UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2011
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to

Commission file number: 0-20820

SHUFFLE MASTER, INC.

(Exact name of registrant as specified in its charter)

Minnesota		41-1448495
(State or Other Jurisdiction		(IRS Employer Identification No.)
of Incorporation or Organization)
1106 Palms Airport Drive, Las Vegas	NV	89119
(Address of Principal	(State)	(Zip Code)
Executive Offices)

Registrant’s Telephone Number, Including Area Code: (702) 897-7150

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes xNo o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer o Accelerated filer x Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of August 25, 2011, there were 54,155,828 shares of our $.01 par value common stock outstanding.

SHUFFLE MASTER, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JULY 31, 2011

TABLE OF CONTENTS

		Page
	PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited):
	Condensed Consolidated Statements of Operations for the Three and Nine Months ended July 31, 2011 and 2010	3
	Condensed Consolidated Balance Sheets as of July 31, 2011 and October 31, 2010	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months ended July 31, 2011 and 2010	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46
Item 4.	Controls and Procedures	47
	PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	47
Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds	47
Item 3.	Defaults Upon Senior Securities	48
Item 4.	(Removed and Reserved)	48
Item 5.	Other Information	48
Item 6.	Exhibits	48
Signatures		49

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PART I

ITEM 1.  FINANCIAL STATEMENTS

SHUFFLE MASTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended						Nine Months Ended
	July 31,						July 31,
	2011			2010			2011			2010
Revenue:
Product leases and royalties	$	24,785		$	22,043		$	72,625		$	64,013
Product sales and service		33,542			29,504			89,400			78,686
Total revenue		58,327			51,547			162,025			142,699
Costs and expenses:
Cost of leases and royalties		8,970			6,932			24,506			20,394
Cost of sales and service		13,135			12,948			36,035			33,492
Gross profit		36,222			31,667			101,484			88,813
Selling, general and administrative		16,816			17,514			50,077			47,573
Research and development		6,695			5,719			19,494			15,925
Total costs and expenses		45,616			43,113			130,112			117,384
Income from operations		12,711			8,434			31,913			25,315
Other income (expense):
Interest income		177			158			429			450
Interest expense		(659	)		(1,023	)		(2,031	)		(3,039	)
Other, net		457			385			(504	)		1,512
Total other income (expense)		(25	)		(480	)		(2,106	)		(1,077	)
Income before income taxes		12,686			7,954			29,807			24,238
Income tax provision		3,560			2,112			7,931			6,832
Net income	$	9,126		$	5,842		$	21,876		$	17,406
Basic earnings per share:	$	0.17		$	0.11		$	0.40		$	0.33
Diluted earnings per share:	$	0.17		$	0.11		$	0.40		$	0.32
Weighted average shares outstanding:
Basic		54,446			53,272			54,317			53,246
Diluted		55,123			54,351			55,009			54,178

See Notes to Unaudited Condensed Consolidated Financial Statements.

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SHUFFLE MASTER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

	July 31,		October 31,
	2011		2010
ASSETS
Current assets:
Cash and cash equivalents	$	30,191	$	9,988
Accounts receivable, net of allowance for bad debts of $421 and $466		39,867		41,176
Investment in sales-type leases and notes receivable, net of allowance for bad debts of $57 and $71		2,516		1,806
Inventories		32,386		27,351
Prepaid income taxes		3,295		7,086
Deferred income taxes		5,917		5,091
Other current assets		4,854		14,969
Total current assets		119,026		107,467
Investment in sales-type leases and notes receivable, net of current portion and net of allowance for bad debts of $8 and $42		325		1,104
Products leased and held for lease, net		34,110		31,975
Property and equipment, net		13,200		12,642
Intangible assets, net		69,491		64,144
Goodwill		86,357		75,932
Deferred income taxes		6,233		7,523
Other assets		2,963		3,173
Total assets	$	331,705	$	303,960
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	2,881	$	7,013
Accrued and other current liabilities		19,230		34,762
Deferred income taxes, current		119		116
Income tax payable		4,042		74
Customer deposits		3,272		2,973
Deferred revenue		4,490		3,901
Total current liabilities		34,034		48,839
Long-term debt		68,770		66,262
Other long-term liabilities		2,366		2,641
Deferred income taxes		73		70
Total liabilities		105,243		117,812
Commitments and contingencies (See Note 12)
Shareholders' equity:
Common stock, $0.01 par value; 151,368 shares authorized; 54,156 and 53,650 shares issued and outstanding		541		536
Additional paid-in capital		113,173		108,705
Retained earnings		71,124		49,248
Accumulated other comprehensive income		41,624		27,659
Total shareholders' equity		226,462		186,148
Total liabilities and shareholders' equity	$	331,705	$	303,960

See Notes to Unaudited Condensed Consolidated Financial Statements.

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SHUFFLE MASTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, except per share amounts)

(Unaudited)

	Nine Months Ended
	July 31,
	2011			2010
Cash flows from operating activities:
Net income	$	21,876		$	17,406
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		17,951			17,584
Amortization of debt issuance costs		357			776
Share-based compensation		2,184			3,324
Provision for bad debts		140			496
Write-down for inventory obsolescence		626			382
Gain on sale of leased assets		(4,182	)		(5,081	)
Loss (Gain) on sale of assets		238			(23	)
Excess tax benefit from exercise of stock options		(808	)		(23	)
Changes in operating assets and liabilities:
Accounts receivable		3,182			1,337
Investment in sales-type leases and notes receivable		779			(22	)
Inventories		(3,948	)		401
Accounts payable and accrued liabilities		(21,232	)		12,811
Customer deposits and deferred revenue		825			(2,117	)
Income taxes payable		3,666			1,554
Deferred income taxes		1,036			248
Prepaid income taxes		3,812			447
Other		10,190			(10,866	)
Net cash provided by operating activities		36,692			38,634
Cash flows from investing activities:
Proceeds from sale of leased assets		6,240			7,277
Proceeds from sale of assets		86			133
Payments for products leased and held for lease		(11,608	)		(16,706	)
Purchases of property and equipment		(2,683	)		(4,314	)
Purchases of intangible assets		(6,269	)		(2,298	)
Acquisition of business		(6,499	)		-
Other		(701	)		(1,039	)
Net cash used in investing activities		(21,434	)		(16,947	)
Cash flows from financing activities:
Proceeds from Revolver		16,500			-
Debt payments on Revolver		(15,000	)		-
Proceeds from Deutsche Bank Senior Secured Credit Facility		-			12,125
Debt payments on Deutsche Bank Senior Secured Credit Facility		-			(10,245	)
Debt payments on Term Loan		-			(4,656	)
Proceeds from issuances of common stock, net		2,156			53
Excess tax benefit from exercise of stock options		808			23
Other		(41	)		(110	)
Net cash provided by (used in) financing activities		4,423			(2,810	)
Effect of exchange rate changes on cash and cash equivalents		522			(239	)
Net increase in cash and cash equivalents		20,203			18,638
Cash and cash equivalents, beginning of period		9,988			7,840
Cash and cash equivalents, end of period	$	30,191		$	26,478

See Notes to Unaudited Condensed Consolidated Financial Statements. 

