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Article by DailyStocks_admin    (08-04-08 07:18 AM)

Shuffle Master Inc. CEO MARK LAWRENCE YOSELOFF bought 100000 shares on 7-25-2008 at $4.25

BUSINESS OVERVIEW

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

We are a gaming supply company that specializes in providing our casino customers Utility Products, including automatic card shufflers, Intelligent Table Systems components ("ITS"), which include Table iD™, and roulette chip sorters; Proprietary Table Games, including live proprietary table games, progressive table games with bonusing options, side bets, and proprietary table game licensing for other gaming media; Electronic Table ("e-Table") Systems, including electronic and wireless table gaming platforms; and our Electronic Gaming Machines, which are traditional video slot machines for select markets. All products are developed to either expand our casino customers' gaming content or to improve our casino customers' profitability, productivity and security.

As of October 31, 2007, we had an installed unit / seat base of approximately 25,000 shufflers, approximately 5,000 live proprietary table games, approximately 6,000 electronic table systems seats, and approximately 19,000 electronic gaming machine seats. Installed unit / seat base is the sum of the product units / seats under lease or license agreements and inception-to-date sold units / seats. We believe that installed units / seats is an important gauge of segment performance because it measures historical market placements of leased and sold units / seats and it provides insight into potential markets for service and next generation products. Some sold units / seats may no longer be in use by our casino customers or may have been replaced by other models. Accordingly, we are unable to determine precisely the number of units / seats currently in use.

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

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

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

As part of our reorganization and the continued implementation of our five point strategy, we reanalyzed our historical reportable segments, the Utility Products and Entertainment Products segments, and determined that it was appropriate to expand our reportable segments to include Utility Products, Proprietary Table Games, Electronic Table Systems and Electronic Gaming Machines. Prior periods have been reclassified to conform to this presentation. Our reportable segments are our operating segments.

We group our product offerings into four business segments, summarized as follows:

•
Utility Products. Our strategy in the Utility Products segment is the development of products for our casino customers that enhance table game speed, productivity, profitability and security. We are working on the development of next generation patent-protected shufflers and technological advancements in the areas of card recognition and remote diagnostics. Currently, Utility Products segment revenue is derived substantially from leases / sales of our automatic card shufflers. We develop and market a full complement of automatic card shufflers for use with the vast majority of card-based table games placed in casinos and other gaming locations, including our own proprietary table games. In addition to leasing shufflers, which provides us with recurring revenue, we also sell and service them. As noted below as one of our core strategies, we have recently renewed our emphasis on leasing as opposed to selling our automatic shufflers. Automatic shufflers increase table game productivity and security, which increases profitability for the casinos and other table game operators. We also offer chip-sorting products that simplify the handling of gaming chips on high volume roulette tables. Additionally, we have acquired or are developing products, such as our ITS products, to gather data and to enable casinos to track table game players, such as our iShoe™ card reading shoe. These products, which include our Table iD, are intended to cost-effectively provide casinos and our other customers with data on table game play for security and marketing purposes, which in turn allows them to increase their profitability. To enhance our ITS product offerings, we entered into a worldwide product integration agreement with International Game Technology ("IGT") and Progressive Gaming International Corporation ("PGIC") to create a comprehensive, automated table management solution using complementary capabilities, technologies and resources of the three companies (Table iD).

•
Proprietary Table Games. Our strategy in the Proprietary Table Games ("PTG") segment is the development and delivery of proprietary table games which enhance our casino customers' and other licensed operators' table game operations. Products in this segment include our traditional live proprietary poker based, baccarat, pai gow poker, and blackjack table games. The majority of these products are licensed to our customers, which provides us with recurring revenue. Specifically, we intend to broaden our library content through development and acquisition, increase domestic market penetrations, exploit international markets, add value to existing installed base with progressive jackpot features and proprietary side bets, fuel replacement cycle with new titles, and emphasize leasing versus selling of these products. Additionally, our strategy is to license our proprietary table game titles on other gaming platforms including, but not limited to, legalized internet gaming providers.

•
Electronic Table Systems. Our strategy in the Electronic Table Systems ("ETS") segment is the development and delivery of various table systems including the Table Master™, Vegas Star®, and Rapid Table Games™, all of which we characterize as our e-Table game platforms. Some of our e-Table products enable us to offer table game content in markets where live table games are not permitted, such as racino (race tracks that also offer slot games), video lottery and arcade markets. We also offer our proprietary table games via wireless gaming solutions. These products are intended to cost-effectively deliver to casinos and other licensed operators popular table game content on e-Table game platforms.

•
Electronic Gaming Machines. Our strategy in the Electronic Gaming Machines ("EGM") segment is the development and delivery of our PC-based video slot machines into select markets, namely Australia and Asia ("Australasia") and Latin America. Additionally, our strategy for these products is to consider the exploitation of them in other jurisdictions that do not require special research and development efforts. We offer an extensive selection of video slot titles, which include a range of bonus round options and can be configured as a network of machines or as stand-alone units. We are also focused on the introduction of the PC4 platform, the pursuit of platform approvals in new markets, and the enhancement of our platforms with additional features including new titles and enhanced graphics on our interactive games.

We are proud of the products that we develop and market and are pleased with our success as we continue our growth and expansion. To that end, we have devised and are implementing the following five point strategy:

•
A renewed emphasis on leasing versus selling.

•
Continuing development of relevant technology to drive new products across all product lines.

•
An effort to increase the return from existing assets already in the field by adding new value elements.

