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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission File No. (0-20820)

SHUFFLE MASTER, INC.
(Exact name of registrant as specified in our charter)

702-897-7150
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $.01 per share

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

        Indicate by check mark whether the Registrant is accelerated filler (as defined in Exchange Act Rule 12b-2). ý

        As of January 27, 2004, 16,588,359 shares of Common Stock of the registrant were outstanding. The aggregate market value of Common Stock beneficially owned by non-affiliates on that date was $595,156,000 based upon the last reported sale price of the Common Stock at that date by The NASDAQ National Market.

DOCUMENTS INCORPORATED BY REFERENCE

        Parts I, II and III of this Annual Report on Form 10-K incorporate by reference information from the Registrant's Proxy Statement for its Annual Meeting of Shareholders to be held on March 17, 2004 (Fiscal 2003 Proxy Statement).

SHUFFLE MASTER, INC.
ANNUAL REPORT OF FORM 10-K FOR THE YEAR ENDED OCTOBER 31, 2003

TABLE OF CONTENTS

PART I

FORWARD LOOKING STATEMENTS

        This report contains forward-looking statements that are based on management's beliefs as well as on assumptions made by and information available to management. We consider such statements to be made under the safe harbor created by the federal securities laws to which we are subject, and we assume no obligation to update or supplement such statements. Forward-looking statements reflect and are subject to risks and uncertainties that could cause actual results to differ materially from expectations. Factors that could cause actual results to differ materially from expectations include, but are not limited to, the following:

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



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advances by competitors;



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acceleration and/or deceleration of various product development and roll out schedules;



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product performance issues;



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higher than expected manufacturing, service, selling, administrative, product development and/or roll out costs;



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



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reliance on strategic relationships with distributors and technology vendors;



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current and/or future litigation or claims;



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acquisitions or divestitures by us or our competitors of various product lines or businesses;



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



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



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general and casino industry economic conditions; and



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

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

ITEM 1. BUSINESS

Our Identity

        We are a gaming supply company that specializes in providing our casino and other gaming customers with Utility Products, including automatic card shufflers, to improve their productivity and security and Entertainment Products, including proprietary table games and Table Master™ games. Our identity has changed over the last ten years, as we were initially a developer and manufacturer solely of card shufflers. During the 1990's, we diversified our business to include proprietary table games and slot products.

        Over the past two years, we have acquired additional technology designed to improve the operating performance of our casino and other customers' table game operations. Along with our

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Intelligent Table System™ initiative, two product acquisitions (our Bloodhound™ blackjack player tracking software and our multi-player video table game platform, branded as Table Master) are the core of our product development efforts. We continue to develop and acquire additional products and technology intended for our customers' business.

        Our products primarily relate to our customers' table game and slot game activities. We broadly group our product offerings into two business segments, summarized as follows:

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Utility Products.  We develop and market a full complement of automatic card shufflers for use with the vast majority of card table games placed in casinos and other locations, including our own proprietary table games. Additionally, we have acquired or are developing products to automatically gather data and to enable casinos to track table game players, such as our Bloodhound and Intelligent Table System products. Our products and efforts in this segment are focused on increasing table game productivity, security, and profitability for the casino and other operators, as well as cost-effectively providing data on table games and players so that casinos and others may better market to these players.



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Entertainment Products.  We develop or acquire and market a broad range of proprietary table game entertainment content to casinos and others. Products in this segment include our traditional live proprietary table poker, baccarat, pai gow poker and blackjack table games, as well as, starting in mid-fiscal 2004, proprietary, licensed and public domain table game content delivered on our recently acquired multi-player video platform, branded as Table Master. Products in this segment focus on cost-effectively delivering to casinos and others popular branded table game content on either live table or multi-player video platforms.

        In December 2003, our Board of Directors approved and we announced our intention to divest of our slot products operations and assets, based on our determination that this product line was no longer a strategic fit with our refocused core business strategy of providing products and services for the table area of casinos. As of the filing of this report, we have sold a significant portion of our slot products operations and assets and expect to dispose of the remainder in the near term.

        The table below presents our product lines and the percentage of total revenue contributed by each product line in fiscal years ending October 31:

*

Less than 1%

        For additional information about our segments, including segment revenue, operating income and assets, see "Item 6. Selected Financial Data," "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8. Financial Statements and Supplementary Data" included elsewhere in this Annual Report.

        In prior fiscal years, we classified our products into segments named "Shufflers," "Table Games" and "Slot Products." Our Table Games segment included our Intelligent Table System and Bloodhound products and our Slot Products segment included our Table Master product. However, because of our decision to exit the slot games market, we have regrouped our operations into two segments. In

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recognition of our development and marketing of the components of our Intelligent Table System, which integrates with our new generation of shufflers, we have included these products as our newly designated Utility Products segment. Similarly, in recognition of our forthcoming rollout of table games on the Table Master multi-player video platform as a brand extension of the content of our live proprietary table games, we have designated our live table game and Table Master products as our new Entertainment Products segment.

        We are a Minnesota corporation that was 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 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.

Our Strategy

        We are proud of the products that we have developed and market and are pleased with our success as we continue our growth and expansion. Our product strategies for the future are:

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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;



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To broaden and diversify our Utility Products segment by completing the development of and by marketing the modular components that comprise our soon-to-be introduced Intelligent Table System, including our Intelligent Shoe™, Intelligent Discard Rack™, optical bet recognition system and player tracking software;



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To develop and market the third generation of our shufflers, including features like optical card recognition, deck validation and integration with the Intelligent Table System, to further penetrate domestic and foreign markets for these products;



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To broaden our Entertainment Products segment by developing or acquiring additional table game content to increase our penetration of casino customers' table game operations;



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To complete the development of and to market our Table Master multi-player video table game platform to provide a cost-effective brand extension of our table game content to existing casino or new racino customers;



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



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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;



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To continue our strong commitment to research and development of new product technologies in both our Utility Products and Entertainment Products segments.

Our Utility Products Segment

        Since our founding, we have developed and marketed products that increase the productivity, security and operating profits of the table game operations of our casino and other customers. Our

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automatic card shufflers were the first such product. Within the past two years, we have added the Bloodhound software product (described below) and expect to soon add our Intelligent Table System (described below), now under development, to this product segment. We believe that our casino and other customers are seeking to increase the operating returns of their table game operations as they have already done in their slot operations. By introducing a combination of technologies designed to automate functions and processes and to gather more accurate and comprehensive data on players for financial and marketing purposes, our Utility Products will aid casinos and other operators in improving their table game operations.

