,813		$	6,157		$	15,483		$	11,508
Depreciation and Amortization:
Utility Products	$	570		$	513		$	1,103		$	980
Entertainment Products	453			158			654			333
Corporate	276			294			541			583
	$	1,299		$	965		$	2,298		$	1,896
Capital Expenditures:
Utility Products	$	1,056		$	1,018		$	1,800		$	1,781
Entertainment Products	484			289			610			298
Corporate	228			166			356			360
	$	1,768		$	1,473		$	2,766		$	2,439

12. COMMITMENTS AND CONTINGENCIES

Purchase Commitments. From time to time, we enter into commitments with our vendors to purchase inventory at fixed prices or in guaranteed quantities. These commitments are not material.

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 April 30, 2004, minimum aggregate severance benefits totaled $3,962.

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

Continuing Operations –

Vending Data – In March 2002, we filed a patent infringement lawsuit against VendingData Corporation, d/b/a Casinovations, and related entities. The suit was filed in the U.S. District Court for the District of Nevada, in Las Vegas, Nevada. The complaint alleges that the defendants have infringed two of our patents and seeks an unspecified amount of damages and a permanent injunction against the defendants’ infringing conduct. The defendants have denied liability, raised numerous affirmative defenses, and also filed a counterclaim alleging, among other causes of action, breach of a confidentiality agreement and patent invalidity. The counterclaim seeks an unspecified amount of damages. We completely deny each of the claims contained in defendants’ counterclaim, and believe we will prevail in our infringement action, including with respect to defendants’ counterclaim.

Awada – In September 2002, Yehia Awada and Gaming Entertainment, Inc. (“Awada”) sued us. The suit was filed in the Second Judicial District Court of the State of Nevada, in Clark County, Nevada. The defendants are us and Mark L. Yoseloff, our CEO and Chairman. The complaint alleges breach of contract and related theories and causes of action concerning the 1999 agreement between us and the plaintiffs, relating to the plaintiffs’ 3 Way Action^® table game. The complaint seeks an unspecified amount of damages. We have cross-complained against the plaintiffs, alleging fraud and related causes of action, and are seeking unspecified damages from the plaintiffs. We completely deny the plaintiffs’ allegations in the complaint. We also believe that we will prevail in our cross-complaint.

VendingData (LA) – In July 2003, we filed a complaint against VendingData Corporation and Casinovations, Inc., in the Central Court of Orleans Parish in New Orleans, Louisiana. The complaint alleges that the defendants are committing unfair sales and trade practices in violation of Louisiana state law, specifically related to the sales of certain VendingData shufflers to a casino customer in Louisiana. The complaint seeks a permanent injunction against the defendants’ conduct and an unspecified amount of damages. The defendants have denied liability, raised numerous affirmative defenses, and also filed a claim alleging that, should they prevail in the litigation, they are entitled to reimbursement of their attorney’s fees. We believe that we will prevail in this litigation. In February 2004, we dismissed our complaint and VendingData dismissed its counterclaim, and the litigation was ended. No amounts were paid by either party to the other. The sales transactions which were the subject of our complaint against VendingData have been reversed by the customer, and the customer has now replaced the VendingData shufflers with our shufflers.

Gaming Entertainment – In July 2003, we filed a patent infringement suit against Gaming Entertainment, Inc., in the U. S. District Court for the Northern District of Mississippi alleging that the defendant’s 3-5-7 Poker Game infringes a patent owned by us. In early March 2004, this litigation was dismissed without prejudice by us, pending settlement negotiations between the parties. No assurances can be given that these negotiations will be successful. At this time, there are no current settlement negotiations ongoing between the parties.

CARD - We were involved in continued litigation with Casinos Austria Research and Development (“CARD”) and its affiliates in the United States, Australia and the United Kingdom. On May 13, 2004, effective May 14, 2004, we completed our acquisition of CARD. As part of the acquisition, all litigation between the companies will be terminated and dismissed. We are also in the process of having returned to us the $1,000 cash security we posted in connection with the preliminary injunction that we obtained in the United States against CARD.

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 completely deny the plaintiff’s claims and believe we will prevail in this litigation.

Aim Management – In June 2003, AIM Management, Inc. and Douglas Okuniwiecz, filed a patent infringement suit against us and our affiliate, Shuffle Master of Mississippi, Inc., in the U. S. District Court for the Southern District of Mississippi. The complaint alleges that we are infringing two patents owned by the plaintiffs. The subject patents involve a certain hardware feature related to computer-based operating systems. The complaint seeks a permanent injunction and an unspecified amount of damages. At the end of April 2004, we settled this litigation by agreeing to pay AIM Management $100, without admitting any infringement or any other liability to AIM Management. The amount of the settlement was, in our view, less than the ongoing legal defense costs.

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

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

BUSINESS OVERVIEW
(In Thousands)

Shuffle Master, Inc. develops, manufactures and markets technology-based products for the gaming industry. Our products primarily relate to our casino customers’ table game activities and are focused on increasing their profitability, productivity and security. These products include a full line of automatic card shufflers for use with the vast majority of card table games placed in casinos and other locations. We also market a line of live proprietary poker, blackjack, baccarat, and pai gow poker based table games.