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SHUFFLE MASTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except unit/seat and per share amounts)

(Unaudited)

1. DESCRIPTION OF BUSINESS AND INTERIM BASIS OF PRESENTATION

Description of business.  Unless the context indicates otherwise, references to “Shuffle Master, Inc.,” “we,” “us,” “our,” or the “Company,” include Shuffle Master, Inc. and its consolidated subsidiaries.

We develop, manufacture and market technology and entertainment-based products for the gaming industry for placement on the casino floor. We specialize in providing licensed casino operators and other users with products and services that improve their speed, profitability, productivity and security. Our business is segregated into the following four operating segments: Utility, Proprietary Table Games (“PTG”), Electronic Table Systems (“ETS”) and Electronic Gaming Machines (“EGM”).

Utility. Our Utility segment develops products for licensed casino operators that enhance table game speed, productivity, profitability and security. Utility products include automatic card shufflers and roulette chip sorters. This segment also includes our i-Shoe™ Auto card reading shoe that gathers data and enables casinos to track table game play and our i-Score™ baccarat viewer that displays current game results and trends. These products are intended to cost-effectively provide licensed casino operators and other users with data on table game play for security and marketing purposes, which in turn allows them to increase their profitability.

Proprietary Table Games. Our PTG segment develops and delivers proprietary table games that enhance our casino customers' and other licensed operators' table game operations. Products in this segment include our proprietary table games, side bets, add-ons and progressives.  Our proprietary content and features are also added to public domain games such as poker, baccarat, pai gow poker and blackjack table games and to electronic platforms such as Table Master® and i-Table®.

Electronic Table Systems.  Our ETS segment develops and delivers various products involving popular table game content using e-Table game platforms. Our primary ETS products are i-Table®, Table Master®, Vegas Star® and Rapid Table Games®.  Our i-Table® platform combines an electronic betting interface with a live dealer who deals the cards from our card reading shoe or shuffler that is designed to improve game speed and security while reducing many operating expenses associated with live tables. Our Table Master® and Vegas Star® feature a virtual dealer which enables us to offer table game content in both traditional gaming markets and in markets where live table games are not permitted, such as some racinos, video lottery and arcade markets. Our Rapid Table Games® product enables the automation of certain components of traditional table games such as data collection, placement of bets, collection of losing bets and payment of winning bets combined with live dealer and game outcomes. This automation provides benefits to both casino operators and players, including greater security and faster speed of play.

Electronic Gaming Machines.  Our EGM segment develops and delivers our PC-based video slot machines into select markets, primarily in Australasia.  We offer an extensive selection of video slot titles which include a range of bonus round options that can be configured as a network of machines or as stand-alone units. In addition to selling the full EGM complement, we sell software conversion kits that allow existing EGM terminals to be converted to other games on the PC3 and PC4 platform. Popular titles for our EGMs include Rise of the Dragon™, Golden Fortunes™, Lucky Panda™, The Conqueror™, Emperor Guan™, Tiki Totems™, Drifting Sands™, Ninja™, iChing™, Kelly Country™, Deep Sea Dollars™, Cuba™, Galapagos Wild™, Sunset on the Serengeti™ and Lonesome George™, as well as the Pink Panther™ and Grand Central™ progressive links. In July 2010, we began initial deliveries of Equinox™, our newest EGM product. Equinox™ offers widescreen displays and substantially improved graphics and user interfaces over older-style EGM machines.

We lease, license and sell our products. When we lease or license our products, we generally negotiate a month-to-month operating lease or license fee. When we sell our products, we often offer our customers long-term financing arrangements. 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 office and manufacturing facility in Milperra, New South Wales, Australia. In addition, we outsource the manufacturing of certain of our products and sub-assemblies in the United States, Europe and Australasia.

Basis of presentation.  The accompanying Unaudited Condensed Consolidated Financial Statements include the results of operations, financial position and cash flows of Shuffle Master, Inc. and its consolidated subsidiaries. All material intercompany balances have been eliminated. All amounts are in thousands except unit/seat and per share amounts. 

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In the opinion of our management, the accompanying Unaudited Condensed Consolidated Financial Statements include all adjustments necessary to fairly state, in all material respects, our results for the periods presented. These Condensed Consolidated Financial Statements have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations.  These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and accompanying notes included in our 2010 Annual Report on Form 10-K filed with the SEC on January 13, 2011.  The results of operations for the three and nine months ended July 31, 2011 are not necessarily indicative of results to be expected for the entire fiscal year.

Use of estimates and assumptions. The preparation of our Condensed Consolidated Financial Statements in conformity with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting periods. Future events and their effects cannot be predicted with certainty; accordingly, our accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of our Condensed Consolidated Financial Statements will change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. We evaluate and update our assumptions and estimates on an ongoing basis. Actual results could differ from those estimates.

Revenue recognition. We recognize revenues when all of the following have been satisfied:

· persuasive evidence of an arrangement exists;

· the price to the customer is fixed and determinable;

· delivery has occurred and any acceptance terms have been fulfilled; and

· collection is reasonably assured.

Revenues are reported net of incentive rebates, discounts and other taxes of a similar nature. Amounts billed prior to completing the earnings process are deferred until revenue recognition criteria are met.