        Our Shuffler Products.    We currently market a complete range of shufflers, including both batch and continuous shufflers. Single deck shufflers are generally used on proprietary games such as our own Let It Ride® and Three Card Poker® table games, as well as other table games such as Caribbean Stud Poker®, pai gow poker and blackjack. Multi-deck shufflers, which include continuous and batch versions, are most commonly used in multi-deck blackjack and mini-baccarat table games. Additionally, we have recently introduced a single deck/double deck shuffler, the Deck Mate®, for use on blackjack tables and poker tables, a previously unpenetrated market for our shuffler products.

        Our shufflers offer several benefits to our customers, including enhanced security and increased productivity. The opportunity for card manipulation by dealers is significantly reduced, 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.

        Foremost among our shuffler products are the following:

        Our Other Utility Products.    We have acquired or are developing technology to enable casinos and others to track and analyze play on their table games. This technology combines computer software and hardware, optics, and the optical card reading features of our next generation of shufflers.

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        Our other Utility Products are the following:

        Customers and Marketing.    We market our Utility Products to over 600 casinos and other gaming establishments around the world with our domestic sales force of 10 account executives and one domestic distributor and with our international sales executive and three international distributors, including Technical Casino Supplies, Ltd., and its affiliated companies. 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 sell and lease our Utility Products. When we lease our products, we generally negotiate a month-to-month operating lease. When we sell our products, we offer our customers a choice between a sale or a longer-term sales-type lease, depending on the needs of each customer.

        Historically, we marketed our shufflers in the table game areas of the casino. With the commercialization of the Deck Mate shuffler, we have extended the market for shufflers into poker rooms in casinos and single deck or double deck blackjack tables. As a result, we now market a full line of shufflers to accommodate virtually all of our customers' shuffler needs.

        Customer Service.    As part of our strategy to maintain and expand our market position in the shuffler business, we have made a commitment to maintain a high level of service to our customers. Within our service areas, we provide regular preventative maintenance service and on-demand repair service for our leased equipment, provide service training to our customers, and provide back-up shuffler units to our lessees. For casinos that purchase shufflers, we offer service contracts providing service benefits similar to those of leased units or a parts-only warranty contract. As of October 31, 2003, we had 90 service employees in 27 field locations.

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        Competition.    We compete with other gaming and entertainment products, including slot games, poker, sportsbook, keno, public domain table games such as blackjack, and other proprietary table games for space on the casino customer's floor to earn our product revenue. Several companies have developed and are marketing shufflers and are likely working to develop and obtain regulatory approvals of additional shuffler products. Those companies include Casinos Austria Research and Development, an Austrian company marketing the Shuffle Star™ and One2Six™ shufflers, VendingData, a U.S. company that markets batch and continuous versions of its multi-deck shuffler, the Random Ejection Shuffler™, and Ten Stix, Inc., a U.S. company that markets the Pro Shuffler™. Although precise information is not available, we believe that these companies' worldwide placements are approximately 1,200 units. These companies typically compete on the basis of price and shuffling speed. We compete on these bases as well as on the bases of offering a complete line of shufflers, product reliability, a superior international service network, the strength of our intellectual property, and the breadth of our sales, regulatory, and distribution channels. These beliefs notwithstanding, we cannot provide assurances that a competitive product will not gain substantial placements or cause price erosion of our shufflers in the future.

        With respect to our efforts to develop the player tracking and data gathering technologies of our Intelligent Table System, we believe that several existing gaming companies are working to develop similar competitive technologies.

        Product Supply.    We obtain most of the parts for our Utility 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 final assembly ourselves and then warehouse and ship our products from our facilities in Las Vegas. Warehousing, quality control, final assembly and shipping are conducted primarily at our Las Vegas facility, although small inventories are maintained and repairs are performed by our field service organization. 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 to improve and upgrade our existing shufflers, to develop new shufflers, to develop technology and products related to our Bloodhound software and the Intelligent Table System and to explore other potential table-related products. We perform the majority of our research and development ourselves. In addition to working to improve existing products and to develop the next generation of shufflers, we also are devoting a significant portion of our research and development efforts to integrating our shufflers with our other Utility Products.

Our Entertainment Products Segment

        Our Entertainment Products segment includes our proprietary table games, our Table Master multi-player video platform and our side-bet system. The products in this segment include proprietary table game content that is delivered on different live-dealt and electronic platforms.

        Our Current Table Games.    We currently are or intend to soon market the following proprietary table games to casinos:

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        Our Other Entertainment Products.    In addition to our live proprietary table games, we have developed or acquired other technology or platforms to deliver our or others' proprietary table game content or public domain games. We are developing these platforms to enable the marketing of our table game content into previously unpenetrated international and domestic racino markets. These different platforms are described below:

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        Customers and Marketing.    We market our Entertainment Products to the same customers to whom we market our Utility Products. We first began offering table games in 1993 to increase the demand for our shuffler products and we still routinely install shufflers and proprietary table games together. We design our proprietary table games to have broad appeal to players who enjoy a more casual and social card game or who are new to or intimidated by traditional table games. Our various table games offer casinos and players a wide variety of betting propositions and risk and reward trade-offs.

        With the introduction of our recently-developed Table Master product, which will not utilize a live dealer, we will be able to market our table game content in unpenetrated jurisdictions that only allow slot games, such as racinos (race tracks that also offer slot games). Additionally, we will be able to market our dealer-less Table Master games to casinos who want more cost-effective table products or who want to offer lower stakes table games.

        We typically market our table games directly to casinos by licensing the games for a monthly fixed fee. In fiscal 2003, we began selling lifetime licenses to our Let It Ride table games. We also market Let It Ride, Three Card Poker and side-bet systems in international jurisdictions.

        Competition.    We compete with other gaming and entertainment products, including slot games, poker, sportsbook, keno, public domain table games such as blackjack, and other proprietary table games for space on the casino customer's floor to earn our product revenue. The market for table games is characterized by numerous competitors who develop and license proprietary table games. Some of our competitors' widely known proprietary table game titles include Mikohn Gaming Corporation's Caribbean Stud®, Bet Technologies, Inc.'s Fortune Pai Gow Poker®, Royal Match 21™ and Casino War®, Galaxy Gaming's Lucky Ladies™ and Masque Publishing's Spanish 21®, among others.

