PART I

ITEM 1. FINANCIAL STATEMENTS

SHUFFLE MASTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited, in thousands, except per share amounts)

	Three Months Ended						Six Months Ended
	April 30,						April 30,
	2007			2006			2007			2006
Revenue:
Utility products leases	$	5,889		$	6,084		$	11,885		$	12,094
Utility products sales and service	16,211			17,531			28,000			33,406
Entertainment products leases and royalties	7,177			6,475			14,179			12,730
Entertainment products sales and service	15,310			13,177			27,830			18,345
Other	57			36			91			45
Total revenue	44,644			43,303			81,985			76,620
Costs and expenses:
Cost of leases and royalties	3,904			2,742			7,567			5,559
Cost of sales and service	14,065			11,712			24,570			18,816
Selling, general and administrative	14,308			13,363			28,878			23,360
Research and development	4,503			3,239			8,400			5,200
In-process research and development	—			19,145			—			19,145
Total costs and expenses	36,780			50,201			69,415			72,080
Income (loss) from operations	7,864			(6,898		)	12,570			4,540
Other income (expense)	(2,757		)	(2,337		)	(4,748		)	(2,827		)
Equity method investment loss	(120		)	(156		)	(261		)	(156		)
Income (loss) from continuing operations before tax	4,987			(9,391		)	7,561			1,557
Provision for income taxes	1,560			3,241			2,183			6,971
Income (loss) from continuing operations	3,427			(12,632		)	5,378			(5,414		)
Discontinued operations, net of tax	13			(88		)	87			47
Net income (loss)	$	3,440		$	(12,720	)	$	5,465		$	(5,367	)
Basic earnings (loss) per share:
Continuing operations	$	0.10		$	(0.37	)	$	0.16		$	(0.16	)
Discontinued operations	—			—			—			—
Net income (loss)	$	0.10		$	(0.37	)	$	0.16		$	(0.16	)
Diluted earnings (loss) per share:
Continuing operations	$	0.10		$	(0.37	)	$	0.15		$	(0.16	)
Discontinued operations	—			—			—			—
Net income (loss)	$	0.10		$	(0.37	)	$	0.15		$	(0.16	)
Weighted average shares outstanding:
Basic	34,696			34,555			34,663			34,522
Diluted	35,336			34,555			35,465			34,522

See notes to unaudited condensed consolidated financial statements

SHUFFLE MASTER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands)

	April 30,		October 31,
	2007		2006
ASSETS
Current assets:
Cash and cash equivalents	$	7,135		$	8,906
Investments	13			11
Accounts receivable, net of allowance for bad debts of $778 and $1,422	31,667			32,662
Investment in sales-type leases and notes receivable, net	9,806			10,064
Inventories	33,015			24,658
Prepaid income taxes	3,224			1,138
Deferred income taxes	7,487			6,785
Other current assets	5,679			5,172
Total current assets	98,026			89,396
Investment in sales-type leases and notes receivable, net	9,297			11,510
Products leased and held for lease, net	11,879			11,282
Property and equipment, net	10,488			9,779
Intangible assets, net	78,617			77,904
Goodwill	96,991			91,700
Deferred income taxes	5,202			4,294
Other assets	10,362			9,342
Total assets	$	320,862		$	305,207
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	9,574		$	11,217
Accrued liabilities	11,757			11,326
Customer deposits	2,379			2,017
Deferred revenue	7,954			5,499
Income taxes payable	1,239			938
Notes payable and current portion of long-term liabilities	3,911			77,294
Total current liabilities	36,814			108,291
Long-term liabilities, net of current portion	223,157			158,753
Deferred income taxes	6,533			5,614
Total liabilities	266,504			272,658
Commitments and contingencies (Note 12)
Shareholders’ equity:
Preferred stock, no par value; 507 shares authorized; none issued or outstanding	—			—
Common stock, $0.01 par value; 151,875 shares authorized; 35,219 and 34,895 shares issued and outstanding	352			349
Additional paid-in capital	4,989			717
Retained earnings	27,856			22,391
Accumulated other comprehensive income	21,161			9,092
Total shareholders’ equity	54,358			32,549
Total liabilities and shareholders’ equity	$	320,862		$	305,207

See notes to unaudited condensed consolidated financial statements

SHUFFLE MASTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six Months Ended
	April 30,
	2007			2006
Cash flows from operating activities:
Net income (loss)	$	5,465		$	(5,367	)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation	3,808			3,564
Amortization	5,357			4,044
Amortization of debt issuance costs	673			892
In-process research and development	—			19,145
Share-based compensation	2,729			2,546
Equity method investment loss	261			—
Provision for bad debts	61			39
Write-down for inventory obsolescence	596			181
Tax benefit from stock option exercises	290			116
Excess tax benefit from stock option exercises	(1,458		)	(2,371		)
Changes in operating assets and liabilities:
Accounts receivable	2,080			(2,751		)
Investment in sales-type leases and notes receivable	2,308			(181		)
Inventories	(7,442		)	(124		)
Accounts payable and accrued liabilities	(127		)	(3,738		)
Customer deposits	379			476
Deferred revenue	2,166			1,396
Prepaid income taxes	(2,046		)	(3,062		)
Income taxes payable, net of stock option exercises	1,759			(344		)
Deferred income taxes	(849		)	1,834
Other	(597		)	(3,857		)
Net cash provided by operating activities	15,413			12,438
Cash flows from investing activities:
Purchases of investments	—			(12,022		)
Proceeds from sale and maturities of investments	—			18,050
Proceeds from sale of leased assets	818			628
Payments for products leased and held for lease	(3,745		)	(3,884		)
Purchases of property and equipment	(1,582		)	(1,008		)
Purchases of intangible assets	(1,618		)	—
Acquisition of Stargames	(1,750		)	(114,337		)
Other	—			—
Net cash used by investing activities	(7,877		)	(112,573		)
Cash flows from financing activities:
Proceeds from acquisition financing	—			115,000
Payments on acquisition financing	(70,000		)	(15,000		)
Proceeds from senior secured revolving credit facility	72,680			—
Payments on senior secured revolving credity facility	(4,500		)	—
Proceeds from other borrowings	1,685			5,085
Payments on notes payable and financing liabilities	(9,380		)	(3,402		)
Repurchases of common stock	(1,933		)	—
Debt issuance costs	(1,722		)	(281		)
Proceeds from issuances of common stock, net	2,493			5,710
Excess tax benefit from stock option exercises	1,458			2,371
Net cash provided (used) by financing activities	(9,219		)	109,483
Effect of exchange rate changes on cash	(87		)	(480		)
Net increase (decrease) in cash and cash equivalents	(1,771		)	8,868
Cash and cash equivalents, beginning of period	8,906			13,279
Cash and cash equivalents, end of period	$	7,135		$	22,147
Cash paid for:
Income taxes, net of refunds	$	2,719		$	6,489
Interest	2,262			2,541

See notes to unaudited condensed consolidated financial statements

SHUFFLE MASTER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, in thousands, except unit and per share amounts)

1. DESCRIPTION OF BUSINESS AND INTERIM BASIS OF PRESENTATION

Description of business. Shuffle Master, Inc. (either “we”, “us” or the “Company”) develops, manufactures and markets 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. We view our business in two operating segments, the Utility Products segment and the Entertainment Products segment.

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™ (formerly known as Intelligent Table System™), currently in development with International Game Technology (“IGT”) and Progressive Gaming International Corporation (“PGIC”).

Our Entertainment Products include our portfolio of live proprietary poker, blackjack, baccarat, and pai gow poker-based table games and side bets as well as several electronic content delivery system platforms including Table Master™, Vegas Star®, Rapid Table Games™, wireless Casino On Demand™ and Shuffle Master Live!, a Malta-based internet gaming site offering our proprietary content and selected public domain content.

We sell, lease or license our products. 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. When we lease or license our products, we generally negotiate month-to-month operating leases. 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 products in the United States, Europe and Asia Pacific.

Basis of presentation. The unaudited condensed consolidated financial statements as of April 30, 2007, and for the three and six months period ended April 30, 2007, have been prepared by us under the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of management, the financial information for the three and six months ended April 30, 2007, reflects all adjustments and accruals, which are of a normal recurring nature, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods.

The financial information as of October 31, 2006, is derived from our audited consolidated financial statements and notes for the fiscal year ended October 31, 2006, included in Item 8 in our Annual Report on Form 10-K/A Amendment No. 2 (“10-K/A”). The information included in this Form 10-Q should be read in conjunction with management’s discussion and analysis and notes to the financial statements in the 10-K/A.

The results of operations for the six months ended April 30, 2007, are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending October 31, 2007.

Investments in Unconsolidated Affiliate. Our investment in and the operating results of our 50%-or-less-owned entity that is not required to be consolidated is included in the condensed financial statements on the basis of the equity method of accounting.

We review our investments in unconsolidated affiliates for other than temporary impairment whenever events or changes in business circumstances indicate that the carrying amount of the investments may not be fully recoverable. Evidence of an impairment loss that is other than temporary might include, but would not necessarily be limited to, a decline in the market price of an investee’s common stock that is long in duration and severe in nature, the absence of an ability to recover the carrying amount of the investment, or the inability of the investee to sustain an earnings capacity which would justify the carrying amount of the investment. There were no such impairment losses recorded during the three and six months ended April 30, 2007 and 2006.

Deferred revenue. Deferred revenue consists of amounts collected or billed in excess of recognizable revenue.

Recently Issued Accounting Standards. In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 expands the use of fair value measurement by permitting entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. This statement is effective for us beginning in November 2008. We have not yet determined the impact, if any, that SFAS 159 will have on our Consolidated Financial Statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. This statement is effective for us beginning in November 2008. We are evaluating the impact of adopting this statement as a result of any changes to our fair value measurements.

In June 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 prescribes the recognition threshold and measurement criteria for determining the tax benefit amounts to recognize in the financial statements. This interpretation is effective for us beginning in November 2007. We are evaluating the potential impact of adopting this interpretation on our future results of operations, financial position or cash flows.

In September 2006, the SEC issued SAB 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 requires analysis of misstatements using both an income statement (rollover) approach and a balance sheet (iron curtain) approach in assessing materiality and provides for a one-time cumulative effect transition adjustment. SAB 108 is effective for our fiscal year 2007. The adoption of this statement did not have a material impact on our results of operations, financial position or cash flows.

2. ACQUISITIONS, DISPOSITIONS AND OTHER SIGNIFICANT TRANSACTIONS

Stargames. On February 1, 2006, we announced that our wholly owned indirect subsidiary, Shuffle Master Australasia Pty. Ltd., had substantially completed its acquisition of Stargames by purchasing 95% of the outstanding Stargames shares. Effective March 8, 2006, we had acquired 100% of the outstanding Stargames shares for AU $1.55 per share.

Consideration to Stargames consisted of an Australian-denominated cash payment of AU $148,441 or US $112,147. In addition, we incurred total direct acquisition costs, consisting primarily of legal and due diligence fees, of approximately US $4,228. The following table sets forth the determination of the consideration paid for Stargames at the date of acquisition:

Cash	$	112,147
Other direct acquisition costs	4,228
Total purchase price	$	116,375

The transaction was accounted for as a purchase and, accordingly, the purchase price was allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of the acquisition. The following table sets forth the final allocation of the purchase price:

Accounts receivable, net of $1,907 allowance for bad debts	$	10,733
Inventory	11,338
Other current assets (including cash of $98)	4,240
Other long-term assets	8,052
Assumed liabilities	(18,566		)
Deferred tax liabilities	(5,872		)
Developed technology, average life of 4 years	8,338
Customer relationships, average life of 10 years	10,015
Tradename	17,291
Goodwill	52,315
In-process research and development	19,145
PVS disposal liability	(654		)
	$	116,375

The acquisition of Stargames enhances the products in our Entertainment Products segment as well as providing for additional electronic platforms for our branded content. Additionally, we acquired a strong brand name as well as an experienced and talented management team. These factors result in the recognition of certain intangible assets, discussed below, and significant goodwill. Developed technology is being amortized on a straight-line basis over its useful life and is charged to cost of sales and service, a component of gross margin. Customer relationships are being amortized on a straight-line basis over their useful life and are reflected in selling, general and administrative expenses in the condensed consolidated statements of income.

A project-by-project valuation using the guidance in SFAS No. 141, “Business Combinations” and the American Institute of Certified Public Accountants (“AICPA”) Practice Aid “Assets Acquired in a Business Combination to Be Used In Research and Development Activities: A Focus on Software, Electronic Devices and Pharmaceutical Industries” has been performed to determine the fair value of research and development projects of Stargames.

In-process research and development (“IPR&D”) is defined as a development project that has been initiated and achieved material progress but has not yet resulted in a technologically feasible product and has no alternative future use. The fair value is determined using the multi-period excess earnings approach on a project-by-project basis. This method is based on the present value of earnings attributable to the asset or costs avoided as a result of owning the assets and after a contributory charge on assets. This method includes risk factors, which include applying an appropriate discount rate that reflects the project’s stage of completion, the nature of the product, the scientific data associated with the technology, the current patent situation and market competition.

The forecast of future cash flows required the following assumptions to be made:

· Revenue that is likely to result from specific IPR&D projects, including the likelihood of approval of the product, estimated number of units to be sold, estimated selling prices, estimated market penetration and estimated market share and year-over-year rates over the product life cycles;

· Cost of sales related to the potential products using historical data, industry data or other sources of market data;

· Sales and marketing expense using historical data, industry data or other market data;

· General and administrative expenses; and

· Research and development expenses.