Product 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. When we lease or license our products, we generally negotiate month-to-month fixed fee contracts, or to a lesser extent, enter into participation arrangements whereby casinos pay a fee to us based on a percentage of net win.   Lease and royalty revenue commences upon the completed installation of the product. Lease terms are generally cancellable with 30 days’ notice.  We recognize revenue from our leases and licenses upon installation of our product on a month-to-month basis.

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. Our credit sales terms are primarily 60 days or less.  Financing for intangible property and sales-type leases for tangible property have payment terms ranging generally from 24 to 36 months and are usually interest-bearing at market interest rates. Revenue from the sale of equipment is recorded in accordance with the contractual shipping terms. 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 as the services are provided over the term of the contracts. Revenue from the sale of lifetime licenses, under which we have no continuing obligation, is recorded on the effective date of the license agreement.

Our EGM, Table Master® and Vegas Star® products that contain both software and non-software components that function together to deliver the product’s essential functionality were previously subject to software revenue recognition rules. Under the new Accounting Standards Updates (“ASUs”) adopted for new and materially modified arrangements entered into after the beginning of our first quarter of fiscal 2010, our EGM, Table Master® and Vegas Star® products no longer fall under the scope of software revenue recognition rules and are generally recognized upon delivery and customer acceptance.

Multiple element arrangements — 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.  The new ASUs adopted provide for a more economically aligned model for allocating revenues among multiple deliverables in a multi-element arrangement, based on relative selling prices. In order of preference, relative selling prices will be estimated based on vendor specific objective evidence (“VSOE”), third-party evidence (“TPE”), or management’s best estimate of selling price (“BESP”), and the residual method is no longer allowed.

7

Most of our products and services qualify as separate units of accounting and the new guidance does not change this premise. When VSOE or TPE is not available, BESP is the amount we would sell the product or service for individually. The determination of BESP is made based on our normal pricing and discounting practices, which consider multiple factors, such as market conditions, competitive landscape, internal costs and profit objectives. Under the new guidance, revenues for certain products in our EGM and ETS segments and other software-enabled equipment in certain bundled arrangements previously deferred because VSOE was not available for undelivered elements will no longer be deferred. Generally, revenues allocated to future performance obligations elements are deferred and will be recognized upon delivery and customer acceptance.

Other recently adopted accounting standards. We adopted accounting standards related to the disclosure about the credit quality of financing receivables and allowances for credit losses which addresses concerns about the sufficiency, transparency and other robustness of credit risk disclosures for financing receivables and the related allowance for credit losses. This update is designed to provide disclosures that enable a better understanding of:

1. the nature of credit risk inherent in our portfolio of financing receivables;

2. how credit risk is analyzed to determine the allowance for credit losses; and

3. changes in and reasons for changes in the allowances for credit losses.

Receivables, allowance for doubtful accounts and credit quality of financing receivables. Accounts receivable is stated at face value less an allowance for doubtful accounts. We generally grant customers credit terms for periods of 30 to 90 days. Our investment in sales-type lease receivables is comprised of contracts. These contracts include extended payment terms granted to qualifying customers for periods from one to three years and are secured by the related products sold.

We evaluate the credit quality of the receivables and establish an allowance for doubtful accounts based primarily upon collection history, using a combination of factors including, but not limited to, customer collection experience, economic conditions, and the customer’s financial condition. In addition to specific account identification, we utilize historic collection experience, where applicable, to establish an allowance for doubtful accounts receivable. A specific reserve is allocated when collectability becomes uncertain due to events and circumstances, such as bankruptcy and tax or legal issues that cause an adverse change in a customer’s cash flows or financial condition. Accounts placed on reserve are evaluated for probability of collection, which is used to determine the amount of the specific reserve. All changes in the net carrying amount of our contracts are recorded as adjustments to bad debt expense. The allowance for doubtful accounts related to accounts receivable as of July 31, 2011 and October 31, 2010 was $421 and $466, respectively. The allowance for doubtful accounts related to investment in sales-type leases and notes receivable as of July 31, 2011 and October 31, 2010 was $65 and $113, respectively.

Uncollectible contracts are written off when it is determined that there is minimal chance of any kind of recovery, such as a customer property closure, bankruptcy restructuring or finalization, or other conditions that severely impact a customer’s ability to repay amounts owed.

Recently issued accounting standards or updates – not yet adopted

·

Fair value measurement disclosure – In May 2011, Financial Accounting Standards Board (“FASB”)issued an ASU on fair value measurement on how to measure fair value and on what disclosures to provide about fair value measurements. The ASU expands disclosure requirements particularly for Level 3 inputs to include following:

· For fair value categorized in Level 3 of the fair value hierarchy:

1. a quantitative disclosure of the unobservable inputs and assumptions used in the measurement,

2. a description of the valuation processes in place (e.g., how the entity decides its valuation policies and procedures, as well as changes in its analyses of fair value measurements, from period to period), and

3. a narrative description of the sensitivity of the fair value to changes in unobservable inputs and interrelationships between those inputs.

·         The level in the fair value hierarchy of items that are not measured at fair value in the statement of financial position but whose fair value must

be disclosed.

This ASU will be effective for our second quarter of fiscal 2012 and is not expected to have a material impact on our financial statements.

Comprehensive income – In June 2011, FASB issued an ASU on presentation of comprehensive income to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. This update changes the requirements for the presentation of other comprehensive income, eliminating the option to present components of other comprehensive income as part of the statement of stockholders' equity, among other items. The guidance requires that all non-owner changes in stockholders' equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements.

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This ASU will be effective for our first quarter of fiscal 2013 and as the update only requires a change in presentation, we do not expect to have a material impact on our financial statements.

2. SIGNIFICANT TRANSACTIONS

Newton Shuffler LLC. On November 15, 2010, we entered into a purchase agreement and related agreements (the “Purchase Agreement”) with Newton Shuffler LLC and related parties (“Newton”) whereby we acquired substantially all of the intellectual property assets of Newton.  Under the terms of the Purchase Agreement, we paid Newton an upfront payment of $6,500.  The Purchase Agreement also calls for approximately $1,400 to be paid over a 9 year period.  In connection with the Purchase Agreement, we also entered into non-competition agreements with Newton and the major owners of Newton for a period of 9 years.