        Competition in the table game market is typically on the basis of price, brand recognition, 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 of 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 growth of the proprietary table game market, but also by displacing other table game products. In the future, table game competitors could market table games that might displace our products.

        Product Supply.    We obtain most of the parts for our Entertainment Products from outside suppliers, including table game felts, signs, and accessories, as well as components for our side bet systems. 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 final assembly ourselves and then warehouse and ship our products from our facilities in Las Vegas. Warehousing, quality control, final assembly and shipping are conducted primarily at our Las Vegas facility, although small inventories are maintained and repairs are performed by our field service organization. We intend to have our Table Master units manufactured by a subcontract manufacturer who will also inventory and ship this product. 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.    Our primary Entertainment Product research and development efforts have involved re-engineering and improving the Table Master multi-player platform. This development work involved re-engineering the Table Master cabinet, betting stations, and electronics as well as improving video quality and game interface options. We are also developing software to allow our proprietary table games, including Three Card Poker and Let It Ride, to operate on this platform.

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Additionally, we developed several new live proprietary table games during fiscal 2003, including Four Card Poker, Dragon Bonus and Big Raise Hold'em.

Research and Development Costs

        Because we believe that one of our strengths is identifying new product opportunities and developing new products, 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 were $8,658,000, $6,845,000, and $6,021,000 in fiscal 2003, 2002, and 2001, respectively.

Significant Customer Sales, Export Sales and Foreign Assets

        No individual customer accounted for more than 10% of total revenue earned during fiscal 2003. In fiscal 2003, 2002 and 2001, we had export revenue, primarily from sales to customers in Canada, United Kingdom and Australia, which accounted for 15%, 23% and 18% of our total revenues. No single foreign country accounted for more than 10% of our total revenue in any year. Long-lived assets outside the United States did not exceed 10% of total assets in any year.

Seasonality and Business Fluctuations

        Quarterly revenue and net income may vary based on the timing of the opening of new gaming jurisdictions, the opening or closing of casinos or the expansion or contraction of existing casinos, gaming regulatory approval or denial of our products and corporate licenses, the introduction of new products or the seasonality of customer capital budgets.

Intellectual Property

        We believe that our patents, trademarks, licenses, copyrights and trade secrets are significant assets, provide us with a competitive advantage and are critical to our future profitability and growth. We protect our investment in research and development by patenting our technologies. We also acquire patents and other intellectual property and routinely acquire and grant intellectual property licenses. 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.

        Patents.    We own numerous United States and international patents related to our products, related to future products that have not yet been introduced, related to potential product modifications and improvements and related to products we have sold or licensed to others. These patents include internally developed, purchased and licensed patents. Most of the patents we own have a life of 20 years from date of patent application and none of our patents will expire before 2007. We also have numerous patent applications pending and unfiled patent applications for our existing, planned and potential products. No assurance can be given that any such patents will issue 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. Among these are Shuffle Master®, the Shuffle Master logo, Shuffle Master Gaming®, Let It Ride®, Let It Ride Bonus®, Let It Ride The Tournament®, Three Card Poker®, Four Card Poker®, Dragon Bonus™, Single 21®, Table Master™, ACE®, King®, Deck Mate®, MD-2™, Bloodhound™ and Intelligent Table System™. We also use a number of licensed trademarks with the permission of the owners. The trademarks, logos, trade names, and product names used herein, other than ours, are the property of their respective owners. We also have numerous pending U.S. and foreign trademark applications. We have not only aggressively sought protection of our current product

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names and other trademarks, but have also sought protection for a number of names we plan to use in the future.

        Intellectual Property Licenses.    We both acquire and grant licenses of intellectual property including patents, trademarks, copyrights, character rights and technology. These licenses are subject to various conditions and restrictions and typically involve us either paying or charging royalties on a fixed or unit basis. 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. When we license our products to our customers, we also license the right to use our intellectual property. We typically earn license royalties on a fixed or unit basis and on a lifetime or periodic basis.

        Other Intellectual Property.    In addition to patents, we also protect much of our intellectual property with copyrights, trademark registrations, trade secrets and non-disclosure agreements. No assurance can be given that we will be successful in maintaining the confidentiality of our proprietary information. Further, costs associated with defending and pursuing infringement claims can be substantial. In the absence of a valid patent, copyright, trademark or trade secret protection, we would be vulnerable to competitors who could lawfully copy our products and technology.

        Product-Related Agreement.    We are a party to certain cross-licensing and cross-supplier agreements with Mikohn Gaming Corporation ("Mikohn"). Under these agreements, we receive approximately $580,000 per year from Mikohn through fiscal 2004 for our license to Mikohn of certain intellectual property.

        Infringement and Litigation.    We do not believe that any of our products, methods or technologies infringes the patents and other 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.

Employees

        As of October 31, 2003, we had 244 full-time, three part-time and two temporary employees. We are not subject to any collective bargaining agreement and we believe that our employee relations are good.

Gaming Regulation

        Overview.    We are subject to a wide range of complex gaming laws and regulations in the 184 jurisdictions in which we are licensed. Jurisdictions include both individual states and Native American tribal lands domestically and individual provinces and countries internationally. Jurisdictions require that we be licensed, that our key personnel be found suitable or be licensed, and that our products be reviewed and approved before placement. Additionally, in most jurisdictions, any beneficial owner of our common stock is subject to being required to file applications with gaming regulatory authorities and undergo investigation to be found suitable or qualified as such. The gaming laws and regulations of most jurisdictions provide that beneficial owners of 5% or more of our common stock are subject to reporting procedures and may be subject to background investigations, including submission of personal and financial information required to be licensed, qualified or found suitable. Furthermore, most jurisdictions have ongoing reporting requirements for certain transactions and are concerned with our accounting practices, internal controls, business relationships, and the fair operation of our products. Gaming regulatory requirements vary from jurisdiction to jurisdiction and licensing, approval, and processes related to findings of suitability of us, our products, our key personnel, and certain shareholders can be lengthy and expensive.