As required by FIN 4, “Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method,” the portion of the purchase price allocated to IPR&D of $19,145 was immediately expensed in the quarter ended April 30, 2006.

As a part of the Stargames acquisition, we acquired Professional Vending Services Pty Ltd (“PVS”), a wholly-owned subsidiary of Stargames. PVS designs, develops and manufactures automatic vending machines. PVS offers exclusive equipment in all main vending segments including snacks, cold drinks, food (hot and cold), coffee and cigarettes. We have determined that the operations of PVS are non-core to our Entertainment Products and Utility Products segments. Accordingly, we entered into an agreement to sell Stargames’ equity interests in PVS including settlement of all existing liabilities of PVS. The estimated liabilities exceeded assets in the amount of approximately $654. The results of operations for PVS were included in Discontinued Operations until the disposition was completed in September 2006.

3. CURRENT AND LONG-TERM ASSETS

	April 30, 2007			October 31, 2006
Accounts receivable, net:
Trade receivables	$	32,445			$	34,084
Less: allowance for bad debts	(778		)		(1,422		)
Total accounts receivable, net	$	31,667			$	32,662

	April 30, 2007			October 31, 2006
Investment in sales-type leases and notes receivable, net:
Minimum sales-type lease payments	$	13,970			$	15,314
Notes receivable-table game licenses	9,921				11,395
Sub-total sales-type leases and notes receivable	23,891				26,709
Less: interest on sales-type leases and notes receivable	(1,474		)		(1,615		)
Less: deferred service revenue	(2,588		)		(2,839		)
Less: allowance for bad debts	(726		)		(681		)
Investment in sales-type leases and notes receivable, net	19,103				21,574
Less: current portion sales-type leases, net	(5,119		)		(4,512		)
Less: current portion notes receivable-table games licenses, net	(4,687		)		(5,552		)
Long-term portion investment in sales-type leases and notes receivable, net	$	9,297			$	11,510

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

Sales-type leases and other notes receivables related to our financing for sales of our intellectual property products are interest-bearing at market interest rates, require monthly installment payments over periods ranging generally from 30 to 60 months and contain bargain purchase options. Future minimum lease payments (principal only) to be received for both sales-type leases and notes receivable are as follows:

	April 30, 2007		October 31, 2006
Inventories:
Raw materials and component parts	$	15,169		$	9,585
Work-in-process	3,473			3,051
Finished goods	14,373			12,022
	$	33,015		$	24,658

	April 30, 2007			October 31, 2006
Products leased and held for lease, net:
Utility products	$	21,927			$	21,500
Entertainment products	7,900				5,482
	29,827				26,982
Less: accumulated depreciation	(17,948		)		(15,700		)
	$	11,879			$	11,282

	April 30, 2007		October 31, 2006
Other long-term assets:
Debt issuance costs, net	$	3,488		$	2,369
Deposits	3,642			3,507
Equity method investment	1,669			1,931
Other	1,563			1,535
	$	10,362		$	9,342

Total debt issuance costs incurred with the issuance of long-term debt are capitalized and amortized as interest expense using the effective interest method. Amortization of debt issuance costs were $325 and $634 for the three months ended April 30, 2007 and 2006, respectively, and $673 and $892 for the six months ended April 30, 2007 and 2006, respectively. Capitalized debt issuance costs related to the senior secured revolving credit facility obtained in November 2006 were $1,742.

Deposits are primarily comprised of a $3,000 security deposit related to our patent infringement lawsuit against VendingData Corporation and deposits associated with equipment purchases. See Note 12 for more information related to the VendingData litigation.

4. INTANGIBLE ASSETS AND GOODWILL

Amortizable intangible assets. All of our recorded intangible assets, excluding goodwill and the Stargames and CARD trademarks, are subject to amortization. Amortization expense was $2,693 and $2,405 for the three months ended April 30, 2007 and 2006, respectively, and $5,357 and $4,044 for the six months ended April 30, 2007 and 2006, respectively.

Amortizable intangible assets are comprised of the following as of April 30, 2007:

	Weighted Avg Useful Life		April 30, 2007			October 31, 2006
Amortizable intangible assets:
Patents, games and products		10 years	$	57,486			$	53,452
Less: accumulated amortization			(19,324		)		(15,159		)
			38,162				38,293
Customer relationships		10 years	10,909				10,221
Less: accumulated amortization			(1,356		)		(767		)
			9,553				9,454
Licenses and other		6 years	6,565				6,313
Less: accumulated amortization			(1,865		)		(1,661		)
			4,700				4,652
Developed technology		4 years	9,115				8,510
Less: accumulated amortization			(2,822		)		(1,596		)
			6,293				6,914
Total			$	58,708			$	59,313

Trademark. Intangibles with an indefinite life, consisting of the Stargames and CARD, trademarks are not amortized and were $19,909 and $18,591 as of April 30, 2007 and October 31, 2006, respectively.

Goodwill. Changes in the carrying amount of goodwill for the six months ended April 30, 2007, are as follows:

Balance at October 31, 2006	$	91,700
Foreign currency translation adjustment	6,366
Final adjustments to purchase price allocation	(1,075		)
Balance at April 30, 2007	$	96,991

All of our goodwill originated from the acquisitions of foreign subsidiaries. For foreign income tax purposes, goodwill is amortized using the straight-line method and deducted over its statutory fifteen year life. Goodwill has been assigned to our Utility and Entertainment Products reporting units, as defined under SFAS 142.

5. NOTES PAYABLE AND OTHER LONG-TERM LIABILITIES

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

	April 30, 2007			October 31, 2006
Contingent convertible senior notes, fixed rate interest at 1.25%, due 2024	$	150,000			$	150,000
Senior secured revolving credit facility	68,180				—
Bridge loan	—				70,000
Stargames credit facility	—				3,872
BTI acquisition contingent consideration	3,420				4,441
ENPAT note payable, non-interest bearing, due in installments through 2007	2,910				5,823
Bet the Set “21” contingent consideration	505				526
VIP note payable	—				329
Other	2,053				1,056
	227,068				236,047
Less: current portion	(3,911		)		(77,294		)
	$	223,157			$	158,753

Contingent convertible senior notes. In April 2004, we issued $150,000 of contingent convertible senior notes due 2024 (the “Notes”) through a private placement under Rule 144A of the Securities Act of 1933. The Notes are unsecured and bear interest at a fixed rate of 1.25% per annum. Interest is payable semi-annually in arrears on April 15 and October 15 of each year, beginning October 15, 2004.

Holders may convert any outstanding Notes into cash and shares of our common stock at an initial conversion price per share of $28.07. This represents a conversion rate of approximately 35.6210 shares of common stock per $1,000 in principal amount of Notes. The value of the cash and shares of our common stock, if any, to be received by a holder converting $1,000 principal amount of the Notes will be determined based on the applicable Conversion Rate, Conversion Value, Principal Return, and other factors, each as defined in the indenture covering these Notes.

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

· during any fiscal quarter commencing after the date of original issuance of the Notes, if the closing sale price of our common stock over 20 trading days, during the previous quarter, is more than 120% of the conversion price of the Notes on the last trading day of the previous quarter;

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

· during the five trading day period immediately after any five consecutive trading day period in which the trading price of the Notes per $1,000 principal amount for each day of such period was less than 95% of the product of the closing sale price of our common stock on such day multiplied by the number of shares of our common stock issuable upon conversion of $1,000 in principal amount of the Notes, provided that, if on the date of any conversion pursuant to this trading price condition, our common stock price on such date is greater than the conversion price but less than 120% of the conversion price, then the holder will be entitled to receive Conversion Value (as defined in the indenture covering these Notes) equal to the principal amount of the Notes, plus accrued and unpaid interest including liquidated damages, if any; or

· upon the occurrence of specified corporate transactions.

100% of the principal amount of the Notes, plus accrued and unpaid interest and including liquidated damages, if any, up to but not including the date of repurchase, payable in cash. Upon a change in control, as defined in the indenture governing the Notes, holders may require us to repurchase all or a portion of their Notes, payable in cash equal to 100% of the principal amount of the Notes plus accrued and unpaid interest and liquidated damages, if any, up to but not including the date of repurchase.

$100,000 Senior Secured Revolving Credit Facility. On November 30, 2006, we entered into a $100,000 senior secured revolving credit facility (the “New Credit Agreement”) with Deutsche Bank AG Cayman Islands Branch, as a Lender, Deutsche Bank Trust Company Americas, as Administrative Agent, Deutsche Bank Securities Inc. and Wells Fargo, N.A., as Joint Lead Arrangers and Book Managers and Wells Fargo, N.A. as Syndication Agent. We drew $71,180 on the facility, which was used to repay in its entirety the bridge loan originally entered into on January 25, 2006 (the “Old Credit Agreement”). Any remaining amount available under the revolving credit facility will be used for working capital, capital expenditures and general corporate purposes, including share repurchases. The revolving credit facility under the New Credit Agreement will mature on November 30, 2011.

The interest rate under the New Credit Agreement is based on the sum of the relevant Base Rate or Eurodollar Rate plus the Applicable Margin, as defined, each as in effect from time to time. The obligations under the revolving credit facility are guaranteed by each wholly-owned domestic subsidiary of ours that is not an immaterial subsidiary and each wholly-owned domestic subsidiary that is not an immaterial subsidiary of the Company established, created or acquired after November 30, 2006, if any. The New Credit Agreement contains customary affirmative and negative covenants for transactions of this nature, including but not limited to restrictions and limitations on the following:

· Permitted acquisitions;

· Incurrence of indebtedness;

· Granting or incurrence of liens;

· Pay dividends and make other distributions in respect of our equity securities;

· Acquire assets and make investments;

· Sales of assets;

· Transactions with affiliates;

· Mergers;

· Total Leverage Ratio

· Interest Expense Coverage ratio; and

· Agreements to restrict dividends and other payments from subsidiaries.

As of April 30, 2007 and October 31, 2006, $68,180 and $0, respectively, remained outstanding under the New Credit Agreement. At April 30, 2007, we had approximately $31,820 of available borrowings under the senior secured credit facility. As of April 30, 2007, we were in compliance with all financial covenants.

Stargames credit facility. Stargames has banking facilities with the Australia and New Zealand Banking Group (“ANZ”). The facilities have a borrowing capacity of AU $12,700; amounts outstanding as of April 30, 2007 and October 31, 2006, were $0 and $3,872, respectively. Interest rates are based on the bank bill swap yield, as defined, plus a margin.

The facilities are secured by a cross guarantee and indemnity between all the operating entities of the Stargames group. The agreements provide for collateralization of all the assets and operations of all members of the Stargames group as well as the operating facilities of Stargames based in Milperra, New South Wales, Australia.

computed as the excess fair value of the acquired assets over the fixed installments and other direct costs. Beginning November 2004, we pay monthly note installments based on a percentage of certain revenue from BTI games for a period of up to ten years, not to exceed $12,000. The balance of this liability as of April 30, 2007 and October 31, 2006, was $3,420 and $4,441, respectively.

ENPAT note payable. In December 2004, we purchased two RFID technology patents from ENPAT for $12,500. The purchase price was comprised of an initial payment of $2,400 followed by a $1,100 payment in January 2005 and non-interest bearing annual installments through December 2007. The balance as of April 30, 2007 and October 31, 2006, of $2,910 and $5,823, respectively, represents the discounted present value of the future payments, including imputed interest of approximately $70 and $265, respectively. The remaining principal and interest payment of $3,000 is due in December 2007.

Bet the Set “21” contingent consideration. In connection with our acquisition of Bet the Set “21” in June 2005, we recorded contingent consideration of $560. The contingent consideration consists of quarterly payments of 22.5% of “adjusted gross revenues,” as defined, attributed to the Bet the Set “21” side bet table games up to a maximum of $560. The balance of this liability as of April 30, 2007 and October 31, 2006, was $505 and $526, respectively.

6. SHAREHOLDERS’ EQUITY

Common stock repurchases. Our board of directors periodically authorizes us to repurchase shares of our common stock. Under our existing board authorizations which totaled $28,233, during the three months ended April 30, 2007 and 2006, respectively, no shares of our common stock were repurchased. During the six months ended April 30, 2007, we repurchased 75 shares of our common stock for a total of $1,933 at an average price of $25.77, as compared to zero shares in the same prior year period. As of April 30, 2007, $28,233 remained outstanding under our board authorizations. We cancel shares that we repurchase.

Tax benefit from stock option exercises. During the six months ended April 30, 2007 and 2006, we realized income tax benefits of $1,748 and $2,487, respectively, related to deductions for employee stock option exercises. These tax benefits, which reduced income taxes payable and additional paid-in capital by an equal amount, had no affect on our provision for income taxes.