We accounted for this acquisition as a business combination and allocated the total consideration of approximately $7,500 to the assets acquired based on their fair values.  We recorded approximately $2,700 to intangible assets which will be amortized on a straight line basis over a 9 year period.  The remaining amount of approximately $4,800 was recorded to goodwill.  We also recorded a liability associated with future consideration of approximately $1,400 due in non-interest bearing payments through 2019.  The balance as of July 31, 2011 of $1,055 represents the discounted present value of the future payments, excluding imputed interest of approximately $345, using an effective interest rate of 4.2%. The Newton acquisition enhances our Utility segment by adding to our intellectual property portfolio and providing for further revenue opportunities.

Prime Table Games, LLC. On December 21, 2010, we entered into a license and release agreement (the “License and Release Agreement”) with Prime Table Games, LLC and related parties (collectively “Prime Table Games”) to settle existing litigation between the parties and to acquire intellectual property licenses related to our PTG segment. Total consideration paid by us was $5,500. Accordingly, we recorded a legal settlement charge of approximately $2,200 for the year ended October 31, 2010, which represented the fair value associated with the effective settlement of the then existing litigation. The remaining $3,300 was recorded as intangible assets which will be amortized on a straight line basis over a 9 year period.

On December 21, 2010, we also entered into a remote gambling intellectual property transfer agreement (the “Remote Gambling Agreement”) in which we acquired licenses to the Three Card Poker™ internet rights in the British Isles for $1,500. The acquired internet rights include internet gambling and gambling via cell phones, in addition to certain social media uses such as play-for-fun applications on the internet.  The $1,500 was recorded as intangible assets which will be amortized on a straight line basis over a 9 year period.

3. SELECTED BALANCE SHEET DATA

The following provides additional disclosures for selected balance sheet accounts:

	July 31,		October 31,
	2011		2010
	(In thousands)
Net inventories:
Raw materials and component parts	$	15,340	$	17,322
Work-in-process		5,979		5,325
Finished goods		11,067		4,704
Total	$	32,386	$	27,351

Included in finished goods as of July 31, 2011 is approximately $3,000 of units on trial at customer facilities, compared to approximately $400 at October 31, 2010.  Our inventory of EGM finished goods has increased from approximately $1,000  at October 31, 2010 to approximately $1,600 at July 31, 2011, due to increased demand for Equinox™,our newest EGM product.

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	July 31,		October 31,
	2011		2010
	(In thousands)
Other current assets:
Prepaid expenses	$	3,054	$	2,483
Insurance receivables		27		10,840
Other receivables		1,394		845
Other		379		801
Total	$	4,854	$	14,969

Insurance receivables of $27 and $10,840 as of July 31, 2011 and October 31, 2010, respectively, related to the settlement of our class action lawsuits discussed in Note 12 and the shareholder derivative lawsuits.  In February and May 2010, we entered into settlement agreements to settle the class action lawsuits and shareholder derivative lawsuits for $13,000 and $1,000, respectively.  Under our Directors and Officers ("D&O") insurance policy, the settlement amounts totaling $14,000 are fully insured and reimbursable and our D&O insurance carriers paid the monetary settlement in full.  In accordance with court instructions, the remaining amount will be paid to beneficiaries as it is approved for payment by the court. As of July 31, 2011, $12,973 and $1,000 has been approved for payment by the court and paid to the beneficiaries of the class action lawsuits and shareholder derivative lawsuits, respectively.

	July 31,			October 31,
	2011			2010
	(In thousands)
Products leased and held for lease:
Utility	$	45,810		$	41,262
Less: accumulated depreciation		(28,220	)		(24,439	)
Utility, net		17,590			16,823
Proprietary Table Games		5,607			3,997
Less: accumulated depreciation		(2,540	)		(2,059	)
Proprietary Table Games, net		3,067			1,938
Electronic Table Systems		28,501			25,437
Less: accumulated depreciation		(15,048	)		(12,223	)
Electronic Table Systems, net		13,453			13,214
Total, net	$	34,110		$	31,975

	July 31,		October 31,
	2011		2010
	(In thousands)
Accrued and other current liabilities:
Accrued compensation	$	12,527	$	13,148
Accrued taxes		1,507		1,896
Accrued legal fees		421		11,376
Other accrued liabilities		4,775		8,342
Total	$	19,230	$	34,762

The decrease in other accrued liabilities primarily related to the settlement of the litigation with Prime Table Games described in Note 2.  The decrease in accrued legal fees is due to payment to the beneficiaries of the class action lawsuits and shareholder derivative lawsuits described above.

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4. INTANGIBLE ASSETS AND GOODWILL

Amortizable intangible assets.  All of our recorded intangible assets, excluding goodwill and the Stargames™ and CARD™ tradenames, are subject to amortization. We amortize certain of our intangible assets proportionate to the related actual 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 all other intangibles, including covenants not to compete, we amortize on a straight-line basis over their useful lives. Amortization expense was $2,533 and $2,788 for the three months ended July 31, 2011 and 2010, respectively, and $7,412 and $8,916 for the nine months ended July 31, 2011 and 2010, respectively.

Amortizable intangible assets are comprised of the following:

	Weighted Average	July 31,			October 31,
	Useful Life	2011			2010
		(In thousands)
Amortizable intangible assets:
Patents, games and products	10 years	$	69,038		$	64,344
Less: accumulated amortization			(51,203	)		(46,925	)
			17,835			17,419
Customer relationships	10 years		26,108			24,299
Less: accumulated amortization			(12,395	)		(9,563	)
			13,713			14,736
Licenses and other	6 - 9 years		18,643			13,328
Less: accumulated amortization			(6,835	)		(4,667	)
			11,808			8,661
Total		$	43,356		$	40,816

Tradenames. Intangibles with an indefinite life, consisting of the Stargames™ and CARD™ tradenames, are not amortized, and were $26,135 and $23,328 as of July 31, 2011 and October 31, 2010, respectively.

