Planning for success 2008 ANNUAL REPORT ongoing Strategic Plan Adding to our Five Point Strategic Plan that was introduced in fiscal 2007, we emphasized a new objective in fiscal 2008: cost savings. 1) A continuing emphasis on leasing versus selling. 2) Continued development of relevant technology to drive new products across all product lines. 3) An effort to increase the return from existing assets already in the field by upgrading or adding new value elements. 4) A value engineering program to reduce manufacturing costs across all product lines. 5) The monetization of non-core assets and the utilization of the proceeds to reduce debt. Increasing recurruing revenue 6) A cost reduction initiative to reduce expenses throughout the Company without compromising was a primary focus of 2008 the quality of our products or service. INCOME STATEMENTS (in thousands, except per share amounts) Year Ended October 31, 2006 2007 2008 Revenue $ 162,991 $ 178,851 $ 190,006 Income (Loss) from Operations 27,482 * 24,582 (1,059) ** Net Income (Loss) 5,093 * 16,379 (10,803) ** Earnings per Share, Diluted 0.14 * 0.46 (0.27) ** BALANCE SHEETS AND CASH FLOWS (in thousands) 2006 2007 2008 Cash, Cash Equivalents and Investments $ 8,917 $ 4,392 $ 5,374 Long-term Liabilities, net of Current Portion 158,753 232,698 86,055 Shareholders’ Equity 34,549 87,634 102,858 Cash Provided by Operating Activities 34,021 33,048 44,018 * Fiscal 2006 earnings included a $19,145, or $0.53, one-time write off of Acquired In Process Research and Development costs resulting from our Stargames acquisition on February 1, 2006. ** Fiscal 2008 earnings included a non-cash goodwill impairment writedown of $22,137, or $0.55, as well as a year-over-year increase in weighted average shares outstanding related to our equity offering in July 2008 resulting in an additional 20.3 million shares. Letter to Our Shareholders REVENUE WAS A RECORD $190.0 miLLION, UP 6% YEAR OVER YEAR It is with bittersweet emotion that I write this, my last letter to Shuffle Master Shareholders. About eighteen months ago we announced my plan to retire from the Company and that we had initiated a search for my successor. That search has now reached a successful conclusion and Timothy J. Parrott, a gaming industry veteran who is extremely well suited to lead our Company, will be taking over as CEO on March 15th of this year. Little did I know in 1994, when I first met John Breeding, the founder of Shuffle Master, what an exciting journey this would turn out to be, nor the extent to which I would devote my next fifteen years to the Company. In any case, it has been an honor and a privilege to serve as your CEO and we can now all look forward to the next phase of this amazing story with Tim Parrott at the helm. Fiscal 2008 was a challenging but generally successful year for Shuffle Master. The Company delivered solid financial results, introduced significant innovations across the breadth of our product portfolio, and executed on initiatives that position us for strong future growth. Despite the challenging economic and competitive environment, the patient pursuit of our focused strategy of delivering cost-saving and value-added products helped us deliver a record-setting year. INCOME STATEMENTS (in thousands, except per share amounts) Year Ended October 31, Thanks to the continued success of our core Utility, Proprietary Table Games and Electronic Table Systems businesses, and strong growth in our Electronic Gaming 2006 2007 2008 Machines segment, revenue jumped to a record $190 million in fiscal 2008, an Revenue $ 162,991 $ 178,851 $ 190,006 increase of 6% compared with the previous fiscal year. Our total royalty, lease and Income (Loss) from Operations 27,482 * 24,582 (1,059) ** service revenue also increased 25% to a record $78.3 million, or 41% of revenue, Net Income (Loss) 5,093 * 16,379 (10,803) ** reflecting our continued emphasis on leasing versus selling. Earnings per Share, Diluted 0.14 * 0.46 (0.27) ** Throughout fiscal 2008 we saw strong adoption of Electronic Table Systems as evidenced by an 18% increase in total seats installed to 7,225, and segment lease BALANCE SHEETS AND CASH FLOWS (in thousands) and service revenue grew 57% to $9.5 million. Shufflers passed the 28,000 worldwide installation mark and recorded more than $73.7 million in revenue. Proprietary Table 2006 2007 2008 Games revenue increased 17% to $38.6 million, 86% of which was royalty, lease and Cash, Cash Equivalents and Investments $ 8,917 $ 4,392 $ 5,374 service revenue. Our Electronic Gaming Machines enjoyed solid revenue growth year- Long-term Liabilities, net of Current Portion 158,753 232,698 86,055 over-year, gross margin improvement and a 23% increase in the average sales price. Shareholders’ Equity 34,549 87,634 102,858 Average lease prices increased in every product segment, excluding Electronic Gaming Cash Provided by Operating Activities 34,021 33,048 44,018 Machines, which are generally sold. Our strongest growth was in the North