Accumulated other comprehensive income. The balance of accumulated other comprehensive income consists of foreign currency translation adjustments and unrealized losses on investments. The following table provides information related to comprehensive income for the for the three and six months ended April 30, 2007 and 2006:

	Three Months Ended April 30,					Six Months Ended April 30,
	2007		2006			2007		2006
Net income	$	3,440	$	(12,720	)	$	5,465	$	(5,367	)
Currency translation adjustments	10,781		2,951			12,069		4,495
Unrealized loss on investments	—		21			—		126
Total comprehensive income (loss)	$	14,221	$	(9,748	)	$	17,534	$	(746	)

7. SHARE-BASED COMPENSATION

Share-based award plans. In February 2004, our board of directors adopted and, in March 2004, our shareholders approved the Shuffle Master, Inc. 2004 Equity Incentive Plan (the “2004 Plan”) and the Shuffle Master, Inc. 2004 Equity Incentive Plan for Non-Employee Directors (the “2004 Directors’ Plan”). These approved plans replaced our prior plans and no further options may be granted from the prior plans. Both the 2004 Plan and the 2004 Directors’ Plan provide for the grant of stock options, stock appreciation rights (none issued), and restricted stock, individually or in any combination (collectively referred to as “Awards”). On January 18, 2007, we amended our 2004 Equity Incentive Plan (the “2004 Plan”) to authorize the grant of restricted stock units. The 2004 Plan now provides for the grant of stock options,

stock appreciation rights, restricted stock units and restricted stock as the basis of our long-term incentive program for executive officers and other key employees. Section 12.1 of the 2004 Plan allows the board of directors to amend the 2004 Plan in certain respects at any time or from time to time. Stock options may not be granted at an exercise price less than the market value of our common stock on the date of grant and may not be subsequently repriced. Options granted under the 2004 Plan generally vest in equal increments over four years and expire in ten years. Options granted under the 2004 Directors’ Plan generally vest immediately and expire in ten years.

The 2004 Plan provides for the grants of Awards to our officers, other employees and contractors. The maximum number of Awards which may be granted is 2,700 of which no more than 1,890 may be granted as restricted stock. The 2004 Directors’ Plan provides for the grants of Awards to our non-employee directors. The maximum number of Awards which may be granted is 1,125 of which no more than 788 may be granted as restricted stock.

Recognition of compensation expense. The following table shows information about compensation costs recognized:

	Three Months Ended April 30,						Six Months Ended April 30,
	2007			2006			2007			2006
Compensation costs:
Stock options	$	526		$	816		$	1,140		$	1,811
Restricted stock	762			419			1,589			735
Total compensation cost	1,288			1,235			2,729			2,546
Less: Related tax benefit	(368		)	(362		)	(793		)	(745		)
Total compensation expense, net of tax benefit	$	920		$	873		$	1,936		$	1,801

Reported share-based compensation expense was classified as follows:

	Three Months Ended April 30,						Six Months Ended April 30,
	2007			2006			2007			2006
Gross margin	$	16		$	16		$	21		$	46
Selling, general and administrative	1,185			1,145			2,557			2,348
Research and development	87			74			151			152
Total share-based compensation	$	1,288		$	1,235		$	2,729		$	2,546
Tax benefit	(368		)	(362		)	(793		)	(745		)
Total share-based compensation, net of tax	$	920		$	873		$	1,936		$	1,801
SFAS 123R Expense as a % of Revenue:
Gross margin	0.0		%	0.0		%	0.0		%	0.1		%
Selling, general and administrative expenses as a% of revenue	2.7		%	2.6		%	3.1		%	3.1		%
Research and development expenses as a% of revenue	0.2		%	0.2		%	0.2		%	0.2		%

8. INCOME TAXES

9. EARNINGS PER SHARE

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

	Three Months Ended April 30,					Six Months Ended April 30,
	2007		2006			2007		2006
Income (loss) from continuing operations	$	3,427	$	(12,632	)	$	5,378	$	(5,414	)
Basic:
Weighted average shares	34,696		34,555			34,663		34,522
Diluted:
Weighted average shares, basic	34,696		34,555			34,663		34,522
Dilutive effect of options and restricted stock	640		—			797		—
Dilutive effect of contingent convertible notes	—		—			5		—
Weighted average shares, diluted	35,336		34,555			35,465		34,522
Basic earnings (loss) per share	$	0.10	$	(0.37	)	$	0.16	$	(0.16	)
Diluted earnings (loss) per share	$	0.10	$	(0.37	)	$	0.15	$	(0.16	)

We account for our contingent convertible notes in accordance with FASB Emerging Issues Task Force Issue No. 04-8 (“EITF 04-8”), “The Effect of Contingently Convertible Debt on Diluted Earnings Per Share” which requires us to include the dilutive effect of our outstanding Notes shares in our diluted earnings per share calculation, regardless of whether the market price trigger or other contingent conversion feature has been met. Because our Notes include a mandatory cash settlement feature for the principal payment, we apply the treasury stock method. This method results in incremental dilutive shares when the average fair value of our common stock for a reporting period exceeds the initial conversion price per share of $28.07. During the six months ended April 30, 2007, the average fair value of our common stock did exceed $28.07, and accordingly, the dilutive effect is included in our diluted shares calculation.

10. OTHER INCOME (EXPENSE)

Other income (expense) is comprised of the following:

	Three Months Ended April 30,						Six Months Ended April 30,
	2007			2006			2007			2006
Interest income	$	392		$	561		$	784		$	1,070
Interest expense	(1,831		)	(2,287		)	(3,722		)	(2,950		)
Amortization of debt issue costs	(325		)	(634		)	(673		)	(892		)
Foreign currency (loss) gain	(990		)	22			(1,130		)	(103		)
Other	(3		)	1			(7		)	48
Total Other expense	$	(2,757	)	$	(2,337	)	$	(4,748	)	$	(2,827	)

Interest income is primarily related to our interest bearing sales-type leases and notes receivable for the three and six months ended April 30, 2007. During the three and six months ended April 30, 2006, interest income also included interest from our investment portfolio which has since matured.

Interest expense for the six months ended April 30, 2007, is primarily related to the $150,000 of Notes due in April 2024 and the New Credit Agreement. Interest expense for the six months ended April 30, 2006 was primarily related to the $150,000 of Notes due in April 2024 and the Old Credit Agreement.

The foreign currency loss for the three and six months ended April 30, 2007 is primarily caused by the weakening of the US dollar versus the Australian dollar and the Euro. Our foreign subsidiaries engage in activities with us and certain customers in US dollar denominated contracts. Additionally, we have initiated the settling of certain inter-company balances, which has resulted in the recognition of additional

foreign currency fluctuations pursuant to SFAS No. 52, “Foreign Currency Translation” for the three months ended April 30, 2007.

11. OPERATING SEGMENTS

We have two reportable segments which are classified as continuing operations, Utility Products and Entertainment Products. Utility Products include our Shufflers, Chip Sorting Machines and ITS product lines. Entertainment Products include our Proprietary Table Games, Table Master products, Shuffle Up Productions and the products developed, manufactured and distributed by Stargames. The Stargames product offerings include Rapid Table Games and Vegas Star multi-terminal gaming machines and a broad line of traditional video slot machines designed more specifically for the Australian and Asian gaming markets. 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. Segment operating income includes revenues and expenses directly and indirectly associated with the product lines included in each segment. Direct expenses primarily include depreciation of leased assets, amortization of intangible assets, cost of products sold, shipping, installation, commissions, product approval costs, research and development and product related litigation. Indirect expenses include an activity-based allocation of other general product-related costs, the most significant of which are service and selling expenses, including stock option expense, and manufacturing overhead. Corporate general and administrative expenses are not allocated to segments. Capital expenditures include amounts reported in our condensed consolidated statements of cash flows for purchases of leased products, property and equipment, and intangible assets plus the financed portion of these purchases which is excluded from cash flows.

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

	Three Months Ended April 30,						Six Months Ended April 30,
	2007			2006			2007			2006
Revenue:
Utility Products	$	22,100		$	23,615		$	39,885		$	45,500
Entertainment Products	22,487			19,652			42,009			31,075
Corporate	57			36			91			45
	$	44,644		$	43,303		$	81,985		$	76,620
Operating Income (Loss):
Utility Products	$	10,602		$	12,756		$	18,847		$	23,471
Entertainment Products	8,298			(9,489		)	14,930			(1,501		)
Corporate	(11,036		)	(10,165		)	(21,207		)	(17,430		)
	$	7,864		$	(6,898	)	$	12,570		$	4,540
Depreciation and Amortization:
Utility Products	$	2,157		$	2,179		$	4,764		$	4,274
Entertainment Products	1,707			1,659			2,832			2,425
Corporate	729			441			1,569			909
	$	4,593		$	4,279		$	9,165		$	7,608
Capital Expenditures:
Utility Products	$	2,112		$	1,428		$	2,836		$	2,983
Entertainment Products	527			469			2,946			980
Corporate	927			705			1,163			929
	$	3,566		$	2,602		$	6,945		$	4,892

12. COMMITMENTS AND CONTINGENCIES

Purchase commitments. From time to time, we enter into commitments with our vendors to purchase inventory at fixed prices or in guaranteed quantities. As of April 30, 2007, our significant inventory purchase commitments totaled $13,688 which are primarily related to our one2six shufflers, Table Master, Vegas Star, Rapid Table Games and the Easy Chipper roulette chip sorter machine.

Employment agreements. We have entered into employment contracts with our corporate officers and certain other key employees with durations ranging typically from one to three years. Significant contract provisions include minimum annual base salaries, healthcare benefits, bonus compensation if performance measures are achieved, and non-compete provisions. These contracts are primarily “at will” employment agreements, under which the employee or we may terminate employment. If we terminate any of these employees without cause, we are obligated to pay the employee severance benefits as specified in their individual contract. As of April 30, 2007, minimum aggregate severance benefits totaled $5,179 for employment agreements expiring through 2009.

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

Continuing operations—

VendingData II—In October 2004, we filed a second patent infringement lawsuit (“VendingData II”) against VendingData Corporation (“VendingData”). We settled our first patent infringement lawsuit against VendingData on July 12, 2005 (“VendingData I”). This second suit alleges that the use, importation and offering for sale of VendingData’s PokerOne™ shuffler infringes another patent owned by us (a different patent than the patents that were the subject of the VendingData I case). VendingData II was filed in the U.S. District Court for the District of Nevada (the “Court”) in Las Vegas, Nevada. The complaint seeks an unspecified amount of damages against VendingData and a preliminary and permanent injunction against VendingData’s infringing conduct. VendingData has denied infringement and has also filed a counterclaim for a declaratory judgment of non-infringement.

On November 29, 2004, the Court granted our motion for a preliminary injunction (the “Injunction”). The Injunction became effective upon our posting of a $3,000 cash security with the Court on November 30, 2004. This security deposit is included in other assets on our condensed consolidated balance sheet. On December 17, 2004, the Court denied VendingData’s two emergency motions to modify the Injunction.

In March 2005, the Court of Appeals for the Federal Circuit (the “Federal Circuit”) stayed the Injunction based on a technical defect in the Court’s process in granting the Injunction, and not on its merits. On December 27, 2005, the Federal Circuit vacated the Injunction and ordered the Court to perform a more complete claim construction analysis in order to deal with any future motions on whether or not to reinstate the Injunction. Two of the three judges on the Federal Circuit panel stated that under VendingData’s claim construction the PokerOne likely did not literally infringe. We continue to believe that infringement exists under either our claim construction or VendingData’s claim construction. The Federal Circuit did not rule on which claim construction is the proper one.

In May 2005, the Court held a Markman hearing for construction of the claims. On September 26, 2005, U.S. Magistrate Judge Lawrence R. Leavitt for the District of Nevada issued his Claim Construction Report and Recommendation in the Markman hearing concerning VendingData’s PokerOne™ shuffler. The Magistrate Judge’s findings were limited to his interpretation of certain words in the patent claim asserted by us, and he agreed with the interpretation put forth by VendingData. On February 26, 2007, the Court adopted and accepted without modification the Magistrate Judge’s Recommendation. The Magistrate Judge’s Recommendation, as adopted by the Court, is not a determination of whether the PokerOne™ infringes the asserted patent, nor does it speak to the validity of our claims. There can be no guarantee that, upon any further appeal of the Court’s adoption of the Magistrate Judge’s Recommendation, the Federal Circuit will agree with our claim construction.

On April 27, 2007, VendingData filed a motion for summary judgment that the PokerOne™ does not infringe. See updated discussion in FN 13.

GEI—In July 2004, we filed a patent infringement lawsuit against Gaming Entertainment, Inc. (“GEI”) in the U.S. District Court for the District of Nevada, in Las Vegas, Nevada. The lawsuit alleges that GEI’s 3-5-7 Poker™ game infringes one of our Three Card Poker® patents and one of our Let-It-Ride® patents. We are seeking a permanent injunction and an as yet undetermined amount of damages against GEI. GEI has answered our complaint, denying infringement, and also seeking a ruling that the patents are invalid. Fact and expert discovery is complete. In November 2005, the Court held a Markman hearing for construction of the claims. The Markman decision is now pending. In March 2006, GEI filed and, we opposed, several summary judgment motions challenging the validity of the Three Card Poker patent involved in this litigation. GEI filed its reply briefs in April 2006, and the summary judgment motions are pending. The case is stayed pending resolution of the summary judgment motions.

Awada—On April 25 and April 26, 2005, our rescission trial was held in the District Court in Clark County, Nevada in the Awada and Gaming Entertainment, Inc. case against us and our CEO, Mark Yoseloff. At the conclusion of the trial, the court granted our rescission motion, ordering that the subject contract, called the “Game Option Agreement”, be rescinded and/or void. On May 18, 2005, the Court entered Findings of Fact/Conclusions of Law confirming the Court’s rescission ruling. Among the findings, the Court found that the actions of plaintiffs Yehia Awada and Gaming Entertainment, Inc. demonstrated that the plaintiffs never had any intention of conveying to us the exclusive license to the 3-Way Action game, as they had agreed and were required to do under the Game Option Agreement. The Court further found that we had established by a preponderance of the evidence that the plaintiffs had materially failed to perform their obligations under the Game Option Agreement and that we were entitled to the remedy of rescission. On May 5, 2005, the Court ruled on the parties’ damages requests in connection with the case and as required under Nevada law. Plaintiffs were seeking approximately $13,000 in damages. The Court ordered that the total damages under Nevada law due to the successful rescission of the Game Option Agreement was $130, including all interest. The damages amount was paid in June 2006. See updated discussion in FN 13.