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

The purchase price, paid at closing, consisted of a Euro-denominated cash payment of €25,931 and the issuance of 767 shares of our common stock. The cash payment was funded with a partial use of proceeds from our $150,000 issuance, in April 2004, of contingent convertible senior notes. We are required to register the shares by November 17, 2004. Prior to the effective registration of the stock, Casinos Austria has the right to require us to purchase back the 767 shares at an aggregate price of €15,813.

Sega. In April 2003, we acquired certain product inventory and product intellectual property rights from Sega Corporation of Japan and its wholly owned subsidiary, Sega Gaming Technology (“Sega”), for $1,730 in cash. The intellectual property comprises worldwide rights (excluding Japan) to Sega’s multi-player games, including Royal Ascot, Royal Derby, Sega Blackjack, Bingo Party and Roulette Club (collectively, “Games License”), and a five year non-compete covenant covering certain games in North America. The Games License is exclusive in North America for ten years and non-exclusive thereafter. The acquired products were assigned to our Entertainment Products segment and are now marketed under the product name Table Master. We plan to expand these products by incorporating our existing proprietary table game titles such as Let It Ride^®and Three Card Poker^® into the multi-player games.

DISPOSITIONS

In December 2003, our board of directors approved and we committed to a plan to divest of 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. As of January 31, 2004, our slot products divestiture was substantially complete. A more detailed discussion is included under the heading “Discontinued Operations.”

CONSOLIDATED RESULTS OF OPERATIONS

(In thousands, except per share amounts)

	Three Months Ended April 30,				Six Months Ended April 30,
	2004		2003		2004		2003

Total revenue	100.0	%	100.0	%	100.0	%	100.0	%
Cost of revenue	19.1	%	19.2	%	19.1	%	19.8	%
Gross margin	80.9	%	80.8	%	80.9	%	80.2	%
Selling, general and administrative	28.4	%	28.5	%	29.4	%	28.6	%
Research and development	8.8	%	6.5	%	8.2	%	6.3	%
Income from operations	43.7	%	45.8	%	43.3	%	45.3	%
Other income (expense), net	(3.0	)%	0.3	%	(1.4	)%	0.4	%
Income from continuing operations before tax	40.7	%	46.1	%	41.9	%	45.7	%
Provision for income taxes	14.2	%	16.6	%	14.7	%	16.4	%
Income from continuing operations	26.5	%	29.5	%	27.2	%	29.3	%
Discontinued operations, net of tax	0.8	%	0.4	%	4.5	%	(0.3	)%
Net income	27.3	%	29.9	%	31.7	%	29.0	%

Our revenue and results of operations are most affected by unit placements, through sale or lease, of our products; as such, we are a revenue-driven business. The number and mix of products placed and the average lease or sales price are the most significant factors affecting our gross margins. These factors are, in turn, affected by the gaming industry generally and our customers’ assessment of our products. To a lesser extent, our overall financial results are affected by fluctuations in selling, general and administrative expenses and our investment in research and development activities.

REVENUE AND GROSS MARGIN

	Three Months Ended April 30,						Six Months Ended April 30,
	2004			2003			2004			2003
Revenue:
Leases and royalties	$	10,771		$	9,578		$	20,507		$	18,964
Sales and service	9,340			3,823			15,189			6,358
Other	45			62			69			68
Total	$	20,156		$	13,463		$	35,765		$	25,390
Cost of revenue:
Leases and royalties	$	1,726		$	1,604		$	3,428		$	3,254
Sales and service	2,115			982			3,411			1,784
Other	—			—			—			—
Total	$	3,841		$	2,586		$	6,839		$	5,038
Gross margin:
Leases and royalties	$	9,045		$	7,974		$	17,079		$	15,710
Sales and service	7,225			2,841			11,778			4,574
Other	45			62			69			68
Total	$	16,315		$	10,877		$	28,926		$	20,352
Gross margin percentage:
Leases and royalties	84.0		%	83.3		%	83.3		%	82.8		%
Sales and service	77.4		%	74.3		%	77.5		%	71.9		%
Total	80.9		%	80.8		%	80.9		%	80.2		%

We earn our revenue in several ways. The largest percentage is by leasing or licensing our products to casino customers, generally under month-to-month fixed fee contracts. Product lease contracts typically include parts and servicing. We also offer most of our products for sale with an optional parts and service contract. A more detailed discussion of our revenue components and related revenue recognition policies is included under the heading “Critical Accounting Policies.”

Our overall revenue growth was primarily due to the increase in both leased and sold units in both our product segments. The increase in the number of units leased and sold resulted from the introduction of new products, greater placements of existing products and the expansion of legal gaming into new jurisdictions. In addition, our acquisition of BTI added 1,090 units to our table games installed base. A more detailed discussion of our revenue is included for each of our operating segments under the heading “Segment Operating Results.”

Total gross margin increased largely due to the increase in our revenue, and to a lesser extent, due to our higher-margin Entertainment products representing a greater percentage of the total revenue in the three and six month periods ended April 30, 2004 compared to the prior year fiscal periods.