Goodwill.  Changes in the carrying amount of goodwill as of July 31, 2011, are as follows:

				Proprietary		Electronic			Electronic
Activity by Segment	Utility			Table Games		Table Systems			Gaming Machines		Total
	(In thousands)
Goodwill	$	44,135		$	8,317	$	33,268		$	11,079	$	96,799
Accumulated impairments		-			-		(22,137	)		-		(22,137	)
Balance as of October 31, 2009	$	44,135		$	8,317	$	11,131		$	11,079	$	74,662
Foreign currency translation adjustment		(1,820	)		-		920			916		16
Other		245			1,009		-			-		1,254
Balance as of October 31, 2010	$	42,560		$	9,326	$	12,051		$	11,995	$	75,932
Foreign currency translation adjustment		1,931			-		1,501			1,494		4,926
Acquisition		4,799			-		-			-		4,799
Other		-			700		-			-		700
Balance as of July 31, 2011	$	49,290		$	10,026	$	13,552		$	13,489	$	86,357

The $4,799 of additional goodwill in our Utility segment relates to the Newton acquisition during the three months ended January 31, 2011. For additional information about the Newton acquisition, see Note 2.

The $700 of additional goodwill in our PTG segment relates to our acquisition of certain assets from Bet Technology, Inc. (“BTI”) in 2004.  In 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.  During the three months ended July 31, 2011, we paid amounts in excess of the remaining liability associated with the contingent consideration originally recorded as part of the acquisition. For additional information about BTI contingent liability, see Note 5.

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5. DEBT

Debt consisted of the following:

	July 31,		October 31,
	2011		2010
	(In thousands)
Revolver	$	66,946	$	65,445
Newton future consideration		1,055		-
Other long-term debt		769		817
Total long-term debt	$	68,770	$	66,262

$200,000 senior secured revolving credit facility. On October 29, 2010, we entered into a new senior secured credit agreement (the “Senior Secured Revolving Credit Facility”) with Wells Fargo Securities, LLC and Banc of America Securities LLC, as joint lead arrangers and joint lead bookrunners, Bank of America, N.A. as syndication agent and Union Bank, N.A. as documentation agent. The Senior Secured Revolving Credit Facility provides for senior secured credit facilities in an aggregate principal amount of $200,000 consisting of a 5-year revolving credit facility (the “Revolver”) in an aggregate principal amount of $200,000 with a sub-facility for letters of credit of $25,000, a sub-facility for multicurrency borrowings in Euros, Australian dollars and Canadian dollars of $25,000, and a sub-facility for swing line loans of $20,000, each on customary terms and conditions. The Senior Secured Revolving Credit Facility includes an option to increase the Revolver to $300,000, which would require syndication approval.

Loans under the Revolver (other than Swing Line Loans, as defined) bear interest based on the Base Rate, as defined, or LIBOR, as elected by us. Base Rate interest is calculated at the Base Rate plus the applicable margin and the Base Rate is the highest of (a) the Federal Funds Rate plus .50%, (b) the prime commercial lending rate of the Administrative Agent, as defined, and (c) the one month LIBOR rate for such day plus 1.00%. Swing Line Loans bear interest at the Base Rate plus the applicable margin. Our effective interest rate as of July 31, 2011 was 2.19%. Borrowings under the Revolver may be used for working capital, capital expenditures and general corporate purposes (including share repurchases).

As of July 31, 2011, the amount drawn under the Revolver was $66,946 and after considering restrictive financial covenants under the Senior Secured Revolving Credit Facility, we had approximately $133,000 of available remaining credit under the Revolver. The Revolver matures on October 29, 2015.

Covenants. Our Senior Secured Revolving Credit Facility contains three financial maintenance covenants requiring us to maintain a Total Leverage Ratio, as defined therein, of not more than 3.75 to 1.0, a Senior Leverage Ratio, as defined therein, of not more than 3.0 to 1.0 until October 31, 2013 and not more than 2.75 to 1.00 after October 31, 2013 and Interest Expense Coverage Ratio, as defined therein, in excess of 3.0 to 1.0 at the end of any fiscal quarter. As of July 31, 2011, our Total Leverage Ratio, Senior Leverage Ratio and Interest Expense Coverage Ratio were 1.00 to 1.0, 0.97 to 1.0 and 28.77 to 1.0, respectively.

Guarantors and collateral. The Revolver obligations under our Senior Secured Revolving Credit Facility are guaranteed by each existing and future wholly-owned domestic subsidiary of ours that is not an immaterial subsidiary and are secured by a first priority lien on substantially all of our and our guarantors’ assets.  

Newton future consideration.  In connection with our acquisition of Newton on November 15, 2010, we recorded a liability associated with future consideration of approximately $1,400 due in non-interest bearing payments through 2019.  The balance as of July 31, 2011 of $1,055 represents the discounted present value of the future payments, excluding imputed interest of approximately $345, using an effective interest rate of 4.2%.

BTI contingent liability. In connection with our acquisition of certain assets from 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.  In November 2004, we began paying 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 final principal and interest payment related to our initial estimated liability of $7,616 was paid in February 2009 and therefore no outstanding balance existed as of July 31, 2011 and October 31, 2011. As of July 31, 2011, we have paid approximately $10,269 of the $12,000 maximum amount since February 2004.

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6. SHAREHOLDERS’ EQUITY

Common stock repurchases.Our board of directors periodically authorizes us to repurchase shares of our common stock.  As of July 31, 2011, $21,077 remained outstanding under our board authorization.  We cancel shares that are repurchased.  No shares were repurchased during the three and nine months ended July 31, 2011.  Although we generally prioritize bank debt reduction over share repurchases we may consider share repurchase when there are anomalies in the value created by, but not limited to, market conditions.

The timing of our common stock repurchases 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.

Other comprehensive income. For the three and nine months ended July 31, 2011 and 2010, other comprehensive income consisted primarily of foreign currency translation adjustments.  The following table provides information related to other comprehensive income:

	Three Months Ended						Nine Months Ended
	July 31,						July 31,
	2011			2010			2011		2010
	( In thousands)
Net income	$	9,126		$	5,842		$	21,876	$	17,406
Currency translation adjustment		(2,136	)		(3,334	)		13,965		(7,792	)
Total comprehensive income	$	6,990		$	2,508		$	35,841	$	9,614

Comprehensive income consists of two components, net income and other comprehensive income. Other comprehensive income refers to revenue, expenses, gains and losses that under GAAP are recorded as an element of shareholders’ equity but are excluded from net income. The Company’s other comprehensive income consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency.

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. In addition, the 2004 Plan provides for the grant of restricted stock units. Awards granted under the plans (collectively “Awards”) may be granted individually or in any combination. 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. Equity granted under the 2004 Plan generally vests in equal increments over four years and expires in ten years. Equity granted under the 2004 Directors’ Plan generally vests over periods of one to two 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.