Awada II—On September 12, 2005, we filed a new lawsuit against defendants Awada and Gaming Entertainment, Inc. The lawsuit alleges that our Four Card Poker® game is being infringed and illegally copied by the defendants’ Play Four Poker game. The lawsuit claims that the defendants are violating the federal Lanham Act by infringing the trademark/trade dress of our Four Card Poker® game layout, and that the defendants are committing acts of unfair competition, interference with prospective business advantage and conversion. Our action seeks appropriate injunctive relief against defendants’ Play Four Poker game layout, as well as unspecified monetary damages. On

September 15, 2005, the U.S. District Court for the District of Nevada issued a temporary restraining order prohibiting the defendants from displaying or advertising the infringing layout.

On or about December 6, 2005, the defendants answered our complaint and denied all liability. They also filed counterclaims for alleged patent misuse, anti-trust violations based on said patent misuse, patent invalidity, unfair competition, unfair trade practices, and other related claims. The counterclaims seek an unspecified amount of damages, disgorgement of our profits as a result of our alleged unfair trade practices, and preliminary and permanent injunctive relief against our alleged unfair trade practices. The defendants filed these counterclaims against both us and our CEO. We completely and uncategorically deny the defendants’ counterclaims, and intend to vigorously oppose them. On January 9, 2006, we filed a motion to dismiss all of defendants’ counterclaims. On January 24, 2006, the defendants filed an opposition to our motion to dismiss. On March 27, 2006, the Court granted our motion for a preliminary injunction and dismissed four of defendants’ seven counterclaims. On April 19, 2007, the Court granted our summary judgment motions on trade dress infringement and defendants’ counterclaims, and all of those counterclaims were dismissed with prejudice. All other claims were dismissed with prejudice, except our trademark infringement claim was dismissed without prejudice. A permanent injunction was also entered. See updated discussion in FN 13.

MP Games I—In July 2004, we filed a complaint against MP Games LLC and certain other defendants in the U.S. District Court for the District of Nevada, in Las Vegas, Nevada. The complaint alleges that the defendants’ MP21 System infringes two patents owned by us. The complaint also alleges misappropriation of trade secrets against certain, but not all, of the defendants, and also includes claims for correction of named inventor on certain related patents held in the name of certain of the defendants. We are seeking a permanent injunction and damages against all of the defendants. The defendants have answered our complaint denying infringement and also claiming that the two patents are invalid. The defendants have also counterclaimed against us, claiming that we infringe several of their patents, and that we misappropriated certain of their trade secrets, and are seeking damages against us. We deny any infringement, misappropriation or wrongdoing. In May 2005, the Court dismissed defendants’ breach of contract counterclaim.

In a Two-Party Agreement transaction with IGT, IGT purchased a 50% ownership interest in the two patents which are the subject of this lawsuit, and IGT has been added as a named plaintiff in this lawsuit.

On December 20, 2005, the Court entered its Markman order, construing the disputed claims in the various patents-in-suit. The Court ruled in our favor on a number of disputed terms and in the defendants’ favor on others. Some or all of these rulings may be overturned on appeal.

In August 2006, the Court dismissed all but one of the defendants’ trade secret misappropriation claims. Subsequently, pursuant to a partial settlement agreement, the parties dismissed all of their trade secret claims.

Recently, the defendants filed seven summary judgment motions dealing with various non-infringement and invalidity arguments. We also filed a summary judgment motion seeking to invalidate two of the four patents asserted by the defendants. These motions have been set for a hearing on July 5, 2007.

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

13. SUBSEQUENT EVENTS

Class Action Lawsuit. On June 1, 2007, a putative class action complaint for violation of the federal securities laws against us and our CEO and CFO was filed in the United States District Court for the District of Nevada on behalf of persons who purchased our stock between December 22, 2006, and March 12, 2007. The case is entitled Joseph Stocke vs. Shuffle Master, Inc., Mark L. Yoseloff and Richard L. Baldwin. We, as well as, Dr. Yoseloff and Mr. Baldwin, were served with the complaint on June 6, 2007. The complaint asserts claims pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. These claims relate to our March 12, 2007, announcement that we would restate our Fiscal Fourth Quarter and full year financial results. The complaint seeks compensatory damages in an unstated amount. Potential plaintiffs have until August 4, 2007, to move the court for appointment as lead plaintiff. At this time, we have not responded to the complaint.

VendingData II Update. On May 23, 2007, the Court entered an order granting VendingData’s motion for a protective order staying all further discovery in the case pending resolution of VendingData’s motion for summary judgment, other than further discovery granted Shuffle Master pursuant to an emergency motion heard on May 10, 2007. On May 31, 2007, Shuffle Master opposed VendingData’s motion for summary judgment of non-infringement, and brought a cross-motion for summary judgment that the PokerOne™ does infringe. No hearing on the summary judgment motions has yet been scheduled.

We intend to continue to enforce our intellectual property rights by moving the litigation forward to resolve our patent infringement claim.

We very strongly believe that there is no factual or legal merit to the allegations in the complaint and that neither the Company nor any members of management have committed any wrongful acts or omissions. We intend to vigorously defend ourself and the individuals and oppose the complaint.

Awada Update. Plaintiffs have appealed the Court’s order granting the rescission of the “Game Option Agreement” to the Nevada Supreme Court. The appeal is pending and oral arguments were heard on June 5, 2007. We cannot predict the date of any decision.

Awada II Update. On May 17, 2007 Awada filed an appeal to the Ninth Circuit Court of Appeals on all issues.

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

BUSINESS OVERVIEW
(In thousands, except units / seats and per share amounts)

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 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 Intelligent Table System™), currently in development with International Game Technology (“IGT”) and Progressive Gaming International Corporation (“PGIC”).

Our Entertainment Products include our portfolio of live proprietary poker, blackjack, baccarat, and pai gow poker-based table games and side bets as well as several electronic content delivery system platforms including Table Master™, Vegas Star™, Rapid Table Games, wireless Casino On Demand™ and Shuffle Master Live!, a Malta-based internet gaming site offering our proprietary content and selected public domain content.

We sell, lease or license our products. 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. When we lease or license our products, we generally negotiate a month-to-month operating lease. We offer our products worldwide in markets that are 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 products 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.

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” elsewhere in this quarterly report.

ACQUISITIONS, DISPOSITIONS AND OTHER SIGNIFICANT TRANSACTIONS

Stargames. On February 1, 2006, we had substantially completed our acquisition of Stargames by purchasing 95% of the outstanding Stargames shares for AU $1.55 per share. Effective March 8, 2006, we had acquired 100% of the outstanding Stargames shares. Consideration to Stargames consisted of an Australian-denominated cash payment of AU $148,441 or US $112,147. In addition, we estimate that our total direct acquisition costs, consisting primarily of legal and due diligence fees, to be approximately US $4,228. See Note 2 to our unaudited condensed consolidated financial statements for information related to the Stargames acquisition and our final purchase price allocation.

The acquisition enhances the products in our Entertainment Products segment as well as provides for additional electronic platforms for our branded content. Additionally, we acquired a strong brand name as well as an experienced and talented management team. These factors result in the recognition of certain intangible assets and significant goodwill.

The following table presents our various revenues and expenses as a percentage of total revenue:

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

	Three Months Ended April 30,				Six Months Ended April 30,
	2007		2006		2007		2006
Revenue
Utility products	49.5	%	54.5	%	48.7	%	59.4	%
Entertainment products	50.4	%	45.4	%	51.2	%	40.5	%
Other	0.1	%	0.1	%	0.1	%	0.1	%
Total revenue	100.0	%	100.0	%	100.0	%	100.0	%
Cost of revenue	40.2	%	33.4	%	39.2	%	31.8	%
Gross margin	59.8	%	66.6	%	60.8	%	68.2	%
Selling, general and administrative	32.0	%	30.9	%	35.2	%	30.5	%
Research and development	10.1	%	7.5	%	10.2	%	6.8	%
In-process research and development	0.0	%	44.2	%	0.0	%	25.0	%
Income from operations	17.7	%	(16.0	)%	15.4	%	5.9	%
Other income (expense), net	(6.2	)%	(5.4	)%	(5.8	)%	(3.7	)%
Equity method investment loss	(0.3	)%	(0.4	)%	(0.3	)%	(0.2	)%
Income (loss) from continuing operations before tax	11.2	%	(21.8	)%	9.3	%	2.0	%
Provision for income taxes	3.5	%	7.5	%	2.7	%	9.1	%
Income (loss) from continuing operations	7.7	%	(29.3	)%	6.6	%	(7.1	)%
Discontinued operations, net of tax	0.1	%	(0.2	)%	0.1	%	0.1	%
Net income (loss)	7.8	%	(29.5	)%	6.7	%	(7.0	)%

Our revenue and results of operations are most affected by unit or seat placements, through sale or lease, 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 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. During the three and six months ended April 30, 2007, one-time charges for the installation of multi-terminal gaming products on operating leases have also negatively impacted margins. Our margins have also been negatively impacted by the amortization of intangibles through our acquisitions of CARD and Stargames.

The following table provides information regarding our revenues, gross profit, and gross margin percentage by leases and royalties, sales and service and other:

REVENUE AND GROSS MARGIN

	Three Months Ended April 30,									Six Months Ended April 30,
	2007			2006			% Change			2007			2006			% Change
Revenue:
Leases and royalties	$	13,066		$	12,559			4.0	%	$	26,064		$	24,824			5.0	%
Sales and service	31,521			30,708				2.6	%	55,830			51,751				7.9	%
Other	57			36				58.3	%	91			45				102.2	%
Total	$	44,644		$	43,303			3.1	%	$	81,985		$	76,620			7.0	%
Cost of revenue:
Leases and royalties	$	3,904		$	2,742			42.4	%	$	7,567		$	5,559			36.1	%
Sales and service	14,065			11,712				20.1	%	24,570			18,816				30.6	%
Other	—			—				—		—			—				—
Total	$	17,969		$	14,454			24.3	%	$	32,137		$	24,375			31.8	%
Gross profit:
Leases and royalties	$	9,162		$	9,817			(6.7	)%	$	18,497		$	19,265			(4.0	)%
Sales and service	17,456			18,996				(8.1	)%	31,260			32,935				(5.1	)%
Other	57			36				58.3	%	91			45				102.2	%
Total	$	26,675		$	28,849			(7.5	)%	$	49,848		$	52,245			(4.6	)%
Gross margin percentage:
Leases and royalties	70.1		%	78.2		%				71.0		%	77.6		%
Sales and service	55.4		%	61.9		%				56.0		%	63.6		%
Total	59.8		%	66.6		%				60.8		%	68.2		%

We earn our revenue in several ways, including 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.”

Our overall revenue growth for the three and six months ended April 30, 2007 was primarily the result of stronger sales in our Entertainment segment. Our Entertainment segment was favorably impacted by our acquisition of Stargames effective February 1, 2006 and the initial placement of 54 units or 270 seats of our Table Master electronic table game platform on a participation basis with the Delaware State Lottery System. A more detailed discussion of our revenue is included for each of our operating segments under the heading “Segment Operating Results.”

Overall gross margin dollars as well as gross margin as a percentage of revenue decreased for the three and six months ended April 30, 2007. Our gross margin decreased to 59.8% from 66.6% and to 60.8% from 68.2% for the three and six months ended April 30, 2007 and 2006, respectively. The decline in our gross margin percentages are being caused by several factors. First, the margin decline is can be attributed to the product shift year-over-year and the inclusion of the results of Stargames. The margins of the Stargames products are lower than those traditionally experienced in our Entertainment Products segment. Second, impacting margins are additional amortization of product related intangibles included in cost of sales and service in our condensed consolidated statements of income. Third, on a year to-date

basis, we had fewer lifetime license sales of our proprietary table games than in the prior period, which sales represent our highest margin products and thus have a favorable impact on gross margin and gross profit. Finally, impacting margins for the three and six months ended April 30, 2007 are two non recurring charges to cost of sales and service. The first charge related to a minimum royalty shortfall of $950 related to the EGM business. The second charge was for a customer credit memo of $400 related to a Stargames sale in August 2005, prior to our acquisition of Stargames.

Our leases and royalties margins have also been negatively impacted by one-time installation charges for newly placed electronic table games that are on a month-to-month operating lease. These costs are incurred at the time of initial installation. For the three months ended April 30, 2007, leases and royalties margin decreased by 8.1% to 70.1% from 78.2% for the same prior year period. For the six months ended April 30, 2007, leases and royalties margin decreased by 6.6% to 71% from 77.6% for the same prior year period. To a lesser extent, the decrease was also attributable to a shift in our leased based product mix to slightly lower margin products.