Leases and royalties gross margin percentage for the three and six month periods ended April 30, 2004, increased slightly because indirect costs, primarily service, did not increase at the same rate as revenues. Sales and service gross margin percentage also increased, reflecting a change in the sold product mix in the three and six month periods ended April 30, 2004 compared to the prior year fiscal periods. Fiscal 2004 revenues include sales of lifetime licenses for our proprietary table games, which generally carry higher margins. We began selling lifetime licenses of proprietary table games in the third quarter of fiscal 2003. Accordingly, there were no comparable sales in the fiscal 2003 periods. The increase in sales and service gross margin percentage from table game sales was offset by a lower gross margin percentage from shuffler sales. The three month period ended April 30, 2004, included a greater percentage of lower-margin foreign sales than the comparable period.

OPERATING EXPENSES

	Three Months Ended April 30,						Six Months Ended April 30,
	2004			2003			2004			2003
Selling, general and administrative	$	5,732		$	3,840		$	10,513		$	7,250
Percentage of revenue	28.4		%	28.5		%	29.4		%	28.6		%

Research and development	$	1,770		$	880		$	2,930		$	1,594
Percentage of revenue	8.8		%	6.5		%	8.2		%	6.3		%

Selling, General and Administrative Expenses (“SG&A”). SG&A increased 49.3% and 45.0% for the three and six month periods ended April 30, 2004 and 2003, respectively, primarily due to the increase in legal fees associated with our various legal proceedings related to our intellectual property, which were $1,059 and $324 for the three month periods ended April 30, 2004 and 2003, respectively, and $2,267 and $584 for the six month periods ended April 30, 2004 and 2003, respectively. We expect that our legal fees will continue to vary from quarter to quarter depending on our level of legal proceedings activity. Our spending for other SG&A also increased as a result of greater business volume. However, these expenses did not increase as much as revenue increased, and as a result, SG&A as a percentage of revenue in the fiscal 2004 periods remained consistent with the prior year periods despite the increase in legal fees.

Research and Development Expenses (“R&D”). Our R&D spending increased for the three and six month periods ended April 30, 2004, primarily due to the re-engineering of our Table Master product line, which we acquired in April 2003.

OTHER INCOME (EXPENSE)

Other income (expense) is comprised of the following:

	Three Months Ended April 30,						Six Months Ended April 30,
	2004			2003			2004			2003

Interest income	$	151		$	51		$	282		$	130
Interest expense	(55		)	(3		)	(58		)	(6		)
Foreign currency loss	(703		)	(2		)	(716		)	(9		)
Other	—			—			—			(10		)
	$	(607	)	$	46		$	(492	)	$	105

Interest income increased primarily due to increases in our sales-type leasing activities over the past year which have resulted in a greater investment in sales-type lease balance as of April 30, 2004. Sales-type leases bear interest. The increase in interest expense is due to the issuance of $150,000 of contingent convertible senior notes in April 2004. A more detailed discussion of these notes is included below under the heading “Liquidity and Capital Resources.”

During the three month period ended April 30, 2004, we entered into foreign currency exchange contracts to fix the U.S. dollars required to fund the Euro-denominated cash component of the CARD purchase price resulting in a foreign currency exchange loss of $703. The contracts do not meet the accounting criteria for hedge accounting, and accordingly, the foreign currency exchange loss is included in our operating results for the three and six month periods ended April 30, 2004.

INCOME TAXES

Our effective tax rate for continuing operations for the three and six month periods ended April 30, 2004, was 35.0% compared to an effective tax rate of 36.0% for the prior fiscal year periods. Our fiscal 2003 annual rate includes a benefit from amended research and development credit claims. However, on a quarterly basis, our rate did not benefit until the third quarter of fiscal 2003, when we filed the claims. Looking forward, our annual effective tax rate may exceed 35.0%. Our estimate of our effective tax rate may fluctuate due to variation in our taxable income, changes in tax legislation, changes in our estimates of federal tax credits and other tax deductions and the related impact on our effective tax rate.

During the six month periods ended April 30, 2004 and 2003, we recorded income tax benefits of $3,281 and $661, respectively, related to deductions for employee stock option exercises. These tax benefits, which increased prepaid income taxes and additional paid-in capital by equal amounts, had no effect on our provision for income taxes.

EARNINGS PER SHARE

	Three Months Ended April 30,						Six Months Ended April 30,
	2004			2003			2004			2003

Income from continuing operations	$	5,334		$	3,969		$	9,744		$	7,429
Basic earnings per share	$	0.21		$	0.16		$	0.39		$	0.29
Diluted earnings per share	$	0.21		$	0.16		$	0.38		$	0.29

Weighted average shares data:
Basic	24,856			24,840			24,827			25,274
Dilutive impact of stock options	905			572			883			599
Diluted	25,761			25,412			25,710			25,873

Outstanding shares data:
Shares outstanding, beginning of period	24,888			25,200			24,715			25,914
Options exercised	507			214			680			312
Shares repurchased	(2,543		)	(460		)	(2,543		)	(1,272		)
Other	(2		)	—			(2		)	—
Shares outstanding, end of period	22,850			24,954			22,850			24,954

On March 16, 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. Share and per share amounts have been adjusted for all periods presented herein to reflect our three-for-two stock split.