America, where we grew revenue $10 million to $99.8 million, with much of this growth being driven by the acceptance and success of our electronic tables which is an excellent example of our broader strategy of anticipating and capitalizing on new product trends in our industry. Our goal has been and will continue to be identifying future trends faster than our competitors and being the first to deliver relevant products that will play a crucial role in the future of gaming. In keeping with this, during 2008 we added what we believe will be an important new product to our broad portfolio, namely, the highly anticipated i-Table, a groundbreaking new e-table format that combines electronic wagering with live cards on popular games like blackjack and baccarat. We also rolled out the i-Shoe Auto, our next generation card reading shoe, and continued the rollout of the i-Deal shuffler, all of which represent important advances in our gaming technologies. In other business developments, in July 2008 we completed a timely equity offering and debt refinancing which strengthened our balance sheet and significantly reduced our debt obligations. We effectively took this action prior to the deterioration Our e-tables experienced substantial growth of the capital markets and I am proud of our ability to execute when we did. As a and ended 2008 with over 7,200 seats in play result, we ended the year with a strong and flexible financial foundation. Further, we expanded our reach into promising Asian markets outside Macau. As we head into a new fiscal year, we believe that Shuffle Master is ideally positioned to drive strong results in 2009 and beyond. We have excellent momentum and a great pipeline of products and technologies. Even more importantly, we have great people at every level, including strong leaders who have the experience and strategic insight to turn the opportunities that lie ahead of us into even greater success in the future. With the promotions of Executive Vice Presidents David Lopez and Roger Snow, we welcome a new generation of leaders stepping up to lead in areas such as worldwide operations, product development, business strategy and marketing. For more than 15 years, Shuffle Master has enjoyed tremendous success by delivering cutting-edge innovations that have revolutionized the table gaming space. Today, despite the economic climate, we’re in the midst of one of the most exciting periods in our history. Gaming content is shifting to electronic formats at During Fiscal 2008, our shuffler installed an expeditious pace. The convergence of technology with traditional table games base surpassed the 28,000 unit mark is transforming the way we create and deliver gaming experiences. With economic conditions affecting the gaming industry, it makes sense to carefully control costs but it is also imperative to be prepared for growth when the economy improves. As we enter fiscal 2009, we have the resources to weather the current market conditions as we continue to focus on the products and opportunities that will provide for our continued success in the future. We appreciate your continued confidence and support. Mark L. Yoseloff, Ph.D. Chief Executive Officer planning FOR future success wiTH A FOCUSED, WELL-DEVELOPED AND EXECUTED STRATEGY 2008 was a challenging year, as gaming operators and suppliers worldwide were significantly impacted by the global economic downturn and financial industry woes. Operators saw their visitor numbers decline, causing them to scale back operations. This directly impacted suppliers who were affected by reduced new product placements and removals. However, with financial uncertainty on the horizon, capital constraints and reducing operating expenses a top priority of many operators, the gaming industry’s need for value-added products that lower operating costs and improve productivity, profitability and security without impacting the player experience is greater than ever, and Shuffle Master is well positioned to meet this need. Our fiscal 2008 financial performance demonstrates not only our ability to execute in a challenging market, but also the resilience of our long term planning, strategy and product mix. It also reflects the importance of global diversification and the benefit of having products that provide our customers with competitive titles, operational savings and productivity, and security-enhancing features in an environment when they need these tools more than ever. As operators strive to ensure that every dollar spent results in a maximum return on investment through improved floor performance and increased revenue, we are confident that our innovative products will continue to justify their cost. In the months ahead while gaming operators and suppliers alike look for ways to streamline their operations to better enable them to weather the current downturn, we renew our commitment to providing relevant, valuable gaming product solutions that will pave the way for even greater success in the future.