OPERATING EXPENSES

	Three Months Ended April 30,						%		Six Months Ended April 30,						%
	2007			2006			Change		2007			2006			Change
Selling, general and administrative	$	14,308		$	13,363		7.1	%	$	28,878		$	23,360		23.6	%
Percentage of revenue	32.0		%	30.9		%			35.2		%	30.5		%
Research and development	$	4,503		$	3,239		39.0	%	$	8,400		$	5,200		61.5	%
Percentage of revenue	10.1		%	7.5		%			10.2		%	6.8		%
In-process research and development	$	—		$	19,145		(100.0	)%	$	—		$	19,145		(100.0	)%
Percentage of revenue	0.0		%	44.2		%			0.0		%	25.0		%
Total operating expenses	$	18,811		$	35,747		(47.4	)%	$	37,278		$	47,705		(21.9	)%
Percentage of revenue	42.1		%	82.6		%			45.5		%	62.3		%

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, 2007. Accordingly, SG&A as a percentage of revenue increased. The fluctuation in SG&A expenses primarily reflects the following:

· Payroll and related expenses, not including employee bonuses and excluding Stargames and CARD, was $5,853 and $11,686 for the three and six months ended April 30, 2007 respectively, compared to $5,382 and $10,766 in the same prior year periods. The increase in payroll and related expenses for the three and six months ended April 30, 2007 are primarily due to an increase in the number of employees in order to support the growth of our business.

· We expensed, for the three and six months ended April 30, 2007, $225 of costs related to corporate development efforts which are no longer being pursued.

· SG&A related to Stargames was $4,025 and $7,931, inclusive of $1,988 and $3,939 of payroll and related expenses, for the three and six months ended April 30, 2007 respectively, compared to $3,430 of Stargames related SG&A expenses for both the three and six months ended April 30, 2006.

· Share-based compensation expense under Statement of Financial Accounting Standards (“SFAS”) No. 123R was $1,185 and $2,557, including $762 and $1,589 of amortization of restricted stock compensation, for the three and six months ended April 30, 2007 respectively, compared to $1,145 and $2,348, including $419 and $735 of restricted stock compensation, respectively, in the same prior year periods.

· Offsetting the above increases was a decline in corporate legal fees which were $1,011 and $1,960 for the three and six months ended April 30, 2007 compared to $1,024 and $2,514 in the same prior year periods. Current period legal fees relate predominately to the Play Four Poker and Mind Play Nevada litigation. We expect that our legal fees will continue to vary from period to period depending on our level of legal activity required to protect our intellectual property.

Research and Development Expenses (“R&D”). Our R&D in both periods presented is distributed among all of our product lines, as we have continued to invest in new product development. For the three and six months ended April 30, 2007, R&D expense increased to $4,503 from $3,239 and increased to $8,400 from $5,200 respectively, for the same prior year periods. R&D expenses for the six months ended April 30, 2007 increased primarily due to the acquisition of Stargames on February 1, 2006. R&D expenses at Stargames for the three and six months ended April 30, 2007 were $2,416 and $4,573, respectively as compared to $1,390 in both the three and six month prior year periods. Further contributing to the increase in R&D expenses are added personnel at both our domestic operation and Stargames and increased expenditures on newer generation shuffler products over those incurred in the prior year period.

We continue to spend significant R&D efforts on the development of our new generation shuffler products, such as the iDeal, our card recognition products, as well as other table accessories, such as the iShoe. With our expansion into the multi player electronic table games and electronic gaming machines market, we continue to spend significant R&D dollars on games development related to our EGM’s and the expansion of our electronic table games portfolio related to our multi terminal electronic table games. Finally, we also have significant R&D spend related to operating systems upgrades to our Vegas Star, Rapid Table Games, and EGM products.

During the three months ended April 30, 2006, as required by FASB Interpretation No. 4, “Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method” (FIN 4), the portion of the purchase price allocated to in-process R&D of $19,145 was immediately expensed.

A project-by-project valuation using the guidance in SFAS 141 and the American Institute of Certified Public Accountants (AICPA) Practice Aid “Assets Acquired in a Business Combination to Be Used In Research and Development Activities: A Focus on Software, Electronic Devices and Pharmaceutical Industries” has been performed by independent valuation specialists to determine the fair value of research and development projects of Stargames.

In-process research and development (“IPR&D”) is defined as a development project that has been initiated and achieved material progress but has not yet resulted in a commercially viable product. The fair value was determined using the income approach on a project-by-project basis. This method is based on the present value of earnings attributable to the asset or costs avoided as a result of owning the assets. This method includes risk factors, which include applying an appropriate discount rate that reflects the project’s stage of completion, the nature of the product, the scientific data associated with the technology, the current patent situation and market competition. The expensing of IPR&D through purchase accounting allows for the expensing of certain R&D efforts at the acquisition date consistent with the expensing of R&D efforts as they are incurred for in-house development efforts.

DEPRECIATION AND AMORTIZATION EXPENSES

Depreciation expense is primarily comprised of depreciation associated with products leased and held for lease and depreciation of property, plant and equipment. Amortization expense is primarily comprised of amortization associated with intellectual property, acquired developed technology, and customer relationships. The following table provides a breakdown of depreciation and amortization expense for the three and six months ended April 30, 2007 and 2006, as well as the geography on the condensed consolidated statements of income.

	Three Months Ended April 30,				Six Months Ended April 30,
	2007		2006		2007		2006
Gross margin:
Amortization	$	2,317	$	1,884	$	4,685	$	3,383
Depreciation	1,164		1,272		2,420		2,522
Total	3,481		3,156		7,105		5,905
Operating expenses:
Amortization	$	376	$	521	$	672	$	661
Depreciation	736		602		1,388		1,042
Total	1,112		1,123		2,060		1,703
Total:
Amortization	$	2,693	$	2,405	$	5,357	$	4,044
Depreciation	1,900		1,874		3,808		3,564
Total	$	4,593	$	4,279	$	9,165	$	7,608

The increase for the six months ended April 30, 2007, as compared to the same prior year period is attributable to the amortization of intangible assets associated with the Stargames acquisition, effective February 1, 2006.

OTHER INCOME (EXPENSE)

Other income (expense) is comprised of the following:

	Three Months Ended April 30,						Six Months Ended April 30,
	2007			2006			2007			2006
Interest income	$	392		$	561		$	784		$	1,070
Interest expense	(1,831		)	(2,287		)	(3,722		)	(2,950		)
Amortization of debt issue costs	(325		)	(634		)	(673		)	(892		)
Foreign currency (loss) gain	(990		)	22			(1,130		)	(103		)
Other	(3		)	1			(7		)	48
Total Other expense	$	(2,757	)	$	(2,337	)	$	(4,748	)	$	(2,827	)

Interest expense for the six months ended April 30, 2007, is primarily related to the $150,000 of Notes due in April 2024 and the New Credit Agreement. Interest expense for the six months ended April 30, 2006, was primarily related to the $150,000 of Notes due in April 2024 and the Old Credit Agreement. A

more detailed discussion of the Notes and the New Credit Agreement are included below under the heading “Liquidity and Capital Resources.”

The increase in the foreign currency loss for the three and six months ended April 30, 2007 is primarily caused by the weakening of the U.S. dollar versus the Australian dollar and the Euro. Our foreign subsidiaries engage in activities with us and certain customers in US dollar denominated contracts. Additionally, we have initiated the settling of certain inter-company balances, which has resulted in the recognition of additional foreign currency fluctuations pursuant to SFAS No. 52, “Foreign Currency Translation” for the three months ended April 30, 2007.

INCOME TAXES

Our effective income tax rate for continuing operations for the three and six months ended April 30, 2007, was 31.3% and 28.9%, respectively. Our effective tax rate for the three and six months ended April 30, 2006, was (34.5%) and 447.7%, respectively. The decrease in our effective income tax rate is primarily due to a one time tax benefit recorded in the six months ended April 30, 2007 related to research and development tax credits. Our tax rate is favorably impacted by a change in the product mix in lower tax jurisdictions as well as the newly enacted manufacturing deduction.

Looking forward, our annual effective tax rate may fluctuate due to changes in our amount and mix of U.S. and foreign income, changes in tax legislation and changes in our estimates of federal tax credits and other tax deductions.

During the six months ended April 30, 2007 and 2006, we realized income tax benefits of $1,748 and $2,487, respectively, related to deductions for employee stock option exercises. These tax benefits, which reduced income taxes payable and increased additional paid-in capital by an equal amount, had no affect on our provision for income taxes.

EARNINGS PER SHARE

	Three Months Ended April 30,						Six Months Ended April 30,
	2007			2006			2007			2006
Income (loss) from continuing operations	$	3,427		$	(12,632	)	$	5,378		$	(5,414	)
Basic earnings (loss) per share	$	0.10		$	(0.37	)	$	0.16		$	(0.16	)
Diluted earnings (loss) per share	$	0.10		$	(0.37	)	$	0.15		$	(0.16	)
Weighted average shares data:
Basic	34,696			34,555			34,663			34,522
Dilutive effect of options and restricted stock	640			—			797			—
Dilutive effect of contingent convertible notes	—			—			5			—
Diluted	35,336			34,555			35,465			34,522
Outstanding shares data:
Shares outstanding, beginning of period	35,171			35,422			34,895			34,958
Options exercised	21			156			224			723
Shares repurchased	—			(407		)	(75		)	(558		)
Restricted stock issued	31			—			205			50
Other	(4		)	—			(30		)	(2		)
Shares outstanding, end of period	35,219			35,171			35,219			35,171

SEGMENT OPERATING RESULTS
(Dollars in thousands, except units / seats and per unit amounts)

SEGMENT OVERVIEW

We have two reportable segments which are classified as continuing operations, Utility Products and Entertainment Products. Utility Products include our shufflers, chip sorting machines and ITS™ product lines. Entertainment Products include our proprietary table games, electronic multi-terminal gaming products, electronic gaming machines, and Shuffle Up Productions. Each segment’s activities include the design, development, acquisition, manufacture, marketing, distribution, installation and servicing of its product lines.

Utility Products. Our strategy in the Utility Products segment is the development of products for our casino customers that enhance table game speed, productivity and security. Currently, Utility Products segment revenue is derived substantially from our automatic card shufflers. We develop and market a full complement of automatic card shufflers for use with the vast majority of card-based table games placed in casinos and other gaming locations, including our own proprietary table games. In addition to selling and servicing, we also lease shufflers, which provides us with recurring revenue. Our current shuffler product portfolio consists of 7 distinct models, including both second and third generation shufflers, in the categories of single deck, multi-deck batch and multi-deck continuous card shufflers. As of April 30, 2007, our shuffler installed base totaled 23,852 units, a 17.1% increase from 20,368 units as of April 30, 2006. Our growth strategy for our shuffler business is the development and distribution of next generation, patent protected shufflers which enhance the value proposition for our customers through technological advancements. As a result, we expect to replace our older generation shufflers over time, while at the same time, increasing the penetration of our shufflers in the marketplace.

Our Table iD product remains in the development stage, including our iShoe which increases table game security by reading each card as it is removed from the shoe to reduce game manipulation.

Entertainment Products. Our strategy in the Entertainment Products segment is the development and delivery of proprietary table game content, which enhances our casino customers’ table game operations. We develop and market a full complement of poker, pai gow poker, baccarat and blackjack table game content. Our current table game portfolio consists of 21 revenue generating titles, including industry leading brands such as Three Card Poker®, Let It Ride®, Four Card Poker® and Fortune Pai Gow Poker®. The majority of these games are licensed to our customers, which provides us with recurring revenue. In fiscal 2003, we began selling lifetime licenses of certain of our proprietary table games. As of April 30, 2007, our proprietary table game installed base totaled 4,599 games, a 20.5% increase from 3,816 games as of April 30, 2006. Our growth strategy for our live proprietary table games business is to broaden our content through increased development and/or acquisition. As a result, we expect to further increase the penetration of our content in the marketplace, as well as create a longer-term replacement opportunity.

As discussed above, our multi-terminal gaming products consist of Table Master, and the Vegas Star and Rapid Table Games products which we acquired through our acquisition of Stargames effective February 1, 2006. These multi-terminal gaming products allow us to expand the distribution of our proprietary table game portfolio. Some of our multi-terminal gaming products enable us to offer table game content into markets where live table games are not permitted, such as racino, video lottery and arcade markets. Our growth strategy for the multi-terminal gaming products is to position these products as a more cost-effective way to offer lower stakes table games to our casino customers. As of April 30, 2007, our multi terminal gaming products installed base totaled 5,153 seats, a 31.3% increase from 3,924 seats as of April 30, 2006.

Table Master is a fixed five station, electronic table game featuring a video screen with a virtual dealer who interacts with players. In addition to selling and servicing, we also lease our Table Master product,

which provides us with recurring revenue. In October 2006, we signed a multi-terminal video lottery machine agreement with the Delaware State Lottery System. Under the terms of the agreement, we completed the initial placement of 54 units or 270 seats of our Table Master electronic table game platform on a participation basis. The Table Master units feature a diverse mix of blackjack and poker-based proprietary table game content, including Royal Match 21 Blackjack, Three Card Poker, Let It Ride Bonus with 3 Card Bonus and Dragon Bonus Baccarat.

The Vegas Star multi-terminal gaming machines feature animated virtual dealers, touch screen player betting and a selection of public domain table games including Roulette, Baccarat and Sic-Bo. The Vegas Star has a modular design which makes it easy to add additional play stations as terminal demand increases. Each Vegas Star configuration can accommodate up to 16 player stations, and will eventually offer all of our proprietary game content.