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        General Regulatory Licensing and Approvals.    We intend to maintain our existing licenses and to seek the necessary licenses, approvals and findings of suitability of us, our products and our management personnel in new jurisdictions where sales opportunities are anticipated. We have never been denied a license, permit or approval necessary to do business in any jurisdiction, nor had a license suspended or revoked. However, there can be no assurance that new licenses, approvals or findings of suitability will be obtained or that our existing licenses will not be revoked, suspended or conditioned. If a license, approval or finding of suitability is required by a regulatory authority and we fail to seek or do not receive the necessary license or finding of suitability, then we may be prohibited from distributing our products for use in the respective jurisdiction or may be required to provide our products through other licensed entities at a reduced profit to us. There can also be no assurance that we will be able to obtain the necessary approvals for our products as they are developed. In addition, changes in legislation or in judicial or regulatory interpretations could occur which could adversely affect us.

        We are licensed as a manufacturer and distributor of gaming devices, an operator of inter-casino linked systems and a slot route operator in Nevada. We are a gaming-related casino service industry licensee in New Jersey and hold supplier, manufacturer and distributor licenses in numerous other jurisdictions throughout North America and elsewhere. Due to similarities in jurisdictional regulatory transaction reporting, as well as manufacturer, distributor, and product licensing requirements, only the specifics of Nevada gaming law requirements are provided below as being representative of gaming regulations to which we are subject in other jurisdictions.

        Nevada Regulatory Matters.    We are subject to the Nevada Gaming Control Act (the "Nevada Act") and to the licensing and regulatory control of the Nevada State Gaming Control Board (the "Nevada Board"), the Nevada Gaming Commission (the "Nevada Commission"), and various local, city and county regulatory agencies (collectively, the "Nevada Gaming Authorities").

        The laws, regulations and supervisory procedures of the Nevada Gaming Authorities are based upon declarations of public policy which are concerned with, among other things: (i) the character of persons having any direct or indirect involvement with gaming to prevent unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any time or in any capacity; (ii) application of appropriate accounting practices and procedures; (iii) maintenance of effective control over the financial practices and financial stability of licensees, including procedures for internal controls and the safeguarding of assets and revenues; (iv) record-keeping and reporting to the Nevada Gaming Authorities; (v) fair operation of games; and (vi) the raising of revenues through taxation and licensing fees.

        We are registered with the Nevada Commission as a publicly traded corporation and are licensed as a manufacturer and distributor of gaming devices, an operator of inter-casino linked systems and a slot route operator. Such licenses are not transferable and require periodic payment of fees. The Nevada Gaming Authorities may limit, condition, suspend or revoke a license, registration, approval or finding of suitability for any cause deemed reasonable by such licensing agency. If it were determined that we violated gaming laws, then the approvals and licenses we hold could be limited, conditioned, suspended or revoked, and we, and the individuals involved, could be subject to substantial fines for each separate violation of the gaming laws at the discretion of the Nevada Commission. Each type of gaming device, slot game, slot game operating system, table game or associated equipment manufactured, distributed, leased, licensed or sold in Nevada must first be approved by the Nevada Board and, in some cases, the Nevada Commission. We must regularly submit detailed financial and operating reports to the Nevada Board. Certain loans, leases, sales of securities and similar financing transactions must also be reported to or approved by the Nevada Commission.

        Certain officers, directors and key employees are required to be found suitable by the Nevada Commission and employees associated with gaming must obtain work permits which are subject to

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immediate suspension under certain circumstances. An application for suitability may be denied for any cause deemed reasonable by the Nevada Commission. Changes in specified key positions must be reported to the Nevada Commission. In addition to its authority to deny an application for a license, the Nevada Commission has jurisdiction to disapprove a change in position by an officer, director or key employee. The Nevada Commission has the power to require licensed gaming companies to suspend or dismiss officers, directors or other key employees and to sever relationships with other persons who refuse to file appropriate applications or whom the authorities find unsuitable to act in such capacities.

        The Nevada Commission may also require anyone having a material relationship or involvement with us to be found suitable or licensed, in which case those persons are required to pay the costs and fees of the Nevada Board in connection with the investigation. We customarily reimburse such costs and fees. Any person who acquires more than 5% of our voting securities must report the acquisition to the Nevada Commission; any person who becomes a beneficial owner of 10% or more of our voting securities is required to apply for a finding of suitability. Under certain circumstances, an "Institutional Investor," as such term is defined in the regulations of the Nevada Commission, which acquires more than 10% but not more than 15% of our voting securities, may apply to the Nevada Commission for a waiver of such finding of suitability requirements, provided the Institutional Investor holds the voting securities for investment purposes only. The Nevada Commission has amended its regulations pertaining to Institutional Investors to temporarily allow an Institutional Investor to beneficially own more than 15%, but not more than 19%, if the ownership percentage results from a stock repurchase program. These Institutional Investors may not acquire any additional shares and must reduce their holdings within one year from constructive notice of exceeding 15%, or must file a suitability application. An Institutional Investor will be deemed to hold voting securities for investment purposes only if the voting securities were acquired and are held in the ordinary course of business as an Institutional Investor and not for the purpose of causing, directly or indirectly, the election of a majority of our Board of Directors, any change in our corporate charter, bylaws, management, policies or our operations, or any of our gaming affiliates, or any other action which the Nevada Commission finds to be inconsistent with holding our voting securities for investment purposes only.

        Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Nevada Commission may be found unsuitable based solely on such failure or refusal. The same restrictions apply to a record owner if the record owner, when requested, fails to identify the beneficial owner. Any security holder found unsuitable and who holds, directly or indirectly, any beneficial ownership of the common stock beyond such period of time as may be prescribed by the Nevada Commission may be guilty of a gross misdemeanor. We are subject to disciplinary action if, after we receive notice that a person is unsuitable to be a security holder or to have any other relationship with us, we: (i) pay that person any dividend or interest upon our voting securities; (ii) allow that person to exercise, directly or indirectly, any voting right conferred through securities held by that person; or (iii) give remuneration in any form to that person. If a security holder is found unsuitable, then we may be found unsuitable if we fail to pursue all lawful efforts to require such unsuitable person to relinquish his or her voting securities for cash at fair market value.

        The Nevada Commission may also, in its discretion, require any other holders of our debt or equity securities to file applications, be investigated and be found suitable to own the debt or equity securities. The applicant security holder is required to pay all costs of such investigation. If the Nevada Commission determines that a person is unsuitable to own such security, then pursuant to the regulations of the Nevada Commission, we may be sanctioned, including the loss of our approvals, if, without the prior approval of the Nevada Commission, we: (i) pay to the unsuitable person any dividends, interest or any distribution whatsoever; (ii) recognize any voting right by such unsuitable person in connection with such securities; (iii) pay the unsuitable person remuneration in any form; or

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(iv) make any payment to the unsuitable person by way of principal, redemption, conversion, exchange, liquidation or similar transaction.