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

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

Furthermore, this five point strategic initiative assists us in defining and implementing our specific product strategies for the future, which in no particular order are:

•
To focus our development, manufacturing, and marketing on products that increase the profitability, productivity, and security of our casino and other customers in their table game operations;

•
To develop and market our newest shufflers, including features like optical card recognition, deck validation and integration with the Table iD System, to replace older generation shufflers and to further penetrate domestic and foreign markets with these products;

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

•
To enhance our ITS product offerings and increase our market share through the contribution of our shuffler and intelligent shoe products pursuant to our Table iD worldwide product integration agreement with IGT and PGIC. This alliance is designed to create a comprehensive, automated table management solution using complementary capabilities, technologies and resources of the three companies;

•
To broaden our Proprietary Table Games segment by developing or acquiring additional table game content to increase our penetration of casino customers' table game operations;

•
To develop a variety of felt-based and electronic progressive table game solutions to increase revenue from existing assets in the field by adding new value elements;

•
To market our Electronic Table Systems to provide a cost-effective brand extension of our proprietary table game content to existing casino or new racino customers and to explore other venues in which the platform could be reasonably modified to fulfill market demands;

•
To further leverage our intellectual property and develop live tournament events;

•
To increase our international sales through specific product development or acquisitions and penetration of new markets;

•
To develop or acquire patents, licenses, or other intellectual property both to broaden our product offerings and to vigorously protect our patents and products from infringers;

•
To continue our strong commitment to research and development of new product technologies in our Utility Products, Proprietary Table Games, Electronic Table Systems, and Electronic Gaming Machines segments.

Since our founding, we have developed and marketed products that increase the productivity, security, and profitability of the table game operations of our casino and other customers. Our automatic card shufflers were the first such products. We expect to soon add additional modules to our Table iD System (described below) now under development. We believe that our casino and other customers are seeking to increase the operating returns of their table game operations. By introducing a combination of technologies our Utility Products increase the profitability, productivity and security for casino and other customers in their table game operations.

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

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

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

Our Electronic Gaming Machines. Developed by our Australian subsidiary Stargames Limited ("Stargames"), we offer an extensive selection of video slot titles developed for select markets including Australasia and Latin America. Featuring a wide variety of denominations and configurations, EGMs can be configured as a network of machines or as stand-alone units. EGM titles are offered in the ergonomic eStar cabinet and are available on both the dependable Stargames PC3 operating platform and more recently the new PC4 operating platform. The PC4 operating platform features improved sound and graphical capabilities as well as greater capacity to integrate with technical advancements expected in the coming years.

At Stargames' Australian headquarters, the slot cabinets are designed and assembled and the gaming content is developed for the various Australian and international jurisdictions where these machines are sold. These games are developed to function on a multitude of operating protocols including SAS, X Series, QCOM, VLC and ASP. Some popular game titles which have been marketed across these jurisdictions include: Drifting Sands 3™, Ninja 3™, and The Pink Panther series of link games (Kelly Country™, Deep Sea Dollars Cuba™, Galapagos Wild™ and Tango Passion™).

Stargames also licenses content from the well known U.S. slot manufacturer WMS Industries Inc. ("WMS"). This agreement is limited to the Australia and New Zealand markets and will terminate effective January 31, 2008.

Customers and Marketing. We market our products to casinos and other legal gaming establishments around the world with our direct domestic and international sales force and several domestic and international distributors. We also market several of our products to a variety of gaming venues not permitted to offer live table games such as racinos and other legal gaming establishments around the world.

Our products and the locations in which we may sell are subject to the licensing and product approval requirements of various national, state, provincial, or tribal jurisdictional agencies that regulate gaming around the world (see additional discussion under "Gaming Regulation"). We both lease and sell our products, although we recently implemented a strategy to renew our emphasis on leasing versus selling. When we lease our products, we generally negotiate a month-to-month operating lease or license our games for a monthly fixed fee, both domestically and internationally. When we sell our products, we offer our customers a choice between a sale or a longer-term sales-type lease or other financing arrangements, depending on the needs of each customer.

Competition. We compete with other gaming products and supply companies for space on the casino customer's floor, as well as for our customer's capital spending. With respect to our Utility Products, namely shufflers, in addition to hand shuffling and other gaming equipment, we compete with Elixir Gaming Technologies, Inc., (formerly "VendingData"), a company with a U.S. presence that markets batch and continuous versions of its multi-deck shuffler, the Random Ejection Shuffler™, their single deck shuffler, the Shuffler Pro™, the Poker One™, and their Deck Checker™ card verification device on a domestic and international basis. Historically, Elixir Gaming Technologies, Inc., (formerly "VendingData") has attempted to compete with our shuffler products on the basis of price. We compete on this basis as well as on the basis of offering a complete line of shufflers, product reliability, a superior service network, the strength of our intellectual property, and the breadth of our sales, regulatory, and distribution channels. Additionally, other companies may develop and market shufflers and seek to develop and obtain regulatory approvals of additional shuffler products. We cannot provide assurances that a competitive product will not gain substantial placements or cause price erosion of our shufflers in the future. We also compete against hand shuffling. As it relates to our Easy Chipper C roulette chip sorting product, several companies also manufacture and sell competitive chipper products. We believe the most successful of these products is the Chipper Champ Plus™ and the most current is the Chipper Champ 2™, both sold by TCS John Huxley. Competition with our iShoe Card Reading Shoe is predominately limited to Angel Co. Ltd.'s Angel Eye® card reading shoe.

With respect to our PTG segment, in addition to companies such as IGT, Bally Technologies, Inc. ("Bally"), Aristocrat Leisure Limited ("Aristocrat") and WMS that primarily market slot machines, we also compete with both non-proprietary table games such as blackjack, and several companies which primarily develop and license proprietary table games. Some of those competitors' widely known proprietary table game titles include Galaxy Gaming's Lucky Ladies™ and Masque Publishing's Spanish 21®. Competition in this segment is particularly based on price, brand recognition, player appeal, and the strength of underlying intellectual property. Smaller developers and vendors are more able to participate in developing and marketing table games, compared to other gaming products, because of the lower cost and complexity associated with the development of these products. We compete on these bases, as well as on the strength of our extensive sales, service and distribution channels. We have been able to increase our placements of table games not only because of the general growth of table games, but also by displacing other table game products. In the future, table game competitors as well as slot machine companies could market table games that might displace our products.