In January 2009, our board of directors adopted and, in March 2009, our shareholders approved the Shuffle Master, Inc. 2004 Equity Incentive Plan (as amended and restated on January 28, 2009) (the “Amended 2004 Plan”). The Amended 2004 Plan increased the number of shares available for issuance in addition to other related technical changes. Subject to the Amended 2004 Plan, the aggregate number of shares that may be granted under the Amended 2004 Plan may not exceed 5,200 shares of which no more than 2,590 shares may be granted as restricted stock.

As of July 31, 2011, under the Amended 2004 Plan and 2004 Directors’ Plan, there were 1,600 and 202 shares available for grant, respectively.

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A summary of activity related to stock options is presented below:

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
	Shares			Price		Term		Value
	(In thousands, except per share amount)
Outstanding at November 1, 2010		4,840		$	13.56
Granted		555			10.86
Exercised		(462	)		4.66
Forfeited or expired		(231	)		16.26
Outstanding at July 31, 2011		4,702		$	13.98		5.4	$	5,086
Fully vested and expected to vest at July 31, 2011		4,671		$	14.05		5.3	$	5,060
Exercisable at July 31, 2011		3,298		$	15.09		4.2	$	3,381

For the three months ended July 31, 2011 and 2010, we issued 28 and 16 stock options, with an aggregate fair market value of $157 and $78, respectively. For the nine months ended July 31, 2011 and 2010, we issued 555 and 707 stock options, with an aggregate fair market value of $3,142 and $2,907, respectively. For the three months ended July 31, 2011, 73 stock options were exercised and $28 of related tax benefit was recognized and for the nine months ended July 31, 2011, 462 stock options were exercised and $71 of related tax benefit was recognized. As of July 31, 2011, there was approximately $4,079 of unamortized compensation expense related to stock options, which expense is expected to be recognized over a weighted-average period of 1.8 years.

A summary of activity related to restricted stock is presented below:

				Weighted
				Average		Remaining		Aggregate
				Grant-Date		Vesting		Intrinsic
	Shares			Fair Value		Period		Value
	(In thousands, except per share amount)
Nonvested at November 1, 2010		356		$	16.25
Granted		339			10.13
Vested		(139	)		15.95
Forfeited		(35	)		9.16
Nonvested at July 31, 2011		521		$	12.83		1.29	$	4,855
Expected to vest		504		$	12.91		1.25	$	4,696

The total value of each restricted stock grant, based on the fair market value of the stock on the date of grant, is amortized to compensation expense over the related vesting period. As of July 31, 2011, there was approximately $3,032 of unamortized compensation expense related to restricted stock, which expense is expected to be recognized over a weighted-average period of 2.0 years.

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

	Three Months Ended						Nine Months Ended
	July 31,						July 31,
	2011			2010			2011			2010
	(In thousands)
Compensation costs:
Stock options	$	483		$	1,128		$	1,471		$	2,677
Restricted stock		223			341			713			647
Total compensation cost	$	706		$	1,469		$	2,184		$	3,324
Related tax benefit	$	(245	)	$	(458	)	$	(761	)	$	(1,032	)

Option valuation models require the input of certain assumptions and changes in assumptions used can materially affect the fair value estimate. Expected volatility and dividends are based on historical factors related to our common stock. Expected term represents the estimated weighted-average time between grant and employee exercise. Risk free interest rate is based on U.S. Treasury rates appropriate for the expected term. We estimate the fair value of each stock option award on the grant date using the Black-Scholes valuation model incorporating the weighted-average assumptions noted in the following table:

	Three Months Ended		Nine Months Ended
	July 31, 2011		July 31, 2011
Option valuation assumptions:
Expected dividend yield		None		None
Expected volatility		63.8%		64.8%
Risk-free interest rate		1.6%		1.7%
Expected term		4.4 years		4.4 years

8. INCOME TAXES

Our effective income tax rate from continuing operations for the three and nine months ended July 31, 2011 was 28.1% and 26.6%, respectively. Our effective income tax rate from continuing operations for the three and nine months ended July 31, 2010 was 26.6% and 28.2%, respectively. The higher effective income tax rate for the three months ended July 31, 2011 compared to the prior year period is primarily attributable to  the decrease in gross unrecognized tax benefits of approximately $800 and related interest and penalties recognized of approximately $100 due to statute of limitation lapses with tax authorities in the prior year.  The lower effective income tax rate for the nine months ended July 31, 2011 compared to the prior year period is primarily attributable to the mix of domestic and foreign income for the year.  Our effective income tax rate may fluctuate due to changes in the amount and mix of domestic and foreign income, changes in tax legislation, changes in valuation allowances and changes in assessments of uncertain tax positions, as well as accumulated interest and penalties.

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9. EARNINGS PER SHARE

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

	Three Months Ended				Nine Months Ended
	July 31,				July 31,
	2011		2010		2011		2010
	(In thousands, except per share amount)
Net income available to common shares	$	9,126	$	5,842	$	21,876	$	17,406
Basic
Weighted average shares		54,446		53,272		54,317		53,246
Diluted
Weighted average shares, basic		54,446		53,272		54,317		53,246
Dilutive effect of options		677		1,079		692		932
Weighted average shares, diluted		55,123		54,351		55,009		54,178
Basic earnings per share	$	0.17	$	0.11	$	0.40	$	0.33
Diluted earnings per share	$	0.17	$	0.11	$	0.40	$	0.32
Weighted average anti-dilutive shares excluded from diluted EPS		3,484		3,506		3,312		3,601

10. FAIR VALUE MEASUREMENT

We utilize a three level hierarchy that defines the assumptions used to measure certain assets and liabilities at fair value.

Cash and cash equivalents, accounts receivable, the current portion of our investment in sales-type leases and notes receivable are not presented in the table below as their carrying value approximates fair value due to their short term nature.  It is impracticable to estimate the fair value of the long-term portion of our investment in sales-type leases and notes receivable as it is comprised of many insignificant balances, customers with different credit profiles and various interest rates.  The fair value of our Revolver as of July 31, 2011 has been calculated based on market borrowing rates available as of July 31, 2011 for debt with similar terms and maturities. The fair value of our Revolver as of October 31, 2010 approximates the carrying value as of October 31, 2010 as we closed on the Senior Secured Revolving Credit Facility on October 29, 2010. The following table provides the fair value measurement information about the Company’s long-term debt.