        We are required to maintain a current stock ledger in Nevada which may be examined by the Nevada Commission at any time, and to file with the Nevada Commission, at least annually, a list of our shareholders. The Nevada Commission has the power to require our stock certificates to bear a legend indicating that the securities are subject to the Nevada Act and the regulations of the Nevada Commission. However, to date, the Nevada Commission has not imposed such a requirement on us.

        We may not make certain public offerings of our securities without the prior approval of the Nevada Commission. Also, changes in control of us through merger, consolidation, acquisition of assets, management or consulting agreements or any form of takeover cannot occur without prior investigation by the Nevada Board and approval of the Nevada Commission.

        Approvals are required from the Nevada Commission before we can make exceptional repurchases of voting securities above the current market price and before a corporate acquisition opposed by management can be consummated. Nevada's gaming regulations also require prior approval by the Nevada Commission if we adopt a plan of recapitalization proposed by our Board of Directors in opposition to a tender offer made directly to our shareholders for the purpose of acquiring control of us.

        We have formally adopted a compliance plan and appointed a compliance committee in accordance with Nevada Commission requirements. Our compliance committee meets quarterly and is responsible for implementing and monitoring our compliance with regulatory matters. This committee also reviews information and reports regarding the suitability of potential key employees or other parties who may be involved in material transactions or relationships with us.

        Federal Registration.    As a manufacturer and distributor of gaming devices, including slot machines and Table Master products, we are registered pursuant to and have complied with the Federal Gambling Devices Act of 1962 (the "Federal Act"). In order to manufacture, sell, deliver or operate our gaming devices, including our Table Master product, we must renew our federal registration annually and comply with its various record-keeping and equipment identification requirements. The Federal Act makes it unlawful for a person or business entity to manufacture, deliver, receive, operate, lease or sell gaming devices in interstate or foreign commerce unless that person or entity has first registered with the Attorney General of the United States. Violation of the Federal Act may result in seizure and forfeiture of the equipment, as well as other penalties.

        Native American Gaming Regulation.    Gaming on Native American lands is governed by the Federal Indian Gaming Regulatory Act of 1988 ("IGRA") and specific tribal ordinances and regulations. Class III gaming, as defined under IGRA, also requires a Tribal-State Compact, which is a written agreement between a specific tribe and the respective state. This compact authorizes the type of Class III gaming activity and the standards, procedures and controls under which the Class III gaming activity must be conducted. The National Indian Gaming Commission ("NIGC") has oversight authority over gaming on Native American lands and generally monitors tribal gaming including the establishment and enforcement of required minimum internal control standards. Each Tribe is sovereign and must have a tribal gaming commission or office established to regulate tribal gaming activity to ensure compliance with IGRA, NIGC, and its Tribal-State Compact. We have complied with each of the numerous vendor licensing and specific product approval and shipping notification requirements imposed by Tribal-State Compacts and enforced by tribal and/or state gaming agencies under IGRA in the Native American lands in which we do business.

        Other Jurisdictions.    All jurisdictions that have legalized gaming require various permits or approvals for and reporting of certain transactions by manufacturers and distributors of gaming devices, table games, and associated equipment. In general, such requirements are similar to those of Nevada.

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        Product Approvals.    Each of our products is subject to extensive testing and review by multiple state, jurisdictional or third party laboratories. The detail and extent of the review generally depends upon the classification of the product by the respective gaming authority as a new game, game variation, associated equipment, gaming equipment or gaming device. The time required for product testing can be extensive and is subject to a wide range of formal and informal standards that can lead to great uncertainty as to the length of the regulatory approval process. Additionally, product testing is subject to changing standards, as a result of which, we may be required to upgrade or revise our products. The laboratories responsible for testing are believed to be handling a great number of product submissions and are also believed to be under the pressure of limited funding and resources. Such limitations could cause our product approvals to be delayed for unknown periods of time. A description of regulatory status and issues related to each of our product segments follows:

        Utility Products.    We have obtained approvals for our shuffler products, excluding the MD-2 or other developmental models, in all gaming markets in North America where casino and poker gaming is legalized. We have also received or filed (directly or through our international distributors) for approval of our shuffler products and related software in additional international jurisdictions where required. Our shufflers and related software are typically classified and approved as associated equipment or as gaming equipment, depending on the particular jurisdiction and their regulations. Associated equipment is equipment that is not classified as a gaming device or gaming equipment but, which due to its integral relationship to the conduct of licensed gaming, regulatory authorities have discretion to require manufacturers and distributors to meet licensing or suitability requirements prior to or concurrent with the use of such equipment in the respective jurisdiction. Although the classifications of shufflers vary among jurisdictions, most, if not all, jurisdictions require specific hardware and software approvals and certain licenses or permits to be held by companies, their key personnel, and service technicians in connection with the manufacture, distribution, service, and repair of such equipment.

        Entertainment Products.    Our Let It Ride and Three Card Poker table games are approved in all major casino gaming markets in North America and numerous other international gaming jurisdictions. Four Card Poker and Dragon Bonus, our newest table games, are now approved in most jurisdictions in North America, with additional approvals expected throughout fiscal 2004. Similar approvals will be required for any future table games and related equipment.

        We intend to submit our Table Master multi-player video table game unit with versions of blackjack and our proprietary games to regulatory laboratories for testing in the second quarter of fiscal 2004 and expect approval in certain jurisdictions in the third quarter.

Our Slot Products

        Slot Products Divestiture.    In December 2003, our Board of Directors approved and we announced our intention to divest of our slot products operations and assets, based on our determination that this product line was no longer a strategic fit with our refocused core business strategy of providing products and services for the table game area of casinos. It is our expectation that our divestiture plan will be completed in the near term.

        In January 2004, we entered into agreements pursuant to which we sold a significant portion of our slot product assets to International Game Technology ("IGT"). See Note 16 to our consolidated financial statements included under Item 8 of this Annual Report.

        Our Slot Games.    As part of our Slot Product operations, we actively marketed a variety of slot games including those we developed and commercialized independently and those we developed and marketed cooperatively with other licensed manufacturers. Among the slot games we actively marketed were The Three Stooges®, Let's Make A Deal®, The Honeymooners™, Sydney Omarr's® Horoscope, Press Your Luck™, Hollywood™, Rubik's Cube® and Chicago™.