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

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

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

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

Research and Development. We employ a staff of electrical, mechanical and software engineers, graphic artists and game developers to support, improve and upgrade our existing shufflers, to develop new shufflers, to develop technology and game content for our Proprietary Table Games, e-Table platforms and EGM products and to develop and explore other potential table-related Utility products including those associated with the Table iD system. We perform the majority of our domestic research and development ourselves. We also use a foreign, third party developer for certain of our international product offerings.

For our Utility products, the main focus of our research and development efforts were on finalizing the mechanical, hardware and software development of the i-Deal shuffler, developing camera-based card recognition systems for the i-Deal and MD2 shufflers and developing and improving other Utility products, including mechanical improvements to the iShoe.

Proprietary Table Games expenses related to development focused on implementing progressives onto existing Proprietary Games as well as developing or licensing a large variety of new games including Three Card Draw Poker, Four Card Draw Poker, Ultimate Three Card Poker, Five Card Omaha, Bad Beat Side Bets, Blackjack Press, Hi Lo Stud Poker, High Five Poker, and Jumpstart Hold'em Poker.

For both our e-Table and EGM product lines, a majority of our research and development efforts have involved creating and implementing new game content and implementing the new PC4 gaming platform in our Vegas Star, Rapid Table Game and EGM products. With respect to our Table Master product, we implemented several new games including Four Card Poker and Bet the Set "21" and focused our efforts on new features such as SAS 6.0 AFT support. Development in the Vegas Star line included a new, lower cost cabinet design as well as improvements in the existing cabinet design through value engineering. In addition, new titles were implemented including Ultimate Baccarat, Slingshot Roulette, and Craps. The Rapid Table Game product line research and development expenses were also attributable to value engineering in its cabinet design and implementation of improved titles, including Baccarat and Craps.

Development efforts in the EGM line included a variety of new game titles and themes, including the new Pink Panther linked jackpot product that took advantage of the improved graphics and sound capabilities of the PC4 gaming platform. The cabinets and platform technology for Table Master, Vegas Star, Rapid Table Games and Electronic Gaming Machines have undergone a program of continuous improvement to reduce cost and increase the capabilities of the technology.

We believe that one of our strengths is identifying new product opportunities and developing new products, therefore we expect to continue to spend a significant portion of our annual revenues on research and development, including the acquisition of intellectual property from third parties. Our total research and development expenses for continuing operations were $17,337, $12,910, and $7,784, in fiscal 2007, 2006, and 2005, respectively.


INTELLECTUAL PROPERTY

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

In September 2007, we purchased PGIC's worldwide Table Game Division ("TGD") including certain worldwide live table rights and lease contracts for all of PGIC's table game titles including Caribbean Stud and Texas Hold'em Bonus. We did not acquire any electronic or video rights in the games in the TGD. The TGD business includes a broad range of intellectual property that complements our existing table game portfolio. In particular, some of the purchased intellectual property relates to progressive table game software and hardware, Caribbean Stud, and Texas Hold'em Bonus.

Patents. We own numerous United States and international patents and applications related to our existing products and methods, future products that have not yet been introduced, potential product modifications and improvements and to products we do not currently sell. A majority of these technologies are internally developed. Some of our technology has been purchased and is licensed.

Most of the patents that we own have a life of 20 years from the filing date of the first non-provisional patent application in a family of patents. None of our material owned patents covering current material products will expire before 2009. A majority of our owned patents expire on 2011 or beyond. The patents we own which expire in 2009 are no longer important to our business. We also have numerous patent applications pending for our existing, planned and potential products. No assurance can be given that any such patents will be issued or that the patents we currently hold or have licensed or any new patents that we acquire will be or remain valid or will provide any competitive protection for our products.

Trademarks. We own numerous United States and international trademark registrations and common law trademarks. Some of the more important marks include: Shuffle Master, Incorporated®, the Shuffle Master 4-square logo™, Shuffle Master Gaming®, Let It Ride®, Let It Ride Bonus®, Let It Ride The Tournament®, Three Card Poker and design®, Four Card Poker and design®, Crazy 4 Poker®, Fortune Pai Gow Poker®, Royal Match 21®, Casino War®, 6 1 / 2 Card Poker™, Bad Beat Texas Hold' Em™, Bringing More to the Table™, Casino On Demand™, Free Roll™, Big Raise Hold' Em®, Ultimate Texas Hold' Em®, 6 Card Poker®, Dakota Stud®, Dragon Bonus®, Jack Magic®, Caribbean Stud®, Texas Hold'em Bonus®, Single 21 and design®, Blackjack Press™, Table Master™, ACE®, King®, Deck Mate®, MD1®, MD2®, Bloodhound®, iShoe™, and mCasino™. We also license trademarks from others.

Intellectual Property Licenses. We obtain licenses to intellectual property from third parties. These licenses are subject to various conditions and restrictions and typically involve us paying royalties on a fixed or unit basis. We acquired a paid-up license in the PGIC Progressive Side Bet patents in 2006 with the grant of certain expanded rights in September 2007. While we do not believe that any of these current license agreements are in jeopardy of being terminated, we can make no assurance that all of these license agreements will remain in effect or that such licenses can be extended under terms favorable to us.

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

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

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

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

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

CEO BACKGROUND

Dr. Mark L. Yoseloff. Dr. Yoseloff has been our chief executive officer since June 2001 and became our chairman of the board in February 2002. Additionally, Dr. Yoseloff was our president from October 2000 until February 2002, and again from January 2003 to October 2003. He served as our executive vice president from August 1997 to October 2000 and was appointed to our board of directors in November 1997. From August 1996 to July 1997, Dr. Yoseloff served as a consultant to us. From May 1996 through the present, Dr. Yoseloff has held the position of president of Well Suited, LLC. Dr. Yoseloff also holds the position of president of Visual Communications Consultants, Inc. (dba Advanced Gaming Concepts), a company he founded in August 1993.