Diluted earnings per share from continuing operations increased 31.3% and 31.0% for the three and six month periods ended April 30, 2004, respectively, when compared to the prior year fiscal periods.

SEGMENT OPERATING RESULTS

(Dollars in thousands)

SEGMENT OVERVIEW

We have four product lines: Shufflers, Proprietary Table Games, Table Master, and Intelligent Table System (“ITS”). Our Shufflers and Proprietary Table Games are each significant to our operating results. Our Table Master and ITS product lines, while important to our strategic direction, consist primarily of research and development activities to date.

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. Accordingly, we do not know precisely the number of units currently active in 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, 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 April 30,						Increase (Decrease)		Percentage Change
	2004			2003			Increase (Decrease)		Percentage Change
Utility Products segment revenue
Lease	$	4,755		$	4,337		$	418	9.6	%
Sales and service	5,541			3,705			1,836		49.6	%
Total	$	10,296		$	8,042		$	2,254	28.0	%

Utility Products segment operating income	$	4,968		$	4,324		$	644	14.9	%
Utility Products segment operating margin	48.3		%	53.8		%

Shufflers installed base (end of quarter)
Lease units	3,884			3,407			477		14.0	%

Sold units, inception-to-date
Beginning of quarter	7,788			6,397			1,391		21.7	%
Sold during quarter	499			322			177		55.0	%
Less trade-ins and exchanges	(29		)	(42		)	13		(31.0	)%
End of quarter	8,258			6,677			1,581		23.7	%
Total installed base	12,142			10,084			2,058		20.4	%

Utility products segment revenue is derived substantially from our shuffler product line. Revenue from our Bloodhound products is not material for the periods presented and our Intelligent Table System products are in the development stage.

The increase in shuffler lease revenue for our fiscal 2004 second quarter reflects the greater number of units on lease offset by a slight decline in overall average lease price. Although the average lease price of our various shuffler models has remained consistent or increased, our shuffler installed base during our fiscal 2004 second quarter includes a greater percentage of our lower-priced Deck Mate^® and MD1 multi-deck batch shuffler models, and, as a result, the overall shuffler average lease price slightly declined. Shuffler lease units increased by 350 during our fiscal 2004 second quarter, comprised of the net placement of 198 Deck Mate, 91 ACE^® and 127 multi-deck batch shufflers, offset by the net removal of 66 King shufflers and the conversion of 158 leased units to sold units (“conversion units”). Our shuffler lease units increased 5.2% during our fiscal 2004 second quarter, compared to 87 units or 2.6% during our fiscal 2003 second quarter.

The increase in shuffler sales and service revenue for our fiscal 2004 second quarter primarily reflects a greater number of units sold. During our fiscal 2004 second quarter, we sold 177 more shuffler units compared to the prior fiscal year second quarter. The average sales price per unit was $9.283 for our fiscal 2004 second quarter compared to $10.055 for the comparable prior year quarter. The average sales price per unit declined due to a greater percentage of lower-margin foreign sales in the fiscal 2004 second quarter.

Utility products segment operating income for the second quarter of fiscal 2004 increased when compared to the prior fiscal year; however, as a percentage of revenue, the Utility products operating margin declined due to the following factors. Shuffler gross margin percentage for the three month period ended April 30, 2004, was lower compared to the prior year period because the three month period ended April 30, 2004, included a greater percentage of lower-margin foreign sales. In addition, Utility product segment operating income was reduced by higher legal expenses associated with legal proceedings regarding patents and other intellectual property directly associated with the segments product lines. These declines were offset somewhat because sales and service expenses allocated to our Utility products segment did not increase at the same rate as Utility products revenue.

	Six Months Ended April 30,						Increase (Decrease)		Percentage Change
	2004			2003			Increase (Decrease)		Percentage Change
Utility Products segment revenue
Lease	$	9,352		$	8,560		$	792	9.3	%
Sales and service	9,109			5,949			3,160		53.1	%
Total	$	18,461		$	14,509		$	3,952	27.2	%

Utility Products segment operating income	$	8,368		$	7,751		$	617	8.0	%
Utility Products segment operating margin	45.3		%	53.4		%

For the six month period ended April 30, 2004, the factors that attributed to the increase in Utility product segment revenue and the decline in segment operating margin as a percentage of sales are the same as for the three month period ended April 30, 2004. The increase in shuffler lease units for the six month period ended April 30, 2004, includes the net placement of 553 units offset by 253 conversion units compared to net placements of 380 units offset by 210 conversion units during the prior year six month period. During the six month periods ended April 30, 2004 and 2003, we sold 787 and 508 shuffler units (including conversion units), respectively, at an average sales price per unit of $10.027 and $9.667, respectively.