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        Our cooperatively developed and marketed games resulted primarily from our strategic alliance with IGT, pursuant to several agreements in which we granted licenses to IGT to develop and manufacture slot games based on entertainment titles we owned or to which we had rights. Under these agreements, IGT developed the games using its game platform and then we purchased and marketed the games in North America. After we each recovered certain expenses, the income generated from these games was split equally. In connection with our sale of certain of our slot assets to IGT in January 2004, these agreements were terminated.

        Using our own proprietary slot game operating system (discussed below), we also independently developed and marketed slot games, which either were used to upgrade existing casino-owned slot machines or were installed in new cabinets purchased from third-party slot machine manufacturers. We both leased and licensed the software and hardware elements and sold them.

        Our Operating System.    We developed an open architecture slot game operating system both to use for our internally developed games and to license to third party game developers and manufacturers. The operating system software used a standard computer circuit board driving an interface board customized to a particular slot game cabinet. The software was Linux-based and drove game and game machine functions. We generated revenue from the operating system by either selling it or charging a daily or annual fee for a license that included maintenance and upgrades for the system.

        Product-Related Agreements.    In our Slot Products segment, we routinely entered into licensing, development, manufacturing and marketing agreements with various participants in the gaming industry and with licensors of intellectual property. Entertainment theme licenses generally involved our payment of royalties in exchange for the right to use specified intellectual property, principally trademarked names, characters and themes.

        We entered into agreements allowing others to use our operating system in exchange for a licensing fee, generally a fixed rate per machine. In connection with the divestiture of our slot products operations and assets, we have assigned our rights to such licensing fees as part of the sale of our operating system.

        We also entered into distribution agreements allowing distributors to develop their own versions of our slot game titles and to distribute these games in limited jurisdictions in exchange for a royalty fee to us based on the number of units placed. We have assigned our rights under some of these agreements as part of our divestiture.

ITEM 2. PROPERTIES

        We lease two facilities with approximately 43,500 square feet in Nevada for substantially all of our business activities. Our shuffler research and development and other administration activities are located in an approximately 5,000 square foot facility in Minnesota. Slot operating system and game software research and development activities are located in an approximately 10,900 square foot facility in Colorado. We also lease other facilities with approximately 21,900 aggregate square feet for field service centers in various locations in the United States and internationally. The leases are not individually significant. We believe that our existing properties are suitable and adequate for our current needs and that additional facilities are available within our current locations to support expansion, if required.

        In connection with the divestiture of our slot products operations and assets, we intend to close our Colorado facility.

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ITEM 3. LEGAL PROCEEDINGS

        For information on Legal Proceedings, see Note 8 to our consolidated financial statements included in Item 8 of this Annual Report.

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

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

        No matters were submitted to a vote of our security holders during the fourth quarter of the fiscal year ended October 31, 2003.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        Stock Listing:    Our common stock is traded on The NASDAQ National Market under the symbol SHFL. As of January 27, 2004, we had approximately 325 shareholders of record. There are a significantly greater number of shareholders whose shares are held in street name. Based on information we collected as of January 27, 2004, we estimate that we have approximately 10,400 beneficial holders in total. The following table sets forth quarterly high and low prices for trades of our common stock during fiscal 2003 and 2002:

        The closing price of our common stock on January 27, 2004, was $36.23 per share.

        Dividend Policy:    We have not paid dividends on our common stock.

        Transfer Agent:    Our stock transfer agent and registrar is Wells Fargo Bank Minnesota, N.A., Shareowner Services, 161 North Concord Exchange, South St. Paul, Minnesota 55075, (800) 468-9716.

        Securities Authorized for Issuance Under Equity Compensation Plans:    The information under the caption "Equity Compensation Plan Information" in our 2003 Proxy Statement is incorporated herein by reference.

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ITEM 6. SELECTED FINANCIAL DATA

(a)

Operating results for the year ended October 31, 1999, included royalty settlement expense of $2,750 related to the settlement of our litigation with Mikohn Gaming Corporation and a benefit of $213 related to a change in estimated relocation expenses recorded in the preceding year.

(b)

Installed Unit Base is the sum of product units under lease or license agreements and inception-to-date sold units. We believe that installed units is an important gauge of segment performance because it measures historical market placements of leased and sold units and it provides insight into potential markets for service and next generation products. Some sold units may no longer be in use by our casino customers or may have been replaced by other models. Accordingly, we do not know precisely the number of units currently in use.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

BUSINESS OVERVIEW

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

        We have acquired or are developing other products to automatically gather data and to enable casinos to track table game players, such as our Bloodhound™ and Intelligent Table System™ products. We have also recently acquired and are re-engineering a multi-player video platform, Table Master™, to cost-effectively deliver to casinos and others our popular branded table game content on the choice of either a live table or a multi-player video platform. We expect to complete initial development or re-engineering of and to begin marketing these products in fiscal 2004 and beyond.

        In December 2003, our Board of Directors approved and we announced our intention to divest of our slot products operations and assets. As of the filing of this report, we have sold a significant portion of our slot products operations and assets and expect to dispose of the remainder in the near term. A more detailed discussion is included under the heading "Slot Products Divestiture."

        We sell, lease or license our products. When we lease or license our products, we generally negotiate a month-to-month operating lease. When we sell our products, we offer our customers a choice between a sale or a longer-term sales-type lease. We sell our products worldwide in markets that are significantly regulated and manufacture our products at our headquarters and manufacturing facility in Las Vegas, Nevada.

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

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

        Our revenue and results of operations are most affected by unit placements, through sale or lease, of our products; as such, we are a revenue-driven business. The number and mix of products placed

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and the average lease or sales price are the most significant factors affecting our gross margins. These factors are, in turn, affected by the gaming industry generally and our customers' assessment of our products. To a lesser extent, our overall financial results are affected by fluctuations in selling, general and administrative expenses and our investment in research and development activities.

REVENUE AND GROSS MARGIN

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

        Our overall revenue growth, both from fiscal 2002 to fiscal 2003 and from fiscal 2001 to 2002 (we refer to our fiscal year ended October 31, 2003 as fiscal 2003 and to our prior fiscal years in a similar manner), were primarily due to the sale or lease of more units in all of our product segments. The increase in the number of units leased and sold resulted both from our introduction of new products and the expansion of legal gaming into new jurisdictions. A more detailed discussion of our revenue is included for each of our operating segments under the heading "Segment Operating Results."