Garry W. Saunders. Mr. Saunders has been a member of our board of directors since October 2002 and currently serves as the chairman of the governance committee. Mr. Saunders has been the executive vice president and chief operating officer of Melco PBL Entertainment (Macau) Limited, a publicly traded developer and owner of gaming and entertainment resort facilities, since January 2007. From May 2004 to October 2005, Mr. Saunders served as vice president of international operations for Las Vegas Sands, Inc. Mr. Saunders has been managing director of Nevluck, LLC, a development company based in Las Vegas, since 2002. Mr. Saunders served Playboy Enterprises, Inc. as president of its gaming division from 1997 to 2001, and ITT Corporation as executive vice president for the gaming activities of its Sheraton and Caesars World Divisions from 1994 to 1997.

Louis Castle. Mr. Castle has been a member of our board of directors since March 2005 and currently serves as the chairman of the compensation committee. Mr. Castle has been vice president of creative development at the Los Angeles studio of Electronic Arts, Inc., a publicly traded interactive entertainment software company, since 2003. Prior thereto, Mr. Castle co-founded and for 18 years held the position of vice president at Westwood Studios, an entertainment software company that was subsequently acquired by Electronic Arts, Inc. While at Westwood Studios, Mr. Castle served in various capacities including vice president—creative development, general manager, chief operating officer and finance officer.

Phillip C. Peckman. Mr. Peckman has been a member of our board of directors since June 2007 and currently serves as the chairman of the audit committee. Mr. Peckman is an attorney and certified public accountant. Mr. Peckman is the chief executive officer of Peckman Outdoor Media, a Las Vegas-based billboard company. Mr. Peckman joined the Las Vegas-based Greenspun family in 1990 as the chief operating officer of The Greenspun Corporation, a privately-owned company with business interests in the areas of real estate, media, communications, travel and tourism, gaming and technology. He was later appointed president and chief executive officer of The Greenspun Corporation and retired in 2006. Prior to 1990, Mr. Peckman was the managing partner of the Las Vegas office of McGladrey and Pullen, a national accounting firm.

Mr. Peckman currently serves as a director and chairman of the nominating and governance committee of Silver State Bancorp, a publicly traded bank.

James L. Nelson. Mr. Nelson has been a member of our board of directors since January 2008. Mr. Nelson has been the chairman and chief executive officer of Eaglescliff Corporation, a privately-owned specialty investment consulting and wealth management company, since 1986. From 1998 until 2000, Mr. Nelson was the chairman and chief executive officer of Orbit Capital, a privately-owned venture capital company, and from 1998 until 2003, he was the chairman and chief executive officer of Orbit Aviation, Inc., a privately-owned company engaged in the acquisition and completion of Boeing Business Jets for private and corporate clients. From August 1995 until July 1999, Mr. Nelson was the chief executive officer and co-chairman of Orbitex Management, Inc, a privately-owned financial services company in the mutual fund sector. Prior to that Mr. Nelson was the president of AVIC Inc., a privately-owned company involved in the development of network connectivity products and two cellular telephone networks in China.

Mr. Nelson currently serves as a director and chairman of the audit committee of Viskase Companies, Inc., a publicly traded supplier to the food industry. Since June 2001, Mr. Nelson has served as a director and member of the audit committee of Icahn Enterprises G.P. Inc., general partner of Icahn Enterprise L.P. (NYSE IEP). Mr. Nelson also serves as a director of that company's Nevada gaming subsidiary which presently operates the hotels at the Stratosphere Hotel and Casino, two Arizona Charlie's Hotels and Casinos and the Aquarius Hotel and Casino.

John R. Bailey. Mr. Bailey has been a member of our board of directors since January 2008. Mr. Bailey is the founder and managing partner of Bailey Kennedy, LLP, a law firm based in Nevada since 2001. From 1991 until 2001, Mr. Bailey was a partner of Lionel Sawyer & Collins, a law firm based in Nevada. Since 2001, Mr. Bailey has been the chairman and a commissioner on the Nevada State Athletic Commission. Since 1993, he has been the vice-chairman and a member of the Moral Character and Fitness Committee of the Nevada State Bar. Mr. Bailey is currently a director of the Public Education Foundation, the Nevada Community Foundation, and the College of Southern Nevada Foundation.

MANAGEMENT DISCUSSION FROM LATEST 10K

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

Our Utility Products include a full line of automatic card shufflers for use with the vast majority of card table games as well as chip sorting machines for use on roulette tables. We also have acquired and/or are developing other products that automatically gather data to enable casinos to track table game play, such as Table iD, part of our ITS product offerings, currently in development with IGT and PGIC.

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

Our Electronic Table Systems consist principally of e-Table gaming platforms including Table Master, Vegas Star, Rapid Table Games and wireless Casino On Demand.

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

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

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

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

Renewed emphasis on leasing versus selling

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

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

This includes our card reading shoes and shufflers, shuffler interface with table systems, table game progressive systems and integration of the PC4 platform for all e-Table gaming products on a worldwide basis.

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

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

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

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

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

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

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

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

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

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

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

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

Our internet address is www.shufflemaster.com . Through the "Investor Relations" page on our internet website, our Annual Report on Form 10-K, Proxy Statement, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act are available free of charge, as soon as reasonably practical after such information has been filed or furnished to the Securities and Exchange Commission.

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 and Risk Factors" elsewhere in this Annual Report on Form 10-K.

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

This includes our card reading shoes and shufflers, shuffler interface with table systems, table game progressive systems and integration of the PC4 platform for all e-Table gaming products on a worldwide basis.

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

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

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

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

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

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

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

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

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

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

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

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

Our internet address is www.shufflemaster.com . Through the "Investor Relations" page on our internet website, our Annual Report on Form 10-K, Proxy Statement, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act are available free of charge, as soon as reasonably practical after such information has been filed or furnished to the Securities and Exchange Commission.

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 and Risk Factors" elsewhere in this Annual Report on Form 10-K.

Our revenue and results of operations are most affected by unit/seat placements, through lease or sale, of our products. The number and mix of products placed and the average lease or sales price are the most significant factors affecting our gross margins. These factors are, in turn, affected by the gaming industry generally and our customers' assessment of our products. To a lesser extent, our overall financial results are affected by fluctuations in selling, general and administrative expenses and our continued investment in research and development activities. In the current year, our margins have been negatively impacted by our renewed emphasis on leasing versus selling, continued shift in product mix, as well as increases in non-cash depreciation and amortization expenses attributable to our recent acquisitions. Please refer to the section entitled "Depreciation and Amortization Expenses" provided below for further discussion of such increases.