ENTERTAINMENT PRODUCTS SEGMENT OPERATING RESULTS

	Three Months Ended April 30,						Increase (Decrease)			Percentage Change
	2004			2003			Increase (Decrease)			Percentage Change
Entertainment Products segment revenue
Royalties and leases	$	6,016		$	5,241		$	775		14.8	%
Sales and service	3,799			118			3,681			3119.5	%
Total	$	9,815		$	5,359		$	4,456		83.1	%

Entertainment Products segment operating income	$	7,366		$	4,469		$	2,897		64.8	%
Entertainment Products segment operating margin	75.0		%	83.4		%

Table games installed base (end of quarter)
Royalty units
Three Card Poker	1,051			931			120			12.9	%
Let It Ride Bonus and basic	512			637			(125		)	(19.6	)%
Royal Match 21	554			—			554			100.0	%
Fortune Pai Gow	521			—			521			100.0	%
Other games	228			53			175			330.2	%
Total	2,866			1,621			1,245			76.8	%
Sold units, inception-to-date
Let It Ride Bonus and basic	130			10			120			1,200.0	%
Three Card Poker	47			—			47			100.0	%
Other games	1			—			1			100.0	%
Subtotal	178			10			168			1,680.0	%
Total installed base	3,044			1,631			1,413			86.6	%

Entertainment products segment revenue is derived substantially from our proprietary table game products. Revenue from our Table Master products is not material for the periods presented.

Our table games installed base of royalty units increased 1,172 units during our fiscal 2004 second quarter, including 1,090 units acquired from BTI, compared to 53 units during the prior fiscal year second quarter. The royalty

revenue increase due to the increase in the installed units was partially offset by a decline in the average royalty rate for table games. The decline in average royalty rate is due to a change in the mix of games in the installed base from the higher-priced Let It Ride games to our newly acquired and other lower-priced table games. Our recently introduced Four Card Poker^® table game is the greatest contributor to the increase in other games units.

Entertainment products sales for our fiscal 2004 second quarter are primarily the sale of lifetime licenses for our proprietary table games, which we began selling in our fiscal 2003 third quarter.

During the second quarter of fiscal 2004, Entertainment products operating income increased consistent with the increase in Entertainment products revenue. However, as a percentage of revenue, the Entertainment products operating margin declined during our fiscal 2004 second quarter compared to the prior fiscal year second quarter. The decline was primarily due to amortization expense associated with intellectual property acquired from BTI. Estimated amortization expense for these acquired assets is $875 for the year ending October 31, 2004, and $1,458 annually for each of the four fiscal years thereafter. In addition, Entertainment Products segment operating profit reflects our continued research and development investment in our Table Master product line.

	Six Months Ended April 30,						Increase (Decrease)		Percentage Change
	2004			2003			Increase (Decrease)		Percentage Change
Entertainment Products segment revenue
Royalties and leases	$	11,155		$	10,404		$	751	7.2	%
Sales and service	6,080			409			5,671		1386.6	%
Total	$	17,235		$	10,813		$	6,422	59.4	%

Entertainment Products segment operating income	$	13,355		$	8,856		$	4,499	50.8	%
Entertainment Products segment operating margin	77.5		%	81.9		%

For the six month period ended April 30, 2004, the factors that contributed to the increase in Entertainment products segment revenue and the decline in segment operating margin as a percentage of revenue are the same as for the three month period ended April 30, 2004. Table royalty units increased 1,206 units during the six month period ended April 30, 2004 (including 1,090 units acquired from BTI) compared to an increase of 104 units during the prior year six month period. We sold 106 lifetime licenses for table games during the six month period ended April 30, 2004, compared to none in the prior year period.

DISCONTINUED OPERATIONS

In December 2003, our board of directors approved and we committed to a plan to divest our slot products, 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. In January 2004, we entered into agreements pursuant to which we sold substantially all of our slot products assets to International Game Technology (“IGT”). Significant terms of the agreements include:

• We sold our share of the IGT Alliance slot operations, related inventory and leased assets to IGT.

• We conveyed to IGT certain intellectual property rights, principally our slot operating system, patents and licenses.

• The IGT Alliance Agreements were terminated and all amounts due to IGT under the IGT Alliance Agreements were paid in full.

• We terminated our initiative to develop retrofit games based on IGT’s S+ game platform.

• Net proceeds from the disposition of slot products assets were $8,447.

criteria to classify these assets as “held for sale,” are recorded at their estimated net realizable value, and are not material.

Discontinued operations consists of the following:

	Three Months Ended April 30,						Six Months Ended April 30,
	2004			2003			2004			2003

Revenues	$	426		$	2,782		$	1,947		$	5,052

Gain (loss) from operations before tax	$	259		$	(1	)	$	(15	)	$	(307	)
Income tax (expense) benefit	(91		)	64			5			227
Net income (loss) from operations	168			63			(10		)	(80		)

Gain on sale of slot assets	—			—			3,373			—
One-time termination benefits, contract termination costs, and other	—			—			(877		)	—
Income tax expense	—			—			(874		)	—
Gain on sale of slot assets, net	—			—			1,622			—

Discontinued operations, net	$	168		$	63		$	1,612		$	(80	)

	Contract Terminations			Facility Closure			Severance			Total

Exit Costs accrued, initial balance	$	366		$	324		$	187		$	877
Cash payments	(51		)	(22		)	(95		)	(168		)
Balance, April 30, 2004	$	315		$	302		$	92		$	709

Our fiscal 2003 results have been reclassified to reflect our slot products as discontinued operations as follows:

	Year Ended October 31, 2003
	January 31,			April 30,			July 31,			October 31,			Total
Discontinued Operations:
Revenues	$	2,270		$	2,782		$	2,034		$	1,990		$	9,076

Loss from operations before tax	$	(306	)	$	(1	)	$	(488	)	$	(585	)	$	(1,380	)
Income tax benefit	163			64			228			280			735
Net income (loss) from operations	(143		)	63			(260		)	(305		)	(645		)

Earnings per share:
Continuing operations
Basic	$	0.13		$	0.16		$	0.20		$	0.21		$	0.70
Diluted	$	0.13		$	0.16		$	0.19		$	0.21		$	0.68

Discontinued operations
Basic	$	—		$	—		$	(0.01	)	$	(0.01	)	$	(0.02	)
Diluted	$	—		$	—		$	(0.01	)	$	(0.02	)	$	(0.02	)

Net income
Basic	$	0.13		$	0.16		$	0.19		$	0.20		$	0.68
Diluted	$	0.13		$	0.16		$	0.18		$	0.19		$	0.66

LIQUIDITY AND CAPITAL RESOURCES

(Dollars and Shares in thousands)

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 contingent convertible senior notes (“Notes”). Our net cash proceeds were approximately $145,400, after deducting note issuance costs. We have used these proceeds to fund approximately $31,100 for the cash component of our CARD purchase price and approximately $57,500 to repurchase our common stock in private transactions. The remainder is available for our general corporate purposes.

LIQUIDITY

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

	April 30, 2004		October 31, 2003		Increase (Decrease)		Percentage Change

Cash, cash equivalents, and investments	$	84,686	$	10,425	$	74,261	712.3	%
Working capital	$	101,311	$	25,809	$	75,502	292.5	%
Current ratio	8.8		3.3		5.5		166.7	%

The significant factors underlying the increase in cash, cash equivalents and investments during the six month period ended April 30, 2004, include net proceeds from the issuance of Notes of $145,434, net proceeds from the disposition of slot products assets of $8,858, cash flow provided by operations of $5,943, net proceeds from option exercise of $4,439, offset by common stock repurchases of $78,661, and aggregate capital expenditures of $2,863.

Cash Flows.

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

	Six Months Ended April 30,						Increase			Percentage
	2004			2003			(Decrease)			Change

Net income	$	11,356		$	7,349		$	4,007		54.5	%
Non-cash items	3,347			4,304			(957		)	(22.2	)%
Income tax related items	323			127			196			154.3	%
Net gain from disposition of slot products assets	(2,495		)	—			(2,495		)	100.0	%
Investment in sales-type leases	(2,969		)	(1,818		)	(1,151		)	63.3	%
Other changes in operating assets and liabilities	(3,619		)	(325		)	(3,294		)	1,013.5	%
Cash flow provided by operating activities	$	5,943		$	9,637		$	(3,694	)	(38.3	)%

Net income for the six month period ended April 30, 2004, includes the after-tax gain from the sale of our slot products assets of $1,622.

Non-cash items are comprised of depreciation and amortization, provision for bad debts, and provision for inventory obsolescence. The decrease in non-cash items is due to lower depreciation and amortization expense during the six month period ended April 30, 2004, primarily due to the January 2004 disposition of our slot products assets, offset somewhat by amortization of intangible assets acquired from BTI in February 2004.

Income tax related items include deferred income taxes, tax benefit from stock option exercises, and prepaid 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.

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 cash flow statement. This use of cash offsets the net proceeds from the sale that we received from IGT of $8,447, 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:

	Six Months Ended April 30,						Increase			Percentage
	2004			2003			(Decrease)			Change

Net maturities (purchases) of investments	$	(19,463	)	$	8,035		$	(27,498	)	(342.2	)%
Capital expenditures	(2,863		)	(2,841		)	(22		)	0.8	%
Business acquired	(6,144		)	(1,730		)	(4,414		)	255.1	%
Net proceeds from disposition of slot assets	8,858			—			8,858			100.0	%
Other	(2,745		)	(6		)	(2,739		)	45,650.0	%
Cash flow provided (used) by investing activities	$	(22,357	)	$	3,458		$	(25,815	)	(746.5	)%

Capital expenditures include purchases of product for lease, property and equipment, and intangible assets. Our largest use of cash for capital expenditures was for product that we manufacture and capitalize into our leased asset base. During the six month period ended April 30, 2004, we capitalized $1,895 of products that are leased or available to lease, compared to $1,746 in the comparable prior fiscal year period.

As discussed above, in February 2004, we acquired certain assets from BTI, for total fixed cash consideration of $10,000 and additional contingent consideration of up to $12,000 payable over the next ten years. Upon closing, we paid $6,000 of the fixed cash consideration and $144 of other direct acquisition expense. In April 2003, we acquired certain assets from Sega for cash of $1,730.

Net proceeds from the disposition of slot assets includes $8,447 from our sale of substantially all our slot products to IGT in January 2004 and other miscellaneous inventory sales for $411 during the three month period ended April 30, 2004.