        Gross margin increased from fiscal 2002 to fiscal 2003 largely due to the increase in our revenue, and to a lesser extent, due to the improvement in the gross margin percentage for our Shufflers and Table Games segments. During fiscal 2003, total gross margin percentage also benefited from better absorption of indirect cost of sales, primarily manufacturing overhead costs, due to our higher production levels, which resulted from our higher revenue and unit volume.

        Leases and royalties gross margin percentage improved for fiscal 2003, primarily due to a reduction in depreciation expense for our leased products when compared to the prior fiscal year.

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Depreciation expense was lower in fiscal 2003 because more leased, or available for lease, products were fully depreciated than in fiscal 2002.

        Sales and service gross margins for fiscal 2003 increased primarily due to a change in the sold product mix in fiscal 2003 compared to fiscal 2002. During the third quarter of fiscal 2003, we began selling lifetime licenses for our proprietary table games, which generally have high margins. Prior to this, proprietary table games were available only on a monthly royalty fee bases. Additionally, fiscal 2003 revenue included a greater percentage of domestic shuffler sales, which generate a higher margin than foreign sales.

        Total gross margin increased from fiscal 2001 to fiscal 2002 because of better absorption of indirect cost of sales due to increased production and revenue levels. The benefit was offset, in part, because revenue of $1,500 under the our cooperative slot development agreements with International Game Technology ("IGT Alliance Agreements") in fiscal 2001 did not recur in fiscal 2002 and fiscal 2002 included a greater volume of foreign shuffler sales, which generally have lower gross margins than domestic sales.

OPERATING EXPENSES

        Selling, General and Administrative Expenses ("SG&A"):    SG&A increased for fiscal 2003, compared to fiscal 2002, primarily due to the increase in legal fees associated with our various legal proceedings related to our intellectual property, which were $2,600 in fiscal 2003 compared to $429 for fiscal 2002. As a percentage of revenue, fiscal 2003 SG&A was consistent with fiscal 2002. We believe that the trend of higher legal costs will continue. These costs are not expected to have a material impact on our financial position or liquidity, but may be material to our results of operations in any given period. The increase in SG&A for fiscal 2003 was also because our bad debt expense increased by $372. During fiscal 2003, our volume of sales-type lease transactions increased significantly. We increased our bad debt allowance to provide for collection risk associated with carrying longer term and higher amounts of accounts receivable.

        From fiscal 2001 to fiscal 2002, the increase in SG&A costs was proportionate to the increase in our revenue, except that health care and legal costs increased more rapidly. The increase in legal costs was due to the same factors described above.

        Research and Development Expenses ("R&D"):    Our R&D spending increases, in both fiscal 2003 and fiscal 2002, were distributed among all of our product lines, as we have continued to invest in new product development, including next generation shufflers and automated player tracking technologies. The increase in fiscal 2003 was greater, in part, because during the third quarter of fiscal 2003, we began incurring development expenses for our newly-acquired Table Master product line. As a percentage of revenue, R&D was consistent in fiscal 2003, 2002, and 2001, and within our target R&D investment range of between 12% and 14% of our annual revenues. We expect to continue this level of R&D spending during fiscal 2004.

INTEREST INCOME, NET

        Interest income, net, was $251, $663 and $702 for fiscal 2003, 2002 and 2001, respectively. The decrease in interest income reflects both lower average interest rates and the reduction in our average

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investment balances in fiscal 2003, compared to the prior fiscal years. This reduction is primarily due to our decision to purchase more of our shares in the open market.

INCOME TAXES

        Our effective tax rates for fiscal 2003, 2002 and 2001 were 34.0%, 34.5% and 34.5%, respectively. The decrease in our effective tax rate to 34.0% in fiscal 2003 reflects amended research and development credit claims that we filed during fiscal 2003. Looking forward, we expect our annual effective tax rate to exceed 35.0%. While we expect the amount of federal tax credits to remain roughly the same, when measured against our expected higher taxable income, they will be of diminishing benefit to our effective tax rate. Our estimate of our effective tax rate may fluctuate due to variation in our taxable income, changes in tax legislation, changes in our estimates of federal tax credits and other tax deductions and the related impact on the effective tax rate.

        During fiscal 2003 and fiscal 2002, we recorded income tax benefits of $2,661 and $8,571 related to deductions for employee stock option exercises. These tax benefits, which increased prepaid income taxes and additional paid-in capital by equal amounts, had no affect on our provision for income taxes.

EARNINGS PER SHARE

        Diluted earnings per share increased 28.6% in fiscal 2003 and 22.2% in fiscal 2002. The increases in diluted earnings per share resulted from increases in net income of 20.8% and 20.9% for fiscal 2003 and 2002, respectively, and the decrease in the weighted average number of shares outstanding in each fiscal year. The decreases in weighted average shares outstanding were primarily due to our open-market repurchases and subsequent cancellation of our common stock.

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SEGMENT OPERATING RESULTS
(Dollars in thousands)

SEGMENT OVERVIEW

        We determine our reportable segments based on our product lines. We have five product lines: Shufflers, Proprietary Table Games, Slot Products, Table Master, and Intelligent Table Systems ("ITS"). Our Shufflers, Proprietary Table Games, and Slot Products are each significant to our operating results. Our Table Master and ITS product lines, while important to our strategic direction, consisted primarily of research and development activities in fiscal 2003.

        During the fiscal years presented, our reportable segments include our Shufflers Segment, comprised of proprietary card shufflers, our Table Games Segment, comprised of proprietary table games, ITS and Bloodhound, and our Slot Products Segment, comprised of slot products and Table Master. This classification is consistent with the manner in which we conducted business and made operating decisions during historical periods. Each segment's activities include the design, development, acquisition, manufacture, marketing, distribution, installation and servicing of its product lines.

        Segment revenues include sale, lease or licensing of products within each reportable segment. We measure segment revenue performance in terms of dollars and Installed Unit Base. Installed Unit Base is the sum of product units under lease or license agreements and inception-to-date sold units. We believe that Installed Unit Base is an important gauge of segment performance because it measures historical market placements of leased and sold units, and it provides insight into potential markets for service and next generation products. Some sold units may no longer be in use by our casino customers or may have been replaced by other models. Accordingly, we do not know precisely the number of units currently in use.