	Carrying Value		Fair Value		Carrying Value		Fair Value		Fair Value
	July 31, 2011		July 31, 2011		October 31, 2010		October 31, 2010		Hierarchy
	(In thousands)
Revolver	$	66,946	$	66,950	$	65,445	$	65,445	Level 2

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11. OPERATING SEGMENTS

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

	Three Months Ended						Nine Months Ended
	July 31,						July 31,
	2011			2010			2011			2010
	(In thousands)
Revenue:
Utility	$	22,575		$	19,807		$	59,108		$	58,554
Proprietary Table Games		10,994			10,949			32,766			30,154
Electronic Table Systems		6,793			11,607			26,721			32,426
Electronic Gaming Machines		17,965			9,184			43,430			21,565
	$	58,327		$	51,547		$	162,025		$	142,699
Gross profit:
Utility	$	12,852		$	11,803		$	35,284		$	35,394
Proprietary Table Games		8,671			8,858			26,338			24,111
Electronic Table Systems		3,197			6,212			12,684			17,963
Electronic Gaming Machines		11,502			4,794			27,178			11,345
	$	36,222		$	31,667		$	101,484		$	88,813
Operating income:
Utility	$	11,208		$	10,179		$	30,294		$	30,324
Proprietary Table Games		7,445			8,297			23,205			22,375
Electronic Table Systems		328			3,786			3,860			10,686
Electronic Gaming Machines		8,336			2,865			18,493			5,950
Unallocated Corporate		(14,606	)		(16,693	)		(43,939	)		(44,020	)
	$	12,711		$	8,434		$	31,913		$	25,315
Depreciation and amortization:
Utility	$	2,252		$	1,941		$	5,451		$	5,913
Proprietary Table Games		1,414			1,588			4,183			4,611
Electronic Table Systems		1,397			1,243			5,300			4,646
Electronic Gaming Machines		38			-			166			197
Unallocated Corporate		974			862			2,851			2,217
	$	6,075		$	5,634		$	17,951		$	17,584
Capital expenditures:
Utility	$	2,171		$	2,134		$	6,537		$	10,930
Proprietary Table Games		668			343			6,843			1,295
Electronic Table Systems		1,299			1,173			4,376			6,188
Electronic Gaming Machines		354			-			421			878
Unallocated Corporate		659			1,805			2,383			4,027
	$	5,151		$	5,455		$	20,560		$	23,318

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REVENUE BY GEOGRAPHIC AREA

The following provides financial information concerning our revenues by geographic area:

	Three Months Ended						Nine Months Ended
	July 31,						July 31,
	2011			2010			2011			2010
	(Dollars in thousands)
Revenue:
United States	$	26,578	45.6%	$	27,934	54.2%	$	76,928	47.5%	$	75,412	52.8%
Canada		2,696	4.6%		1,978	3.8%		5,970	3.7%		6,642	4.7%
Other North America		1,308	2.2%		797	1.5%		3,668	2.3%		2,585	1.8%
Europe		2,344	4.0%		2,030	3.9%		5,986	3.7%		6,609	4.6%
Australia		20,395	35.0%		13,034	25.3%		55,909	34.5%		37,446	26.2%
Asia		4,189	7.2%		5,331	10.3%		11,965	7.4%		12,726	8.9%
Other		817	1.4%		443	1.0%		1,599	0.9%		1,279	1.0%
	$	58,327	100.0%	$	51,547	100.0%	$	162,025	100.0%	$	142,699	100.0%

12. COMMITMENTS AND CONTINGENCIES

Employment agreements. We have entered into employment agreements with our corporate officers and certain other key employees with durations ranging from one to four 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 employment agreement. As of July 31, 2011 and October 31, 2010, minimum aggregate severance benefits totaled $6,510 and $5,670, respectively.

Legal proceedings. In the ordinary course of business, we are involved in various legal proceedings and other matters that are complex in nature and have outcomes that are difficult to predict.  We record accruals for such contingencies to the extent that we conclude that it is probable that a loss will be incurred and the amount of loss can be reasonably estimated.  We have not recorded any loss accruals for these contingencies unless otherwise noted below. Our assessment of each matter may change based on future unexpected events.  An unexpected adverse judgment in any pending litigation could cause a material impact on our business operations, intellectual property, results of operations or financial position.  Unless otherwise expressly stated, 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.

GEI – In July 2004, we filed a patent infringement lawsuit against Gaming Entertainment, Inc. (“GEI”) and Yehia Awada (“Awada”) in the U.S. District Court for the District of Nevada, in Las Vegas, Nevada.  The lawsuit alleges that GEI/Awada's 3-5-7 Poker™ game infringes one of our Three Card Poker® patents and one of our Let-It-Ride® patents.  We were seeking a permanent injunction and an undetermined amount of damages against GEI/Awada.

On March 6, 2008, the Court ordered entry of default against GEI/Awada.  In accordance with the Court's order, we sought appropriate damages, an injunction and costs to be included in a default judgment.  In June 2008, the Court issued a default judgment against Awada and GEI for $792 and also issued a permanent injunction against their 3-5-7 Poker™ game, which judgment was entered in July 2008. The judgment is still outstanding. There is no assurance of collectability of all or any part of this judgment.

In August 2008, we started certain proceedings to collect the judgment for $792 including, without limitation, a lawsuit filed in the Eighth Judicial District Court, Clark County, Nevada, related to the fraudulent transfer of certain intellectual property assets by Awada/GEI.  The Court entered an order on August 11, 2008, that in part required GEI/Awada to remove all 3-5-7 Poker™ games by August 12, 2008, with which they complied, on a later date, to the best of our knowledge. In October 2009, Awada filed for bankruptcy, which stayed all collection activities against him, including those arising from our judgment.  On November 24, 2009, GEI joined Awada in filing for bankruptcy protection, and thus all collection activities with respect to our judgment against both GEI and Awada were stayed at that time.  In August 2010, the bankruptcy court dismissed Awada’s bankruptcy case.  Collection efforts with respect to our judgment against Awada may now be resumed.  The stay of collection efforts as a result of bankruptcy protection remains in effect as to GEI.