The Rapid Table Games product line combines a live dealer with multi-terminal electronic wagering for popular games like Roulette, Baccarat and Craps. The Rapid Table Games product line focuses on combining popular high-volume gaming content with unparalleled game play, operator usability, systems integration and technical support.

Through the acquisition of Stargames, we also acquired a broad line of traditional video slot machines designed more specifically for the Australian and Asian gaming markets. The Electronic Gaming Machines (“EGM’s”) feature a variety of game selections including licensed content provided by WMS Industries. In addition to selling the full EGM complement, we sell conversion kits which allow existing EGM terminals to be converted to other games on the Stargames platform. As of April 30, 2007, our EGM’s installed base totaled 17,441 seats, a 16.6% increase from 14,953 seats as of April 30, 2006.

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 / seat base. Installed unit / seat base is the sum of product units or seats under lease or license agreements and inception-to-date sold units or seats. As discussed above, we have combined the presentation of our Table Master, Rapid Table Games and Vegas Star products as multi-terminal gaming seats. Due to their modular design, both the Rapid Table Games and Vegas Star products are best analyzed based upon number of seats sold or leased. Our Table Master is a fixed five seat station and accordingly is analyzed as five seats. We believe that Installed Base 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 or seats may no longer be in use by our casino customers or may have been replaced by other models or products. Accordingly, we are unable to determine precisely the number of units or seats currently in active use.

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

UTILITY PRODUCTS SEGMENT OPERATING RESULTS

	Three Months Ended
	April 30,						Increase				Percentage
	2007			2006			(Decrease)				Change
Utility Products segment revenue
Lease	$	5,889		$	6,084			$	(195	)		(3.2	)%
Sales—Shuffler	13,509			15,138				(1,629		)		(10.8	)%
Sales—Chipper	315			463				(148		)		(32.0	)%
Service and other	2,387			1,930				457				23.7	%
Total sales and service	16,211			17,531				(1,320		)		(7.5	)%
Total Utility Products segment revenue	$	22,100		$	23,615			$	(1,515	)		(6.4	)%
Utility Products segment operating income	$	10,602		$	12,756			$	(2,154	)		(16.9	)%
Utility Products segment operating margin	48.0		%	54.0		%
Shufflers installed base (end of quarter)
Lease units	4,633			4,630				3				0.1	%
Sold units, inception-to-date
Beginning of quarter	18,245			14,580				3,665				25.1	%
Sold during quarter	1,044			1,293				(249		)		(19.3	)%
Less trade-ins and exchanges	(70		)	(135		)		65				48.1	%
End of quarter	19,219			15,738				3,481				22.1	%
Total installed base	23,852			20,368				3,484				17.1	%
Chipper installed base (end of quarter) *
Lease units	10			10				—				0.0	%
Sold units, inception-to-date
Beginning of quarter	646			519				127				24.5	%
Sold during quarter	13			17				(4		)		(23.5	)%
End of quarter	659			536				123				22.9	%
Total installed base	669			546				123				22.5	%

* Chipper units adjusted in all periods presented to include the Chipmaster product which was previously excluded.

Utility Products segment revenue is derived substantially from our shuffler product line and secondarily from our chipper products.

For the three months ended April 30, 2007, Utility Products segment revenue decreased 6.4%, compared to the same prior year period, primarily due to a decrease in Utility Products sales and service revenue. Our Utility Products lease revenue remained relatively flat compared to the same prior year period.

The slight decrease in Utility Products lease revenue for the three months ended April 30, 2007, compared to the same prior year period primarily reflects:

· A net increase of 3 shuffler units leased from 4,630 to 4,633. Conversions from leased shufflers to sold shufflers were 252 in the prior year period as compared to 102 in the current year period, which is consistent with our renewed emphasis on leasing versus selling.

· The average shuffler lease price reflects a price increase on the older generation shufflers during the current year period. However, this price increase was offset by “introductory” lease pricing on newer generation shufflers. Additionally, the timing of conversions and new lease installs has had

a negative impact on the average lease price compared to the prior year. The conversions weighting heavier at the beginning of the quarter and the new leases weighting heavier at the end of the quarter result in a net decline in the average lease price metric.

· The shuffler lease base continues to grow on our one2six and MD2® shufflers over the prior year period with replacements in the period predominantly of our King shuffler.

The decrease in Utility Products sales and service revenue for the three months ended April 30, 2007, compared to the same prior year period primarily reflects:

· A decrease in shuffler sale revenue largely attributable to the conversion activity referred to above. Conversions in the prior year period were 252 versus 102 in the current year period.

· Offsetting the revenue decrease was an increase in the average selling prices of our shufflers. The increase is demonstrated in the calculated average sales price, using the metrics in the above table of $12,940 in the current year period compared to $11,708 in the prior year period. Placements in the current quarter were predominately our third generation shuffler products, including the one2six and MD2 shufflers. Sales of our MD2 shufflers with card recognition, which carry a much higher average sales price, totaled 218 units, representing a new quarterly record for this product. The majority of these shufflers were sold in Macau, where the security features of the optical card recognition capability is proving to be essential to Macau casino operators.

· The decrease in sold shuffler units was comprised primarily of decreases in the sales of Ace and DeckMate shufflers, which totaled 41 and 120, respectively, in the current quarter compared to 183 and 251 respectively, in the prior year quarter.

· A decrease in chipper unit sales to 13 units from 17 units sold for the same prior year period. The decrease was primarily caused by a large order from a customer during the three months ended April 30, 2006.

Utility Products segment operating income and operating margin for the three months ended April 30, 2007, decreased 16.9% and 6.0%, respectively, compared to the same prior year period, primarily due to the decrease in utility revenue and the overall increase in SG&A and R&D expenses allocated to the Utility segment. Also contributing to the decline was an increase in amortization expense associated with the one2six shuffler and Easy Chipper of $1,118 for the three months ended April 30, 2007, compared to $863 for the same prior year period.

UTILITY PRODUCTS SEGMENT OPERATING RESULTS

	Six Months Ended
	April 30,						Increase				Percentage
	2007			2006			(Decrease)				Change
Utility Products segment revenue
Lease	$	11,885		$	12,094			$	(209	)		(1.7	)%
Sales—Shuffler	22,965			26,759				(3,794		)		(14.2	)%
Sales—Chipper	912			3,345				(2,433		)		(72.7	)%
Service and other	4,123			3,302				821				24.9	%
Total sales and service	28,000			33,406				(5,406		)		(16.2	)%
Total Utility Products segment revenue	$	39,885		$	45,500			$	(5,615	)		(12.3	)%
Utility Products segment operating income	$	18,847		$	23,471			$	(4,624	)		(19.7	)%
Utility Products segment operating margin	47.3		%	51.6		%
Shufflers installed base (end of period)
Lease units	4,633			4,630				3				0.1	%
Sold units, inception-to-date
Beginning of period	17,630			13,780				3,850				27.9	%
Sold during period	1,795			2,250				(455		)		(20.2	)%
Less trade-ins and exchanges	(206		)	(292		)		86				29.5	%
End of period	19,219			15,738				3,481				22.1	%
Total installed base	23,852			20,368				3,484				17.1	%
Chipper installed base (end of period)*
Lease units	10			10				—				0.0	%
Sold units, inception-to-date
Beginning of period	620			368				252				68.5	%
Sold during period	39			168				(129		)		(76.8	)%
End of period	659			536				123				22.9	%
Total installed base	669			546				123				22.5	%

* Chipper units adjusted in all periods presented to include the Chipmaster product which waspreviously excluded.

For the six months ended April 30, 2007, Utility Products segment revenue decreased 12.3%, compared to the same prior year period, primarily due to a 16.2% decrease in Utility Products sales and service revenue. Additionally, Utility Products lease revenue decreased 1.7%, compared to the same prior year period.

The decrease in Utility Products lease revenue for the six months ended April 30, 2007, compared to the same prior year period, primarily reflects:

· Conversions of 526 shufflers in the prior year period as compared to 353 in the current year period, consistent with our renewed emphasis on leasing versus selling. This has allowed the overall installed base to grow to 23,852, or an increase of 3,484 units, or 17.1% period over period.

· “Introductory” pricing for the newer generation shuffler leases offset the price increase implemented in the current year period for older generation shuffler units. Timing of conversions and new leases also dilutes the average lease price.

· Shuffler placements in the six month period were predominately our Deck Mate®, ACE®, MD1®, and MD2® shufflers. Shuffler conversions for the current period were comprised primarily of

second generation ACE® shufflers, in anticipation of introducing our next generation specialty table game shuffler, the iDeal shuffler, in late fiscal 2007. Shuffler conversions for the same prior year period were comprised primarily of ACE, MD1, and Deck Mate shufflers.

The decrease in Utility Products sales and service revenue for the six months ended April 30, 2007, compared to the same prior year period primarily reflects:

· The impact of the shuffler conversions referred to above.

· Offsetting the revenue decrease was an increase in the average selling prices of our shufflers. The average sales price, as computed from the information in the table above, increased to $12,794 from $11,893 in the same prior year period. This increase reflects the higher price point on our newer shuffler models plus the impact of an increase in the older generation shuffler models.

· The decrease in sold shuffler units was comprised primarily of sales of Deck Mate, one2six and MD2 shufflers of 410, 494, and 470, respectively, in the current period compared to 625, 604, and 580, respectively, in the prior year period.

· We sold 39 chipper units compared to 168 units for the same prior year period, which was a decrease of 129. The decrease was due to a large Easy Chipper sale to one customer in the prior year period. For the six months ended April 30, 2007, total revenue contribution from Chipper sales was approximately $912 as compared to $3,345 in the prior year period, which was a decrease of $2,433, or 72.7%.

Utility Products segment operating income and operating margin for the six months ended April 30, 2007, decreased 19.7% and 4.3%, respectively, compared to the same prior year period. The decrease primarily relates to the increased SG&A and R&D as a percentage of revenue attributable to the Utility segment. This increase also includes a larger percentage of one2six amortization expense than in the prior year period. Amortization expense associated with the one2six shuffler and Easy Chipper was $2,248 for the six months ended April 30, 2007, compared to $1,711 for the same prior year period.

ENTERTAINMENT PRODUCTS SEGMENT OPERATING RESULTS

	Three Months Ended
	April 30,						Increase				Percentage
	2007			2006			(Decrease)				Change
Entertainment Products segment revenue
Royalties and leases—Table games	$	6,076		$	6,123			$	(47	)		(0.8	)%
Royalties and leases—Multi-Terminal Gaming	1,080			341				739				216.7	%
Other	21			11				10				90.9	%
Total royalties and leases	7,177			6,475				702				10.8	%
Sales—Table games	1,359			1,697				(338		)		(19.9	)%
Sales—Multi-Terminal Gaming	3,774			5,433				(1,659		)		(30.5	)%
Sales—Electronic Gaming Machines	8,836			2,879				5,957				206.9	%
Service and other	1,341			3,168				(1,827		)		(57.7	)%
Total sales and service revenue	15,310			13,177				2,133				16.2	%
Total Entertainment Products segment revenue	$	22,487		$	19,652			$	2,835			14.4	%
Entertainment Products segment operating income	$	8,298		$	(9,489	)		$	17,787			187.4	%
Entertainment Products segment operating margin	36.9		%	(48.3		)%
Table games installed base (end of quarter)
Royalty units	3,239			2,952				287				9.7	%
Sold units, inception-to-date
Beginning of quarter	1,312			833				479				57.5	%
Sold during quarter	48			31				17				54.8	%
End of quarter	1,360			864				496				57.4	%
Total installed base	4,599			3,816				783				20.5	%
Multi-Terminal Gaming Products installed base (end of quarter)
Lease seats	634			214				420				196.3	%
Sold seats, inception-to-date
Beginning of quarter	4,345			430				3,915				910.5	%
Sold during quarter	194			249				(55		)		(22.1	)%
Less trade-ins and exchanges	(20		)	—				(20		)		100.0	%
Stargames acquired base	—			3,031				(3,031		)		(100.0	)%
End of quarter	4,519			3,710				809				21.8	%
Total installed base	5,153			3,924				1,229				31.3	%
Electronic Gaming Machines installed based (end of quarter)
Lease seats	—			—				—				0.0	%
Sold seats, inception-to-date
Beginning of quarter	16,720			—				16,720				100.0	%
Sold during quarter	721			281				440				156.6	%
Stargames acquired base	—			14,672				(14,672		)		(100.0	)%
End of quarter	17,441			14,953				2,488				16.6	%
Total installed base	17,441			14,953				2,488				16.6	%

For the three months ended April 30, 2007, Entertainment Products segment revenue increased 14.4%, compared to the same prior year period. The increase was primarily due to the $13,892 contribution from the Stargames product line in the current year period as compared to $10,700 in the prior year period.

The 10.8% increase in Entertainment Products royalty and lease revenue for the three months ended April 30, 2007, compared to the same prior year period, primarily reflects:

· A net increase of 420 multi-terminal gaming product seats on lease from 214 to 634 seats. The increase in multi-terminal gaming seats were predominantly caused by an increase in Table Master seats on lease. In October 2006, we signed a multi-terminal video lottery machine agreement with the Delaware State Lottery System. Under the terms of the agreement, we completed the initial placement of 270 seats of our Table Master electronic table game platform on a participation basis.

· A net increase of 287 table game royalty units on lease, consistent with our renewed emphasis on leasing versus selling.