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

Our revenue growth for fiscal 2007, reflects the renewed emphasis in our leasing model. Also contributing to the revenue growth is sales of our EGM's. The Australasia market, where these EGM's are placed, is predominately a "sales-based" market. Additionally, our e-Tables have performed very well in certain markets which are also predominately sales-based markets. The revenue growth in fiscal 2006 as compared to fiscal 2005 is largely attributable to increased lifetime license sales of our proprietary table games as well as increased conversion of shufflers from lease to sale in anticipation of the roll out of our next generation shufflers.

The cost of revenue in fiscal 2007 as compared to fiscal 2006 has increased, both in dollars as well as percentage of revenue, mostly attributable to the strength of our EGM and e-Table revenues in the period. These products are much more capital intensive than our shuffler and table game products and accordingly generate lower margins than experienced in prior years.

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

Fiscal 2007 compared to Fiscal 2006

As discussed above, our revenues increased in fiscal 2007 to $178,851 as compared to $162,991 in fiscal 2006. The increase was primarily attributable to strong overall revenue growth in our ETS and EGM segments, owing in part to the fact that fiscal 2007 includes a full year of Stargames' revenues compared to nine months in fiscal 2006. Lease revenue also increased year-over-year consistent with our renewed emphasis on leasing as well as an increase in our monthly average lease prices and increases in leased units/seats. A more detailed discussion of our revenue is included for each of our operating segments under the heading "Segment Operating Results."

Although revenue increased in fiscal 2007 as compared to fiscal 2006, our gross profit, as well as gross margin, decreased during the current fiscal year.

The declines in our gross profit and margin were caused principally by the following factors:

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

•
Our gross profit and margin were impacted by additional depreciation and amortization expense of product related intangibles included in cost of leases and sales and service. This includes purchase related depreciation and amortization for acquired products from PGIC's TGD, Stargames and CARD;

•
Consistent with our renewed emphasis on leasing as opposed to selling our products, we had fewer sales of our Utility Products and lifetime license sales as compared to the prior year. Such sales have historically yielded the highest product gross margins. Our leases and royalty margins were also impacted by the timing of lease installations as well as introductory pricing. Additionally, these margins were negatively impacted by upfront installation charges for newly placed e-Table gaming products that are on either month-to-month operating leases or participation arrangements. Offsetting the decrease in the lease and royalties margin is approximately $663 of royalty revenue from our Delta Rangers license agreement, of which there is no corresponding cost, discussed in the PTG section included under "Segment Operating Results;" and

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

Our revenue and margins will continue to be impacted by the mix of products, timing of lease installations and upfront installation costs related to leases of e-Table products.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

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

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

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

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

•
Our leases and royalties revenue growth for the three and six months ended April 30, 2008 as compared to the same prior year periods, reflects the renewed emphasis on our leasing model predominantly in North America. Utility, PTG and ETS segment lease and royalty revenues increased from the same prior year periods due to increases in either our monthly average lease price, significant increases in our leased units / seats installed base and the approximate 600 unit installed base that we acquired in connection with the PGIC TGD acquisition that occurred in the fourth quarter of fiscal 2007.

•
Utility lease revenue for the three and six months ended April 30, 2008 was $6,911 and $13,735, respectively, as compared to $5,889 and $11,885, respectively, in the same prior year periods. This 17.4% and 15.6% increase in Utility lease revenue was principally driven by a 721 shuffler unit increase in our lease installed base as well as increases in our monthly average lease prices period over period.

•
PTG royalty and lease revenue for the three and six months ended April 30, 2008 was $8,150 and $16,235, respectively, as compared to $6,081 and $11,892, respectively, in the same prior year periods. This 34.0% and 36.5% increase in PTG royalty and lease revenue was due to measurable organic revenue growth in our traditional non-PGIC table games as well as the revenues associated with the acquisition of an approximate 600 unit installed base in connection with the PGIC TGD acquisition that occurred in the fourth quarter of fiscal 2007. See Note 2 for a detailed discussion of the PGIC TGD acquisition.

•
ETS royalty and lease revenue for the three and six months ended April 30, 2008 was $2,323 and $4,433, respectively, as compared to $1,080 and $2,259, respectively, in the same prior year periods. This 115.1% and 96.2% increase was primarily driven by an additional 495 seats of Table Master™ and an additional 110 seats of Vegas Star® e-Table seats on lease.

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

•
Utility sales and service revenue for the three and six months ended April 30, 2008 was $14,942 and $25,635, respectively, as compared to $16,211 and $28,000, respectively, in the same prior year periods. This 7.8% and 8.4% decrease was due to reductions in units sold as well as decreases in conversions from leased to sold units. This is consistent with our renewed emphasis on leasing versus selling. Offsetting the decline in units is an increase in our average sales price, which is consistent with our pricing strategy.

•
PTG sales and service revenue for the three and six months ended April 30, 2008 was $1,626 and $2,698, respectively, as compared to $1,407 and $4,011, respectively, in the same prior year periods. The 15.6% increase in PTG sales and service revenue for the three months ended April 30, 2008 as compared to the same prior year period was predominantly due to an 18 unit increase in our PTG sold units. The 32.7% decrease in PTG sales and service revenue for the six months ended April 30, 2008 as compared to the same prior year period was predominantly due to a 38 unit decrease in our PTG sold units combined with a shift in the sold unit product mix for the period.

•
ETS sales and service revenue for the three and six months ended April 30, 2008 was $4,349 and $7,777, respectively, as compared to $4,036 and $8,324, respectively, in the same prior year periods. The 7.8% increase for the three months ended April 30, 2008 as compared to the same prior year period was primarily caused by an increase in our average sales price associated with our Vegas Star e-Table platform. The decrease of 6.6% for the six months ended April 30, 2008 as compared to the same prior year period was primarily caused by a decrease in sold seats offset by a significant increase in our average sales price associated with our Vegas Star and Rapid Table Games e-Table platforms.