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

	Six Months Ended April 30,						Increase			Percentage
	2004			2003			(Decrease)			Change

Proceeds from issuance of Notes, net of costs	$	145,434		$	—		$	145,434		100.0	%
Proceeds from stock option exercises	4,439			1,772			2,667			150.5	%
Repurchases of common stock	(78,661		)	(15,642		)	(63,019		)	402.9	%
Cash flow provided (used) by financing activities	$	71,212		$	(13,870	)	$	85,082		(613.4	)%

Our employees and directors exercised 680 options during the six month period ended April 30, 2004, at an average exercise price of $6.73 per share, compared to 312 options during the comparable prior year period at an average exercise price of $5.74 per share.

During the six month period ended April 30, 2004, we repurchased 2,543 shares of our common stock at an average cost of $30.93 compared to 1,272 at an average cost of $12.30 during the fiscal 2003 prior period. See discussion of “Stock Repurchase Authorizations” below.

LONG-TERM LIABILITIES

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 semiannually in arrears on April 15 and October 15 of each year, beginning October 15, 2004. After deducting Note issuance costs of $4,566, our net proceeds were $145,434.

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

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

• upon the occurrence of specified corporate transactions.

BTI Liabilities. In connection with our acquisition of certain assets from BTI, we have a current liability for the remaining portion of the fixed installments of $4,000. In addition, we have 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 then carrying value of the acquired assets will be reduced.

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. In May 2004, our board of directors authorized the repurchase of up to $30,000 of our common stock. Repurchases under all previous outstanding authorizations have been substantially completed.

The following table provides additional monthly detail regarding our share repurchases during the three month period ended April 30, 2004:

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 (a)
February 1 - February 29	—		$	—	—	$	30,000
March 1 - March 31	296		$	28.92	296	$	21,432
April 1 - April 30	2,247	(b)	$	31.20	376	$	8,839
Total	2,543		$	30.93	672

(a) On October 28, 2003, we announced that our board had authorized management to repurchase up to $30,000 of our common stock in the open market under a share repurchase program with no expiration. Amounts represent remaining authorizations as of the period end date.

(b) On April 21, 2004, our board authorized and we repurchased, in private transactions, 1,871 shares of our common stock with funds provided from the issuance of our contingent convertible senior notes.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

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

	Payments Due by Year
	October 31,
Contractual Obligations:	2004		2005		2006		2007		2008		Thereafter

Long-term obligations:
Convertible notes	$	—	$	—	$	—	$	—	$	—	$	150,000
Fixed installment, BTI	3,930		—		—		—		—		—
Note payable	175		250		—		—		—		—
Operating leases	564		857		684		512		173		—
Total	$	4,669	$	1,107	$	684	$	512	$	173	$	150,000

BTI Contingent Consideration. In addition to the fixed installment payment associated with the BTI acquisition noted above, the Agreement includes contingent installments that are based on future revenue performance of Fortune Pai Gow. Beginning November 2004, we will pay monthly note installments based on a percentage of such revenue for a period of up to ten years, not to exceed $12,000.

Employment Agreements. We have entered into employment contracts, with durations ranging from one to three years, with our corporate officers and certain other key employees. Significant contract provisions include minimum annual base salaries, healthcare benefits, bonus compensation if performance measures are achieved, and non-compete provisions. These contracts are “at will” employment agreements, under which the employee or we may terminate employment. If we terminate any of these employees without cause, then we are obligated to pay the employee severance benefits as specified in their individual contract. As of April 30, 2004, minimum aggregate severance benefits totaled $3,962.

Purchase Commitments. From time to time, we enter into commitments with our vendors to purchase inventory at fixed prices or in guaranteed quantities. These commitments are not material. Certain of our intellectual property licenses require additional payments if we elect to renew the licenses. These renewal payments are not material. In addition, we may choose to negotiate and renew licenses upon their normal expiration. No assurances can be given as to the terms of such renewals, if any.

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

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; provisions for bad debts; accounting for stock-based compensation; and contingencies. We base our estimates on historical experience and expectations of the future. Actual reported and future amounts could differ from those estimates under different conditions and assumptions.

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 sales price is fixed or determinable, and collectibility is reasonably assured. Specifically, we earn our revenue in a variety of ways. Shuffler and table equipment are both sold and leased. 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 – Shuffler lease revenue is earned and recognized monthly based on a monthly fixed fee, generally through indefinite term operating leases of shuffler equipment. Table royalties are earned and recognized monthly based on indefinite term, monthly rate license agreements for our proprietary table games. Lease and royalty revenue commences upon the completed installation of the leased equipment or table game.

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 include 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.

Long-lived Assets. We have significant investments in long-lived assets, including products leased and held for lease, property and equipment, intangible assets, and goodwill. 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.

We estimate useful lives for our long-lived assets based on historical experience, estimates of products’ commercial lives, the likelihood of technological obsolescence, and estimates of the duration of commercial viability for patents, licenses and games. Should the actual useful life of an asset differ from the estimated useful life, future operating results could be positively or negatively affected.