· The increase in net table game lease additions comprised primarily of unit increases in Bet the Set “21”™, Dragon Bonus® and Ultimate Texas Hold’em™. The side bet table games have a lower monthly average lease price than our premium table games resulting in a decline in the average monthly lease price. The table game royalty unit increases were offset by the conversion of 41 royalty units to lifetime license sales, consisting primarily of Three Card Poker, Four Card Poker® and Fortune Pai Gow Poker which currently yields higher average monthly lease prices than our more recent game introductions. These conversions are consistent with our strategy of selling certain proprietary table games to allow access to expanded casino floor space for our newer table game introductions. Prior period conversions totaled 26 royalty units and consisted primarily of Three Card Poker.

As discussed above, the increase in Entertainment Products sales and service revenue for the three months April 30, 2007, compared to the same prior year period is primarily attributed to the Stargames product line contribution. Other contributions include:

· A net increase of 440 EGM seats sold to 721 from 281, primarily due to timing of customer orders.

Entertainment Products segment operating income and margin for the three months ended April 30, 2007 increased $17,787 and 85.2%, respectively, from the same prior year period. As discussed earlier, the prior year period reflects a one-time charge related to IPR&D of $19,145 related to the acquisition of Stargames. Excluding the impact of the IPR&D, the prior year operating margin would have been $9,656 and 49.1%, respectively. The current period margins were negatively impacted by the minimum royalty shortfall related to EGM’s of $950 and a customer credit related to a Stargames sale in August 2005, prior to our acquisition on February 1, 2007. The decrease was also caused by a decrease in lifetime license sales of our premium live proprietary table games. Finally, installation costs related to our Table Master and other multi terminal gaming machines on lease have a negative impact on the period of the initial installation. These costs are one-time in nature.

ENTERTAINMENT PRODUCTS SEGMENT OPERATING RESULTS

	Six Months Ended
	April 30,						Increase				Percentage
	2007			2006			(Decrease)				Change
Entertainment Products segment revenue
Royalties and leases—Table games	$	11,877		$	12,051			$	(174	)		(1.4	)%
Royalties and leases—Multi-Terminal Gaming	2,259			662				1,597				241.2	%
Other	43			17				26				152.9	%
Total royalties and leases	14,179			12,730				1,449				11.4	%
Sales—Table games	4,112			4,715				(603		)		(12.8	)%
Sales—Multi-Terminal Gaming	7,883			7,615				268				3.5	%
Sales—Electronic Gaming Machines	12,361			2,879				9,482				329.4	%
Service and other	3,474			3,136				338				10.8	%
Total sales and service revenue	27,830			18,345				9,485				51.7	%
Total Entertainment Products segment revenue	$	42,009		$	31,075			$	10,934			35.2	%
Entertainment Products segment operating income	$	14,930		$	(1,501	)		$	16,431			1,094.7	%
Entertainment Products segment operating margin	35.5		%	(4.8		)%
Table games installed base (end of quarter)
Royalty units	3,239			2,952				287				9.7	%
Sold units, inception-to-date
Beginning of period	1,233			768				465				60.5	%
Sold during period	127			96				31				32.3	%
End of period	1,360			864				496				57.4	%
Total installed base	4,599			3,816				783				20.5	%
Multi-Terminal Gaming Products installed base (end of quarter)
Lease seats	634			214				420				196.3	%
Sold seats, inception-to-date
Beginning of period	4,142			300				3,842				1,280.7	%
Sold during period	397			379				18				4.7	%
Less trade-ins and exchanges	(20		)	—				(20		)		100.0	%
Stargames acquired base	—			3,031				(3,031		)		(100.0	)%
End of period	4,519			3,710				809				21.8	%
Total installed base	5,153			3,924				1,229				31.3	%
Electronic Gaming Machines installed based (end of quarter)
Lease units	—			—				—				0.0	%
Sold seats, inception-to-date
Beginning of period	16,279			—				16,279				100.0	%
Sold during period	1,162			281				881				313.5	%
Stargames acquired base	—			14,672				(14,672		)		(100.0	)%
End of period	17,441			14,953				2,488				16.6	%
Total installed base	17,441			14,953				2,488				16.6	%

For the six months ended April 30, 2007, Entertainment Products segment revenue increased 35.2%, compared to the same prior year period primarily due to the $24,012 revenue contribution of Stargames as compared to $10,700 in the prior year period. These increases were offset by decreases in lifetime license sales, partially offset by increases in revenue related to our Table Master products.

The increase in Entertainment Products royalty and lease revenue for the six months ended April 30, 2007, compared to the same prior year period, primarily reflects:

· A net increase of 287 table game royalty units on lease, consistent with our renewed emphasis on leasing vs. selling.

· The increase in net table game lease additions comprised primarily of unit increases in Ultimate Texas Hold’em, Fortune Pai Gow Poker, Dragon Bonus®, and our more recently acquired games. Additionally, effective January 1, 2007, we increased the monthly lease rate for Three Card Poker, which partially benefited the six month period. The table game royalty unit increases were offset by the conversion of 106 royalty units to lifetime license sales, consisting primarily of Three Card Poker, Four Card Poker, and Fortune Pai Gow which currently yields higher average monthly royalty rates than our more recent game introductions. These conversions are consistent with our strategy of selling our older proprietary table games to allow access to expanded casino floor space for our newer table game introductions. Prior period conversions totaled 86 royalty units and consisted primarily of Three Card Poker and Let It Ride.

As discussed above, the increase in Entertainment Products sales and service revenue for the six months ended April 30, 2007, compared to the same prior year period is primarily attributed to the Stargames contribution offset by a decrease in lifetime license sales revenue during the six months ended April 30, 2007.

Entertainment Products segment operating income for the six months ended April 30, 2007, increased compared to the same prior year period. As discussed earlier, the prior year period reflects a one-time charge related to IPR&D of $19,145 related to the acquisition of Stargames. Excluding the impact of the IPR&D, the prior year operating margin would have been $17,644 and 56.8%. The current period margins were negatively impacted by the minimum royalty shortfall related to EGM’s of $950 and a customer credit related to a Stargames sale in August 2005, prior to our acquisition on February 1, 2007. Installation costs related to our Table Master and other multi terminal gaming machines on lease have a negative impact on the period of the initial installation. These costs are one-time in nature. In general, our multi terminal gaming products have lower operating margins than our traditional table game products. The decrease was also caused by a decrease in lifetime license sales of our premium live proprietary table games. Also contributing to the margin decline is the allocation of larger SG&A and R&D expenses to the entertainment segment due to the overall increases in these amounts used to support the entertainment products segment.

REVENUE BY GEOGRAPHIC AREA

The following provides financial information concerning our revenues by geographic area for the three and six months ended April 30, 2007 and 2006:

	Three Months Ended				Three Months Ended				Six Months Ended				Six Months Ended
	April 30,				April 30,				April 30,				April 30,
	2007				2006				2007				2006
Revenue:
United States	$	17,687	39.6	%	$	21,493	49.6	%	$	39,744	48.5	%	$	45,374	59.2	%
Canada	2,351		5.3	%	2,885		6.7	%	4,020		4.9	%	4,087		5.3	%
Other North America	443		1.0	%	913		2.1	%	957		1.2	%	1,790		2.3	%
Europe	2,386		5.3	%	1,604		3.7	%	4,166		5.1	%	4,099		5.3	%
Australia	9,215		20.6	%	9,896		22.9	%	18,499		22.6	%	10,268		13.4	%
Asia	11,598		26.0	%	6,373		14.7	%	13,031		15.9	%	10,674		13.9	%
Other	964		2.2	%	139		0.3	%	1,568		1.9	%	328		0.4	%
	$	44,644	100.0	%	$	43,303	100.0	%	$	81,985	100.0	%	$	76,620	100.0	%

Revenues by geographic area are determined based on the location of our customer. For the three and six months ended April 30, 2007, sales to customers outside the United States accounted for 60.4% and 51.5%, respectively, of consolidated revenue, compared to 50.4% and 40.8%, respectively, for the same prior year period. The period-over-period increase in sales to customers outside the United States is primarily attributed to contributions from our acquisition of Stargames in Australia and expansion into the Macau market. Going forward, we expect our international revenues to continue to grow, particularly in the Australasia region.

LIQUIDITY AND CAPITAL RESOURCES
(In thousands, except ratios and per share amounts)

Our primary historical source of liquidity and capital resources has been cash flow generated by our profitable operations. We use cash to fund growth in our operating assets, including accounts receivable, inventory, sales-type leases and notes receivable and to fund new products through both research and development and strategic acquisitions of businesses and intellectual property. In April 2004, we obtained additional capital resources, through the issuance of $150,000 of Notes. Additionally, on November 30, 2006, we entered into a $100,000 senior secured revolving credit facility (the “New Credit Agreement”) with Deutsche Bank AG Cayman Islands Branch, as a Lender, Deutsche Bank Trust Company Americas, as Administrative Agent, Deutsche Bank Securities Inc. and Wells Fargo, N.A., as Joint Lead Arrangers and Book Managers and Wells Fargo, N.A. as Syndication Agent. We drew $71,180 on the facility, which was used to repay in its entirety the bridge loan originally entered into on January 25, 2006 (“Old Credit Agreement”).

LIQUIDITY

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

	April 30,		October 31,				Increase				Percentage
	2007		2006				(Decrease)				Change
Cash, cash equivalents, and investments	$	7,148		$	8,917			$	(1,769	)		(19.8	)%
Working capital	$	61,212		$	(18,895	)		$	80,107			424.0	%
Current ratio	2.7			0.8				1.9				237.5	%

As of October 31, 2006, we had $70,000 outstanding under our Old Credit Agreement which was due to mature on November 30, 2006, and accordingly it was classified as a current liability. This current maturity resulted in negative working capital.

Excluding the short-term bridge financing of $70,000, working capital was $51,105 and the current ratio was approximately 2.3 as of October 31, 2006.

Cash flows.

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

	Six Months Ended
	April 30,						Increase				Percentage
	2007			2006			(Decrease)				Change
Income (loss) from continuing operations	$	5,378		$	(5,414	)		$	10,792			199.3	%
Non-cash items	13,485			11,266				2,219				19.7	%
IPR&D	—			19,145				(19,145		)		-100.0%
Income tax related items	(2,304		)	(3,827		)		1,523				39.8	%
Investment in sales-type leases and note receivable	2,308			(181		)		2,489				1375.1	%
Other changes in operating assets and liabilities	(3,541		)	(8,598		)		5,057				-58.8%
Discontinued operations, net of tax	87			47				40				85.1	%
Cash flow provided by operating activities	$	15,413		$	12,438			$	2,975			23.9	%

· Non-cash items are comprised of depreciation and amortization, amortization of debt issuance costs, share-based compensation expense, provision for bad debts, provision for inventory obsolescence and equity method investment loss. The increase in non-cash items for the six months ended April 30, 2007, is substantially due to an increase in depreciation and amortization expense for the six months ended April 30, 2007. Depreciation and amortization expense related to

Stargames was $2,013 for the six months ended April 30, 2007 compared to $867 for the same prior year period.

· Income tax related items include prepaid income taxes, deferred income taxes, tax benefit from stock option exercises, prepaid income taxes and is net of excess tax benefit from stock option exercises.

· We utilize sales-type leases and notes receivable as a means to provide financing alternatives to our customers. It is our intent to continue offering a variety of financing alternatives, including sales, sales-type leases and notes receivable, and operating leases, to meet our customers’ product financing needs, which may vary from quarter to quarter. Effective March 1, 2007, we implemented a significant increase in the interest rate that we are charging on all new sales-type leases and notes receivables. This is in partly in response to our lease versus buy strategy discussed in the segment reporting section of Management’s Discussion and Analysis, as well as a result of the debt that the we have taken on related to the acquisition of Stargames. We expect that some of our customers will continue to choose sales-type leases and notes receivable as their preferred method of purchasing our products. The volume of sales-type leases and notes receivable in any period may fluctuate, largely due to our customers’ preferences.

· Other changes in operating assets and liabilities primarily consisted of net changes in accounts receivable, inventories, and accounts payable and accrued liabilities. The increase in inventories is related to the increased cost related to our EGM and multi terminal gaming machines as compared to our traditional shuffler and live proprietary table games business model.

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

	Six Months Ended
	April 30						Increase			Percentage
	2007			2006			(Decrease)			Change
Net purchases of investments	$	—		$	6,028		$	(6,028	)		(100.0	)%
Capital expenditures	(6,945		)	(4,892		)	(2,053		)		(42.0	)%
Proceeds from sale of leased assets	818			628			190				30.3	%
Acquisition of Stargames, net of cash acquired	(1,750		)	(114,337		)	112,587				98.5	%
Other	—			—			—				0.0	%
Cash flow used by investing activities	$	(7,877	)	$	(112,573	)	$	104,696			(93.0	)%

· Capital expenditures include purchases of products for lease, property and equipment, and intangible assets.

· Direct acquisition cost associated with the acquisition of Stargames was $1,750 in the six months ended April 30, 2007 compared to $114,337 in the same prior year period.