•
EGM sales and service revenue for the three and six months ended April 30, 2008 was $10,683 and $16,324, respectively, as compared to $9,866 and $15,506, respectively, in the same prior year periods. These 8.3% and 5.3% increases primarily were due to a significant increase in our average sales price of our EGM's.

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

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

•
Consistent with our renewed emphasis on leasing as opposed to selling our products, we had fewer conversion sales in our Utility and PTG segments as compared to the same prior year period. Such sales have historically yielded higher gross margins.

•
Our leases and royalty margins were impacted by the continued shift in product mix, timing of lease installations, as well as introductory pricing on newer products. These margins were negatively impacted by upfront installation charges for newly placed e-Table gaming products that are on either month-to-month operating leases or participation arrangements.

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

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

SG&A—Three Months Ended Comparison

•
Personnel cost increased $1,688, or 18.7%, to $10,705 for the three months ended April 30, 2008, as compared to $9,017 over the same prior year period, which related to staffing our newly established corporate division and to bolster the sales and service staff in our Shuffle Master Americas profit center to support the growth of our newer products, including our e-Table product line, and expansion into new territories.

•
Corporate legal expense increased $511, or 56.2%, to $1,420 for the three months ended April 30, 2008, as compared to $909 over the same prior year period. Corporate legal costs principally related to VendingData II, shareholder derivative claims and other general corporate matters (for further information on Legal Proceedings, see Note 12). Total legal expenses were offset by $468 related to legal fees reimbursable under our D&O insurance policy (see Note 3). We expect that our legal fees will continue to vary from period to period depending on the level of legal activity required to protect our intellectual property and defend the shareholder derivative claims and class action lawsuit.

•
Costs of $704 associated with the increased facilities and staffing in our Macau operation to enhance our competitive presence in that market.

•
Increases of approximately $999 at our foreign subsidiaries due to the weakening of the U.S. dollar.

•
Total SG&A expenses were offset by a gain of $738 recognized on the sale of our fractional ownership in a Net Jets, Inc. ("Net Jets") corporate airplane. Effective February 27, 2008, we sold our interest in the airplane. This sale, carried out as part of our strategic initiative to monetize certain non-core assets, resulted in proceeds of approximately $1,309, comprising the agreed-upon sales price of $1,290 plus additional credits of $19.

SG&A—Six Months Ended Comparison

•
Personnel cost increased $3,356, or 18.8%, to $21,250 for the six months ended April 30, 2008, as compared to $17,894 over the same prior year period, which related to staffing our newly established corporate division and to bolster the sales and service staff in our Shuffle Master Americas profit center to support the growth of our newer products, including our e-Table product line, and expansion into new territories.

•
Corporate legal expense increased $957, or 53.9%, to $2,731 for the six months ended April 30, 2008, as compared to $1,774 over the same prior year period. Corporate legal costs principally related to VendingData II, shareholder derivative claims and other general corporate matters (for further information on Legal Proceedings, see Note 12). Total legal expenses were offset by $650 related to legal fees reimbursable under our D&O insurance policy (see Note 3). We expect that our legal fees will continue to vary from period to period depending on the level of legal activity required to protect our intellectual property and defend the shareholder derivative claims and class action lawsuit.

•
Costs of $1,204 associated with the increased facilities and staffing in our Macau operation to enhance our competitive presence in that market.

•
Severance costs of approximately $360 associated with the departure of a senior executive in our corporate office.

•
Increases of approximately $1,759 at our foreign subsidiaries due to the weakening of the U.S. dollar.

•
Total SG&A expenses were offset by a gain of $738 recognized on the sale of our partial interest in a Net Jets business jet. See "SG&A-Three Months Ended" discussion for detail.

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

The increase in R&D expenses can also be attributed to our newly created Corporate Products Group ("CPG"), which was a new department formed in our fourth quarter of fiscal 2007. The CPG is responsible for overseeing the creation and development of our existing and future product lines as well as overseeing our global products R&D. For the three and six months ended, April 30, 2008, approximately $248 and $388 respectively, was expended by the newly formed CPG for general operational purposes.

Each year we continue to spend significant R&D efforts on the development of newer generation products in each of our segments. For the three and six months ended April 30, 2008, R&D expenses related to our Utility segment, were primarily in support of our next generation shufflers and secondarily in support of our card recognition products and other table accessories. For our PTG segment, R&D related to the development of new progressive table games with bonusing options and side bets. For our ETS segment, R&D predominantly focused on developing newer and more innovative e-Table configurations, which include our Table Master™, Rapid Table Games™ and Vegas Star® products such as Ultimate Draw Poker, Vegas Star Craps and Rapid Craps. For our EGM segment, R&D principally related to developing and commercializing new content with respect to the new PC4 operating platform.

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

DEPRECIATION AND AMORTIZATION EXPENSES

Depreciation expense is primarily comprised of depreciation associated with products leased and held for lease and to a lesser extent depreciation of property, plant and equipment. Amortization expense is primarily comprised of amortization associated with intellectual property, acquired developed technology, and customer relationships. Depreciation and amortization expenses increased $1,254, or 27.3%, to $5,847 for the three months ended April 30, 2008, as compared to $4,593 for the same prior year period. Depreciation and amortization expenses increased $2,371, or 25.9%, to $11,536 for the six months ended April 30, 2008, as compared to $9,165 for the same prior year period.

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

CONF CALL

Gerry Smith

Good afternoon and thank you all for joining us today for our second quarter 2008 earnings call. I am Gerry Smith, Senior Vice President and General Counsel of Shuffle Master. With me today are Mark Yoseloff, Chairman of the Board and Chief Executive Officer of Shuffle Master, Paul Meyer, President and Chief Operating Officer and Coreen Sawdon, Senior Vice President, Chief Accounting Officer and Acting Chief Financial Officer.