We assess the recoverability of long-lived assets annually or when circumstances indicate that the carrying amount of an asset may not be fully recoverable. If undiscounted expected cash flows to be generated by a long-lived asset or asset group are less than its carrying amount, then we would record an impairment charge to write down the long-lived asset or asset group to its estimated fair value. An adverse change to the estimate of these undiscounted future 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 a provision for obsolete or unsalable inventories based on assumptions about the future demand for our products and market conditions. If future demand and market conditions are less favorable than our assumptions, additional provisions for obsolete inventory could be required. Likewise, favorable future demand could positively impact future operating results if written-off inventory is sold.

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

Stock Based Compensation. We account for employee and director stock options using the intrinsic value method. Under this method, no compensation expense was recorded in any period presented because all stock options were granted at an exercise price equal to the market value of our common 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 valuation 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, 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;

• advances by competitors;

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

• product performance issues;

• higher than expected manufacturing, service, selling, 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 vendors;

• current and/or future litigation or claims;

• 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 our debt service obligations and to refinance our indebtedness, which will depend on our future performance and other conditions or events and will be subject to many factors that are beyond our; 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 documents filed by us with the Securities and Exchange Commission, including our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and Annual Report on Form 10-K.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 $53.

Contingent Convertible Senior Notes. We estimated that the fair value of our Notes, as of April 30, 2004, is $154,300. The fair value of our Notes is sensitive to changes in both our stock and interest rates. Assuming interest rates are held constant, we estimate a 10% decrease in our stock price would decrease the fair value of our Notes by $7,500. Assuming our stock price is held constant, we estimate a 10% increase in interest rates would decrease the fair value our Notes by $1,500.

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 April 30, 2004. 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 April 30, 2004, 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 12 to our condensed consolidated financial statements included in Part 1, Item 1 of this quarterly report.

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

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

At the Annual Meeting of Shareholders held on March 17, 2004, the shareholders approved the following proposals by the indicated votes. A discussion of each proposal is included in the Company’s Proxy Statement dated February 23, 2004, previously filed with the Securities and Exchange Commission.

	Votes
Matter	For	Against	Abstained	Withheld

1) Proposal to elect four (4) directors to hold office until the next annual meeting or until their successors are elected.
Mark L. Yoseloff	15,325,986			248,897
Don Kornstein	14,724,595			850,291
Garry Saunders	14,703,642			871,241
Ken Robson	14,705,253			869,630

2) Proposal to approve the Shuffle Master, Inc. 2004 Equity Compensation Plan for employees and contractors.	7,985,434	3,112,897	80,890

3) Proposal to approve the Shuffle Master, Inc. 2004 Equity Compensation Plan for Non-Employee Directors.	9,158,651	1,933,734	86,836

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

3.1		Articles of Amendment of Articles of Incorporation of Shuffle Master, Inc. dated March 16, 2004.
10.1		Purchase Agreement, dated May 13, 2004, by and between Casinos Austria AG and Cai Casinoinvest Middle East GMBH on the one hand and Shuffle Master Management – Service GMBH and Shuffle Master GMBH on the other hand.
10.2		Registration Rights Agreement dated May 13, 2004, by and between Casinos Austria AG and Shuffle Master, Inc. on the other hand.

10.3		Agreement and Guaranty dated May 12, 2004, by and between Casinos Austria AG and Cai Casinoinvest Middle East GMBH on the one hand and Shuffle Master, Inc. on the other hand.
10.4		Purchase Agreement, dated April 15, 2004, among Shuffle Master, Inc. and Deutsche Bank Securities, Inc. relating to the 1.25% Contingent Convertible Senior Notes due 2024.
10.5		Registration Rights Agreement dated April 21, 2004, among Shuffle Master, Inc. and Deutsche Bank Securities, Inc. and Goldman, Sachs & Co. relating to the 1.25% Contingent Convertible Senior Notes due 2024.
10.6		Indenture, dated as of April 21, 2004, between Shuffle Master, Inc. and Wells Fargo Bank, N. A. relating to the 1.25% Contingent Convertible Senior Notes due 2024.
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.

(b) Reports on Form 8-K

We filed a Current Report on Form 8-K dated February 24, 2004, disclosing our acquisition of certain assets from BET Technologies, Inc.

We filed a Current Report on Form 8-K dated February 26, 2004, that included our press release announcing our financial results for our fiscal first quarter ended January 31, 2004.

We filed a Current Report on Form 8-K dated April 15, 2004, disclosing recent developments and risk factors. Included as an exhibit was our audited financial statements for the year ended October 31, 2003, reclassified to reflect our slot products operations as discontinued and our change in reportable segments.

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: May 27, 2004


/s/ Mark L. Yoseloff
Mark L. Yoseloff
Chairman and Chief Executive Officer


/s/ Gerald W. Koslow
Gerald W. Koslow
Senior Vice President, Chief Financial Officer and Secretary
(Principal Accounting Officer)

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 (In Thousands)

ACQUISITIONS

DISPOSITIONS

CONSOLIDATED RESULTS OF OPERATIONS

OPERATING EXPENSES

OTHER INCOME (EXPENSE)

SEGMENT OVERVIEW

UTILITY PRODUCTS SEGMENT OPERATING RESULTS

LIQUIDITY

LONG-TERM LIABILITIES

CAPITAL RESOURCES

STOCK REPURCHASE AUTHORIZATIONS

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

BUSINESS OVERVIEW
(In Thousands)