        Segment operating income or loss includes revenues and expenses directly and indirectly associated with the product lines included in each segment. Direct expenses primarily include depreciation of leased assets, cost of product sold, shipping, installation, commissions, product approval costs, and research and development. Indirect expenses include an activity-based allocation of other general product-related costs, the most significant of which are service and selling expenses and manufacturing overhead. Corporate general and administrative expenses are not allocated to segments.

        Segment operating results are presented in the manner in which we were organized in prior periods.

SLOT PRODUCTS DIVESTITURE

        In December 2003, our Board of Directors approved and we announced our intention to divest of our slot products operations and assets, based on our determination that this product line was no longer a strategic fit with our refocused core business strategy of providing products and services for the table game area of casinos. It is our expectation that this divestiture will be completed in the near term and that the transactions will result in a net gain from disposition.

        As a result of our redefined strategy and the divestiture of our slot products, beginning in fiscal year 2004, we have realigned our reportable segments. We now have two reportable segments within our continuing operations, Utility Products and Entertainment Products. Revenues and costs associated with our slot products will be reported as discontinued operations beginning with our first quarter fiscal 2004 filings.

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        The following table summarizes our segment classifications and product lines:

        In January 2004, we entered into agreements pursuant to which we sold a significant portion of our slot product assets to IGT. Significant terms of the agreements include:

•

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



•

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



•

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



•

We agreed to terminate our initiative to develop retrofit games based on IGT's S+ game platform.



•

Aggregate consideration was $9,400 cash.

ACQUISITIONS

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

        In April 2001, we acquired the assets and certain liabilities of three separate Australian companies operating under the Gaming Products name as well as all the common stock of Gaming Product Pty Ltd, a fourth company that holds patents relating to the QuickDraw® line of continuous multi-deck shufflers that Gaming Products manufactured. The acquisition cost of $4,127 in cash was provided by internally generated cash flows.

        In addition to business acquisitions, we make strategic purchases of intellectual property. In August 2002, we purchased the Bloodhound product line and a patent related to automated table bet recognition.

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SHUFFLERS SEGMENT OPERATING RESULTS

Fiscal 2003 compared to Fiscal 2002

        The increase in shuffler lease revenue during fiscal 2003 reflects the greater number of units on lease and a consistent average lease price. Shuffler lease units increased by 347 during fiscal 2003, comprised of the net placement of 321 Deck Mate®, 247 King®, 206 ACE® and 231 multi-deck batch shufflers, offset by the conversion of 614 leased units to sold units ("conversion units") and the net removal of 44 other single-deck shufflers. Our shuffler lease installed base increased 10.7% during fiscal 2003, compared to 5.3% during fiscal 2002. The percentage increase in shuffler lease revenue during fiscal 2003 was less than the percentage increase in the lease installed base due to timing of lease installs or removals during the fiscal year.

        The increase in shuffler sales and service revenue for fiscal 2003 reflects a greater number of units sold and an increase in the average sales price per unit. During fiscal 2003, we sold 1,369 shuffler units (628 single-deck and 741 multi-deck) compared to the sale of 1,205 units (587 single-deck and 618 multi-deck) in fiscal 2002. The average sales price per unit was $9.770 in fiscal 2003 compared to $8.904 for fiscal 2002. Average sales price per unit increased in fiscal 2003 primarily because fiscal 2003 included a greater percentage of domestic units, which generally have a higher unit price than foreign sales. Fiscal 2003 sold units includes 614 conversion units, compared to 276 conversion units in fiscal 2002.

        The increase in Shufflers segment operating income is primarily due to the greater lease and sale volume in fiscal 2003 compared to fiscal 2002. To a lesser extent, operating income also increased because of an improvement in shuffler segment operating margin. The shuffler operating margin increase reflects the above-mentioned increase in domestic sales and lower depreciation expense for our leased products. Depreciation expense was lower in fiscal 2003 because more leased, or available for lease, products were fully depreciated than in fiscal 2002. The Shufflers segment operating income and margin increases were offset somewhat by an increase in our level of spending for research and development of our next-generation shufflers.

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Fiscal 2002 compared to Fiscal 2001

        The increase in shuffler lease revenue during fiscal 2002 was due to greater number of units under lease offset by lower average lease rates. The increase of 162 units under lease during fiscal 2002 includes the net placement of 233 ACE shufflers, 64 King shufflers, 153 multi-deck batch shufflers, and 15 Deck Mate shufflers, offset by the conversion of 276 leased units to sold units and the net removal of 27 other single deck shufflers.

        Shuffler unit sales for fiscal 2002 increased 155 units, or 14.8%, compared to the prior fiscal year, reflecting strong foreign sales activity. Because foreign sales transactions generally have lower unit prices, the average unit price per shuffler sold during fiscal 2002 declined. Sold units include the conversion of 276 and 378 leased units to sold units during fiscal 2002 and 2001, respectively.

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TABLE GAMES SEGMENT OPERATING RESULTS

Fiscal 2003 compared to Fiscal 2002

        The increase in table royalties for fiscal 2003 was primarily due to the net increase in placements of Three Card Poker tables. Additionally, fiscal 2003 includes a full year's benefit from our 50% increase in April 2002 in the list price for our Three Card Poker table game. Even though we increased the royalty rate, we were able to increase the number of Three Card Poker tables placed because of strong casino demand. The increase in royalty revenue from Three Card Poker was partially offset by declines in royalties from the Let It Ride family of table games. Let It Ride royalties have declined due to lower unit placements and the conversion of royalty units to units sold under lifetime licenses.

        Table sales for fiscal 2003 are primarily the sale of lifetime licenses for Let It Ride, which we began selling in fiscal 2003. Fiscal 2002 table sales are comprised primarily of foreign sales of side-bet systems and the sale of lifetime licenses for multi-tiered Let It Ride tournament games.

        The increase in Table Games segment operating income is primarily due to the greater monthly royalty and lifetime license sale volume in fiscal 2003 compared to fiscal 2002. Table Games operating income also increased because products sold in fiscal 2003, primarily the sale of lifetime licenses of Let It Ride, have higher margins than the side-bet systems sold in fiscal 2002. The increase in Table Games operating margin in fiscal 2003, also reflects this change in mix of sold products between fiscal 2003 and fiscal 2002. The Table Games segment operating income and margin increases were offset somewhat by an increase in our level of spending for research and development of our ITS products.

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Fiscal 2002 compared to Fiscal 2001