Today’s conference call is being simultaneously webcast through our website, www.shufflemaster.com and will also be archived for the next 30 days. Before we get started I would like to remind you that various remarks we make about future expectations, plans and prospects for the company constitute forward-looking statements for purposes of the Safe Harbor Provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from these expectations.

We will also be discussing certain financial measures such as adjusted EBITDA, which represent non-GAAP financial measure. The importance of this measure to investors as well as reconciliation to the most directly comparable GAAP measures can be found in our most recent 10-Q which was filed earlier today as well as in our prior public filings and in today’s press release which was issued shortly before this conference call announcing our second quarter 2008 results.

Now I’ll turn the call over to our CEO, Mark Yoseloff.

Mark Yoseloff

Thanks Gerry, before I get started I would like to provide a few brief updates and reiterate several positive announcements we made during the quarter. First I would like to provide an update on our ongoing CFO search. We are in the midst of a retained search and are hopeful that the process will be completed in a reasonably short time. Coreen Sawdon, our CAO, has also been serving as our acting CFO for the past quarter and will continue to serve as interim CFO until we find a qualified successor.

As for the CEO search, it is continuing. The Board and I are fully cooperating in the process. No final decisions have been made. More importantly I’m confident that any transition will be smooth and seamless.

I would also like to provide an update on the progress and success of the Stargames product lines as this quarter marks our two year anniversary of the acquisition. Stargames is an important element of our international expansion efforts and has provided valuable access to some of the most important gaming markets in the world.

Total second quarter revenue contributed from Stargames products sold throughout the world was $14.3 million, or nearly 30% of revenues; a sequentially quarter increase of $5.1 million and an increase of $400,000 from the prior year period. The integration issues which we initially encountered at Stargames are now behind us. The increased revenue contribution for the Stargames products demonstrates the growing demand for these products and their likely success in the future.

In fact, in the EGM business, Stargames is showing great success. They were the leader in new EGM installations in New South Wales, Australia’s largest gaming market, for the first calendar quarter ended March 31, 2008. We announced in early May that we signed agreements with [CDI] Corporation and RGB [Abiati] two affiliates of Dreamgate in Malasia to serve as our distributor in certain markets in Asia outside of Macau.

Although Macau is clearly the center of gaming in Asia, many emerging markets such as Cambodia, Vietnam and the Philippines, to name a few, hold great promise for the future and is essential we secured the best possible channels of distribution to capitalize on these opportunities. Having recently returned from Macau where I participated in the G2E Asia trade show, I am pleased to report that the Shuffle Master product offerings were greeted with an extremely positive response.

Gaming revenue in Macau is about 95% table games and 5% electronic gaming formats. It was clear that our strategy of being the world’s foremost provider of table game utility and entertainment products has made us the leading supplier in this important market. I am encouraged by our success and look forward to the Asian market rollout of such product as the i-deal shuffler and the second generation card reading shoe.

Finally both Caribbean Stud Poker and Casino War are enjoying great success in Macau and we look forward to the introduction of Three Card Poker and other of our very popular titles. We announced during our last earnings call that we had received a sizable order for an Australian operator for 500 e-Table seats and 100 EGMs which would extend through July, 2009. Although a small number of e-Table seats as well as all of the 100 EGMs have been shipped, the balance of this order is now on hold due to some recently announced regulatory changes that will take place in certain parts of Australia. We continue to monitor the situation and will provide an update as events warrant.

Turning to the quarter, we reported $49 million in revenue, $14.8 million in adjusted EBITDA and $3 million in net income or $0.09 per diluted share. In keeping with the recent trend, we saw excellent growth year-over-year in lease and service revenue in all of our product segments except EGMs. Utility products grew from $7.3 million to $8.6 million, a 17% increase. Proprietary table games grew from $6.1 million to $8.2 million, a 35% increase and electronic table systems grew from $1.2 million to $2.5million, an over 100% increase.

This results in overall lease and service revenue growth from $14.6 million to $19.2 million, a 32% increase. Just as a note, in the past we have referred to the combination of lease and service revenue as recurring revenue. Although it is calculated in precisely the same manner, hereafter we will use the phrase lease and service revenue to more accurately reflect the nature of this revenue. The continued success in rebuilding our lease and service revenue base should lead to continuing improvements in operating results throughout the remaining half of this fiscal year and position us for an even better fiscal 2009.

When I look at our excellent progress this quarter I see the patient pursuit of a focused strategy. The benchmarks are excellent. Revenues are up, expenses are down, and for the first time in over a year total gross margin is up from the prior sequential quarter. There are many positive indicators of our overall health. We are driving down debt. We are in a strong cash position. We are decreasing inventories and adjusted EBITDA is the highest it has been since the fourth quarter of 2006.

We have communicated that we believe we should see lease and service revenue overcome the impact of any decrease in sales revenue during fiscal 2009. The truth is, is this quarter demonstrates it already has. Although we cannot guarantee that this trend will continue, our second quarter performance certainly bodes well going into 2009.

Now let me turn the call over to Coreen to review the quarterly results in more detail.

Coreen Sawdon

Thank you Mark and good afternoon to everyone. To summarize our second quarter results, revenue was $49 million, representing growth of 10% over the prior year period and 29% over the prior sequential quarter. Total lease and service revenue increased 32% to $19.2 million for the prior year period and was a record in all segments except for electronic gaming machines which are generally sold, not leased.

US revenue was $21.3 million or nearly 44% of revenue, an increased $3.6 million from the prior year period. International revenue was $27.7 million or 57% of total revenue and increased $700,000 from the prior year period. Adjusted EBITDA and GAAP EPS from continuing operations totaled $14.8 million and $0.09 respectively. Operating expenses were up approximately 13% from the prior year period but decreased 8% from the prior sequential quarter. These results reflect the gain on the sale of our fractional ownership in a NetJet’s corporate aircraft of $700,000 or $0.01 per diluted share.

Operating expenses peaked in the first quarter of 2008 at $23 million and because of our disciplined expense control have come down by almost $2 million. In fact this is the first quarter since the fourth quarter of 2006 in which operating expenses have decreased from the prior sequential quarter and we continue to diligently look at every expense with an eye towards driving them downward.