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

	Six Months Ended
	April 30.						Increase			Percentage
	2007			2006			(Decrease)			Change
Repurchases of common stock	$	(1,933	)	$	—		$	(1,933	)		(100.0	)%
Proceeds from stock option exercises, net	2,493			5,710			(3,217		)		(56.3	)%
Proceeds from bridge financing, net of issue costs	—			114,719			(114,719		)		(100.0	)%
Proceeds from senior secured revolving credit
facility, net of issue costs	70,958			—			70,958				100.0	%
Proceeds from other borrowings	1,685			5,085			(3,400		)		(66.9	)%
Excess tax benefit from stock option exercises	1,458			2,371			(913		)		(38.5	)%
Payments on acquisition financing	(70,000		)	—			(70,000		)		(100.0	)%
Payments on senior secured revolving credit facility	(4,500		)	—			(4,500		)		(100.0	)%
Payments of notes payable and financing liabilities	(9,380		)	(18,402		)	9,022				49.0	%
Cash flow provided (used) by financing activities	$	(9,219	)	$	109,483		$	(118,702	)		(108.4	)%

· During the six months ended April 30, 2007, we repurchased 75 shares of our common stock for a total of $1,933 at an average price of $25.77, as compared to zero shares in the same prior year period.

· Our employees and directors exercised 224 options during the six months ended April 30, 2007, at an average exercise price of $18.94 per share, compared to 490 options at an average exercise price of $11.65 per share during the same prior year period.

· We received $70,958 proceeds, net of debt issuance costs, from our senior secured revolving credit facility. Proceeds were used to pay off the Old Credit Agreement associated with the acquisition of Stargames.

CAPITAL RESOURCES

Excluding any significant acquisitions of businesses, we believe our existing cash, investments, debt financing and projected cash flow from future operations will be sufficient to fund our operations, long-term obligations, capital expenditures, and new product development for the foreseeable future. Projected cash flows from operations are based on our estimates of revenue and expenses and the related timing of cash receipts and disbursements. If actual performance differs from estimated performance, projected cash flows could be positively or negatively impacted.

STOCK REPURCHASE AUTHORIZATIONS

The timing of our repurchases of our common stock pursuant to our board of directors’ authorization is dependent on future opportunities and on our views, as they may change from time to time, as to the most prudent uses of our capital resources, including cash and borrowing capacity. Alternatives that we consider as possible uses of our capital resources include investment in new products, acquisitions,

principle payments on the New Credit Agreement, funding of internal growth in working capital, and investments in sales-type leases and notes receivable.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

Except for the $100,000 senior secured revolving credit facility discussed elsewhere, our contractual obligations have not changed materially from the amounts disclosed in our Annual Report on Form 10-K/A for the year ended October 31, 2006. We do not have material off-balance sheet arrangements.

INDEBTEDNESS

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

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

· upon the occurrence of specified corporate transactions.

We may call some or all of the Notes at any time on or after April 21, 2009, at a redemption price, payable in cash, of 100% of the principal amount of the Notes, plus accrued and unpaid interest and including liquidated damages, if any, up to but not including the date of redemption. In addition, the holders may require us to repurchase all or a portion of their Notes on April 15, 2009, 2014 and 2019, at 100% of the principal amount of the Notes, plus accrued and unpaid interest and including liquidated damages, if any, up to but not including the date of repurchase, payable in cash. Upon a change in control, as defined in the indenture governing the Notes, holders may require us to repurchase all or a portion of their Notes, payable in cash equal to 100% of the principal amount of the Notes plus accrued and unpaid interest and liquidated damages, if any, up to but not including the date of repurchase.

· Permitted acquisitions;

· Incurrence of indebtedness;

· Granting or incurrence of liens;

· Pay dividends and make other distributions in respect of our equity securities;

· Acquire assets and make investments;

· Sales of assets;

· Transactions with affiliates;

· Mergers;

· Total Leverage Ratio;

· Interest Expense Coverage ratio; and

· Agreements to restrict dividends and other payments from subsidiaries.

As of April 30, 2007, $68,180 remained outstanding under the New Credit Agreement. At April 30, 2007, we had approximately $31,820 of available borrowings under the senior secured credit facility. As of April 30, 2007, we were in compliance with all financial covenants.

BTI liabilities. In connection with our acquisition of certain assets from Bet Technology, Inc. (“BTI”) in February 2004, we recorded an initial estimated liability of $7,616 for contingent installment payments computed as the excess fair value of the acquired assets over the fixed installments and other direct costs.

Beginning November 2004, we pay monthly note installments based on a percentage of certain revenue from BTI games for a period of up to ten years, not to exceed $12,000. The balance of this liability as of April 30, 2007 and October 31, 2006, was $3,420 and $4,441, respectively.

CRITICAL ACCOUNTING POLICIES

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

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

Revenue recognition. We recognize revenue when the following criteria are met:

· persuasive evidence of an arrangement between us and our customer exists,

· shipment has occurred or services have been rendered,

· the price is fixed or determinable, and

· collectibility is reasonably assured.

We earn our revenue in a variety of ways. We offer our products for lease or sale. We also sell service and warranty contracts for our sold equipment. Proprietary table games are sold under lifetime licensing agreements or licensed on a monthly or daily fee basis.

Lease and royalty revenue—Lease and royalty revenue is earned from the leasing of our tangible products and the licensing of our intangible products, such as our proprietary table games. We recognize revenue monthly, based on a monthly fixed fee, generally through indefinite term operating leases. Lease and royalty revenue commences upon the completed installation of the product.

Sales and service revenue—We generate sales revenue through the sale of equipment in each product segment, including sales revenue from sales-type leases and the sale of lifetime licenses for our proprietary table games. Financing for intangible property and sales-type leases for tangible property have payment terms ranging generally from 30 to 60 months and are interest-bearing at market interest rates. Revenue

from the sale of equipment is generally recorded upon shipment. If a customer purchases existing leased equipment, revenue is recorded on the effective date of the purchase agreement. Revenue on service and warranty contracts is recognized over the terms of the contracts, which are generally one year. Revenue from the sale of lifetime licenses, under which we have no continuing obligations, is recorded on the effective date of the license agreement.

Certain of our products contain software, and as such we have considered the guidance contained in Statement of Position (“SOP”) 97-2, “Software Revenue Recognition”, as modified by SOP No. 98-9, “Software Revenue Recognition, With Respect to Certain Transactions”. Under this guidance when selling or leasing software we consider whether the software component is incidental to the product as a whole based on the following criteria:

· Whether the software is a significant focus of the marketing effort or is sold separately.

· Whether post-contract customer support or PCS (PCS includes the right to receive services or unspecified upgrades/enhancements, or both, offered to users or resellers) is provided.

· Whether the development and production costs of the software as a component of the cost of the product is incidental (as defined in FASB Statement of Financial Accounting Standard (“SFAS”) No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed”).

· Whether an agreement includes service elements (other than PCS related services), such as training or installation, and whether such services are essential to the functionality of the software or whether such software is considered “off-the-shelf” (off-the-shelf software is software that is marketed as a stock item that can be used by customers with little or no customization). Conversely, “core software” requires significant customization of the software in order for the software to be used by the end customer.

Some of our revenue arrangements contain multiple deliverables, such as a product sale combined with a service element or the delivery of a future product. If an arrangement requires the delivery or performance of multiple elements, we apply the guidance from SOP 97-2, as amended, Emerging Issues Task Force (“EITF”) 03-05, “Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software”. Deliverables are divided into separate units of accounting if:

· The delivered items have value to the customer on a stand alone basis

· We have objective and reliable evidence of the fair value of the undelivered items

· Delivery of any undelivered item is considered probable and substantially in our control

If these criteria are not met, we do not recognize revenue until all essential elements have been delivered. If the installation of the product is not considered inconsequential and perfunctory, then we defer revenue recognition until installation is complete.

Business Combinations. We account for business combinations in accordance with SFAS No. 141, “Accounting for Business Combinations” (“SFAS 141”) and SFAS No. 142, “Accounting for Goodwill and Other Intangible Assets” (“SFAS 142”), and related interpretations. SFAS 141 requires that we record the net assets of acquired businesses at fair value, and we must make estimates and assumptions to determine the fair value of these acquired assets and assumed liabilities.

In determining the fair value of acquired assets and assumed liabilities in the Stargames acquisition, we used valuation specialists to assist us with certain fair value estimates, primarily related to intangible assets, including IPR&D, developed technology, tradename and customer relationships, as well as inventory and land, property and equipment. We and the valuation specialists applied significant judgment

and utilized a variety of assumptions in determining the fair value of acquired assets and liabilities assumed, and in-process research and development, including market data, estimated future cash flows, growth rates, current replacement cost for similar capacity for certain fixed assets, market rate assumptions for contractual obligations and settlement plans for contingencies and liabilities.

Intangible Assets and Goodwill. We have significant investments in intangible assets and goodwill. Intangible assets primarily include values assigned to acquired products, patents, trademarks, licenses and games. Significant accounting policies that affect the reported amounts for these assets include the determination of the assets’ estimated useful lives and the evaluation of the assets’ recoverability based on expected cash flows and fair value.

Except for the trademarks related to the Stargames and CARD acquisitions, which are not subject to amortization and are tested periodically for impairment, all of our significant intangible assets are definite lived and amortized over their expected useful lives. We estimate useful lives based on historical experience, estimates of products’ commercial lives, the likelihood of technological obsolescence, and estimates of the duration of commercial viability for patents, trademarks, licenses and games. We amortize substantially all of our intangible assets proportionate to the related projected revenue from the utilization of the intangible asset. We believe this method reflects the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up. For certain other intangibles, we use the straight-line amortization method. Should the actual useful life of an asset differ from the estimated useful life, future operating results could be positively or negatively affected.

We review our intangible assets for impairment when circumstances indicate that the carrying amount of an asset may not be fully recoverable from undiscounted estimated future cash flows. We would record an impairment loss if the carrying amount of the intangible asset is not recoverable and the carrying amount exceeds its estimated fair value.

We review our goodwill for impairment in October annually using a two step impairment test. The review is performed at the reporting unit level, which we have determined is the equivalent to our reportable segments. In the first step, we estimate the fair value of the reporting unit and compare it to the book value of the reporting unit, including its goodwill. If the fair value is less than the book value, then we would perform a second step to compare the implied fair value of the reporting unit’s goodwill to its book value. The implied fair value of the goodwill is determined based on the estimated fair value of the reporting unit less the fair value of the reporting unit’s identifiable assets and liabilities. We would record an impairment charge to the extent that the book value of the reporting unit’s goodwill exceeds its fair value.

Tests for impairment and recoverability of assets involve significant estimates and judgments regarding products’ lives and utility and the related expected future cash flows. While we believe that our estimates are reasonable, different assumptions could materially affect our assessment of useful lives, recoverability and fair values. An adverse change to the estimate of these cash flows could necessitate an impairment charge that could adversely affect operating results.

Inventory Obsolescence and Costing Methods. We value our inventory at the lower of cost, determined on a first-in-first-out basis, or market and estimate a provision for obsolete or unsalable inventories based on assumptions about the future demand for our products and market conditions. If future demand and market conditions are less favorable than our assumptions, additional provisions for obsolete inventory could be required. Likewise, favorable future demand could positively impact future operating results if fully-reserved-for inventory is sold.

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

our customers could result in the adjustment upward or downward in the provisions for bad debts, with a corresponding impact to our operating results.

Share-Based Compensation. Beginning November 1, 2006, we account for share-based compensation in accordance with the provisions of SFAS No. 123 (revised 2004) (“SFAS 123R”), “Share-Based Payment”, and SEC Staff Accounting Bulletin No. 107 (“SAB 107”), “Share-Based Payment”. Under the fair value recognition provisions of SFAS No. 123R, stock-based compensation cost is estimated at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period of the award. Determining the appropriate fair value model and calculating the fair value of share-based awards requires judgment, including estimating stock price volatility, forfeiture rates and expected life. If actual results differ significantly from these estimates, share-based compensation expense and our results of operations could be materially impacted.

The application of this policy affects the level of our cost of sales, research and development expenses, selling and administrative expenses, and additional paid-in capital. During fiscal 2006, we had no material changes in the critical accounting estimates arising from the application of this policy and we do not anticipate material changes in the near term.

Contingencies. We assess our exposures to loss contingencies including legal and income tax matters and provide for an exposure if it is judged to be probable and reasonably estimable. If the actual loss from a contingency differs from our estimate, there could be a material impact on our results of operations or financial position. Operating expenses, including legal fees, associated with contingencies are expensed when incurred.

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended April 30, 2007
	OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Minnesota		41-1448495
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

1106 Palms Airport Drive, Las Vegas	NV	89119
(Address of Principal	(State)	(Zip Code)
Executive Offices)

		Page
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited):
	Condensed Consolidated Statements of Income Three and Six months ended April, 30, 2007 and 2006	1
	Condensed Consolidated Balance Sheets April 30, 2007 and October 31, 2006	2
	Condensed Consolidated Statements of Cash Flows Six months ended April 30, 2007 and 2006	3
	Notes to Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47
Item 4.	Controls and Procedures	47
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	50
Item 1A.	Risk Factors	50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 6.	Exhibits	52
Signatures		53

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Period	Total Number of Shares Purchased		Average Price Paid per Share			Total Number of Shares Purchased as Part of a Publicly Announced Plans or Programs		Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
Feb 1 - Feb 28		—		$	—		—		$	28,233
Mar 1 - Mar 31		—		$	—		—		$	28,233
Apr 1 - Apr 30		—		$	—		—		$	28,233
Total		—		$	—		—

/s/ MARK L. YOSELOFF
Mark L. Yoseloff Chairman of the Board and Chief Executive Officer (Principal Executive Officer)
/s/ RICHARD L. BALDWIN
Richard L. Baldwin Senior Vice President and Chief Financial Officer (Principal Accounting Officer)

Quarter ending April 30,