Also in the second quarter we recognized the impairment write-down related to our investment in Sona Mobile Inc. of $400,000 or a loss of $0.01 per diluted share. Now I’ll move into a product recap.

As compared to the prior year quarter, utility product total revenue declined by just 1%. This decrease in total revenue for this segment was a result of an 11% decline in sale revenue from the prior year period due to our de-emphasis on selling almost entirely offset by a 17% increase in lease and service revenue to $8.6 million. Total shuffler lease installed based reached a record high of approximately 5,400 units. Total shuffler installed base is now approximately 26,800 units, a nearly 3,000-unit increase from the prior year period.

The proprietary table games, the shift to leasing continued with year-over-year gains in many of our premium titles as well as side bets and progressives. Total revenue in the proprietary table games segment was $9.8 million, up $2.3 million or 31% from the prior year period and 7% from the prior sequential quarter. Proprietary table games lease and service revenue reached a record $8.2 million, increasing 34% from the prior year quarter and 1% from the prior sequential quarter.

Sales revenue in this segment was essentially flat, year-over-year. Total proprietary table game installed base and lease unit installed base reached record highs of approximately 5,600 and 4,100 units respectively.

Moving to electronic table systems, revenues increased significantly from the prior sequential quarter to $6.7 million, an increase of 20% and up $1.5 million from the prior year period. [inaudible] sales revenue decreased by 2%, leasing again was strong and increased in every product line. In fact, we saw leased revenue for Table Master and Vegas Star jump over 100% year-over-year and Rapid increased by 28% in the same period, demonstrating strong growth in this category.

Our electronic gaming machines saw marked improvement this quarter compared to the prior sequential quarter with total revenue contribution of $10.7 million, an 89% increase. EGM revenue was up 8% from the prior year period due to the popularity of our Drifting Sands 3 and Ninja 3 titles and the Pink Panther linked progressive. Total worldwide lease and service revenue versus sales revenue in the second quarter 2008 showed great improvement over the prior year period accounting for 39% of total revenue compared to 33%.

These numbers continue to reinforce positive results in this revenue category which aligns with the first of our five major strategic initiatives and gives us continued confidence for future performance.

On the margin side, our gross margin increased to 60% compared to 58% in the prior sequential quarter and remained unchanged from the prior year period. After three previous quarters of gross margins in the 50s the upward trend here is compelling. Despite the longer time it takes to recoup manufacturing costs on leases as well as introductory pricing to encourage leasing of our newer products, lease and service revenue was strong enough to build us back to the margin levels we last reported in the second quarter of 2007.

We think it’s important to provide an update on our $150 million convertible senior notes. Since our last quarterly call the company has met with several bankers and financial institutions. We are currently assessing our capital structure and considering a variety of refinancing options and objectives including several debt and equity offering options, though this call does not constitute an offer of any securities for sale. Pending market conditions, the response to our second quarter performance and other circumstances we hope to finalize our plan in the near future.

As we communicated in the first quarter we have been committed to paying down debt and our reductions in this quarter show our success in staying on target. We reduced net debt by $13 million from the prior sequential quarter and by $18 million from the period ended October 31, 2007 to $212.3 million.

Moving to the balance sheet as communicated in the first quarter the convertible debt has transferred to current liabilities. Cash and cash equivalents increased to $9.4 million, up $5 million from $4.4 million as of October 31, 2007 due to strong accounts receivable collections and declines in inventories. Our inventories have been reduced by 16% since October 31, 2007 which is attributable to a formal emphasis on inventory management, improved forecasting and strong revenue performance. These reductions underscore our progress and balance sheet management.

With that I would like to turn the call over Mark for wrap-up and closing remarks.

Mark Yoseloff

Thanks Coreen, as I have done on recent calls, I would like to review our progress against our strategic initiatives. We believe the results we reported this quarter reflect a consistent and successful execution of our five point strategic plan. First I’ll touch on the status of our shift to leasing versus selling.

Total lease and service revenue increased over the prior year period and prior sequential quarter by 32% and 3% respectively. Total revenue for the quarter was $49 million compared to $45 million for the prior year period and $38 million in the prior sequential quarter thereby demonstrating our accelerated progress in overcoming any decrease in sales revenue.

The Wall Street Journal reaffirmed the success of our second strategic initiative; the continued development of relevant technology. In late April they published an article which listed the top 35 most innovative companies in the world on the patent boards consumer electronic patent score card. We are extremely pleased to not only have received this recognition but to have ranked second among the eight US based companies listed and 21st overall. Additionally Shuffle Master led all firms worldwide by a wide margin in the industry impact category; a [inaudible] of how influential a company’s patent portfolio is on the development of technologies in its industry.

Third we focused on increasing revenue from existing assets by upgrading or adding new value elements. We have been able to add to our existing real estate in the field by adding new wagers, particularly progressive side bets. As an example, as of April 30th, 2008, we have over 100 progressive add-ons installed in the field. Once more I’ll touch on what we said last quarter with regard to value engineering and our cost reduction strategy and related increase in gross profit. We mentioned that engineering changes to our shuffler designs should result in manufacturing cost savings of 10% to 15% in this product line with no impact on performance or reliability.

Just one example is a new i-deal shuffler controller board which will reduce costs by approximately 15% and will be in full production before the end of fiscal 2008. Lastly we recognized the sale of our fractural ownership in a NetJet’s corporate aircraft this quarter and continue to determine areas where we can monetize non-core assets.

Finally I’ll address our financial outlook for the balance of this fiscal year; we believe that our financial results for the second quarter offer compelling evidence of the success of the lease and service revenue model. During our last conference call we acknowledged that there would be some time required before the increase in lease and service revenue overcame reductions in sale revenue. As the second quarter has demonstrated, we certainly have the capability to achieve this result.

Although there is no certainty that this will continue for the balance of this year, the implication for future growth is nonetheless extremely positive. Given the generally better margins associated with lease revenue versus sale revenue, we anticipate that adjusted EBITDA and EBT will show improvement over fiscal 2007.


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