18

Class Action Lawsuits –

a. Stocke Complaint—On June 1, 2007, a putative class action complaint for violation of federal securities laws against the Company and our then Chief Executive Officer, Mark L. Yoseloff, and our then Chief Financial Officer, Richard L. Baldwin, was filed in the U.S. District Court for the District of Nevada on behalf of persons who purportedly 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 (the “Stocke Complaint”).  The Stocke 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 allegedly relate to our March 13, 2007, announcement that we would restate our 2006 fiscal fourth quarter and 2006 full year financial results.  The Stocke Complaint sought compensatory damages in an unstated amount.  On or about August 4, 2007, four plaintiffs moved the Court for appointment as lead plaintiff.

b. Armistead Complaint—On June 12, 2007, a second putative class action complaint for violation of certain federal securities laws against the Company,  Dr. Yoseloff and Mr. Baldwin was filed in the U.S. District Court for the District of Nevada.  The case is entitled Robert Armistead, Jr. vs. Shuffle Master, Inc., Mark L. Yoseloff and Richard L. Baldwin.  This lawsuit effectively mirrors the allegations in the Stocke Complaint, except that this complaint was filed on behalf of persons who purportedly purchased our stock between March 20, 2006 and March 12, 2007.

c. Tempel Complaint—On June 25, 2007, a third putative class action complaint for violation of certain federal securities laws against the Company, Dr. Yoseloff and Mr. Baldwin was filed in the U.S. District Court for the District of Nevada.  The case is entitled Andrew J. Tempel vs. Shuffle Master, Inc., Mark L. Yoseloff and Richard L. Baldwin. This lawsuit is a “copycat” lawsuit of the Stocke Complaint.

d. Consolidation of Stocke, Armistead and Tempel Complaints – On June 22, 2007, a Joint Stipulation was filed in the U.S. District Court for the District of Nevada providing that all presently filed and any subsequently filed related class actions shall be consolidated and captioned In Re Shuffle Master, Inc. Securities Litigation.  We were not required to answer, move against or otherwise respond to any class action complaints until a consolidated complaint was filed.

On November 30, 2007, the Court appointed the Shuffle Master Institutional Investor Group, consisting of the Tulsa Municipal Employees' Retirement Plan and the Oklahoma Firefighters Pension and Retirement System as lead plaintiffs.

A Consolidated Amended Class Action Complaint (the “Consolidated Complaint”) was filed on February 5, 2008.  The Consolidated Complaint asserted the same causes of action for violation of federal securities laws as the initial class actions and applied to a class period of February 1, 2006 to March 12, 2007.  The Consolidated Complaint contained essentially the same material allegations as in the initial lawsuits and also contained allegations arising out of the Company's acquisition of Shuffle Master Australasia (d/b/a “Stargames”) and disclosures concerning the Company's internal controls.  This Consolidated Complaint superseded all previously filed lawsuits covering this class period.  On March 25, 2008, the defendants filed a Motion to Dismiss the Consolidated Complaint, which was denied on March 23, 2009.  The defendants answered the Consolidated Complaint on April 29, 2009.

On February 2, 2010, the lead plaintiffs filed a Motion for Preliminary Approval of Settlement, which was granted on February 4, 2010.  Our D&O insurance carriers escrowed the monetary settlement in full, being the amount of $13,000 for payment to the plaintiffs in full upon final approval of the settlement by the Court.

On June 8, 2010, the Court gave its final approval to this settlement and on June 9, 2010, the Court entered an order and final judgment concluding the matter. No appeal was filed from the order and final judgment and the period for appeal has subsequently expired.  As of July 31, 2011, substantially the entire amount was approved for payment by the court and paid to the beneficiaries of the Class Action Lawsuits. See Note 3 for more information. We consider the matters to be materially concluded.

TableMAX – On April 14, 2009, TableMAX IP Holdings, Inc. and TableMAX Gaming, Inc. filed a complaint (the “First Complaint”) against us in the United States District Court for the District of Nevada.  This case is a patent infringement claim alleging that our Table Master® product infringes U.S. Patents 5,688,174, 6,921,337 and 7,201,661.  The First Complaint sought injunctive relief and an unspecified amount of damages, including claims for attorneys’ fees, costs, increased damages and disbursements.  On August 13, 2009, TableMAX Holdings, Inc. and TableMAX Gaming, Inc. voluntarily dismissed the First Complaint.  On the same date, TableMAX IP Holdings, Inc., TableMAX Gaming, Inc. and Vegas Amusement, Inc. (collectively “TableMAX”), the alleged owner of Patents 5,688,174, 6,921,337 and 7,201,661, filed a new complaint (the “New Complaint”) making allegations materially the same as the allegations in the First Complaint.  In August 2009, TableMAX filed an amended complaint (the “Second Complaint”), which superseded and is materially the same as the New Complaint, except that the plaintiffs added a new claim that Table Master® infringes U.S. Patent 7,575,512, which was issued on August 18, 2009.  On August 19, 2009, the plaintiffs filed a Motion for Preliminary Injunction in the Second Complaint that sought to enjoin future sales of our Table Master® product.  In October 2009, the Court denied the Motion for Preliminary Injunction without hearing oral argument and the Court also denied without prejudice various motions for summary judgment that we filed. During the discovery process, TableMAX made new allegations that certain of our Vegas Star® products infringe one of the patents in the Second Complaint. In January 2010, TableMAX filed a Second Amended Complaint (the "Third Complaint"), which has materially the same allegations as the Second Complaint, except that it alleges that our Vegas Star® product allegedly infringes all of the patents in suit. A document produced in the discovery process appears to limit TableMAX's allegations of infringement regarding our Vegas Star® product to only one of TableMAX's patents in suit.

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The Court set the Markman hearing for December 15, 2010.    In November 2010, the Court granted our Motion to Stay and the case remains currently stayed.  We believe that the claim is entirely without merit and we intend to continue to vigorously defend this matter.

Macau Rapid Baccarat® Patent Issue – On or about June 3, 2009, at the G2E Asia Gaming Show, customs officials from Macau SAR seized a Rapid Baccarat® unit related to an alleged claim of patent infringement by a Macau patent owner.  There is a possibility of future legal proceedings being commenced against our subsidiary, Shuffle Master Asia Limited (“SMAL”) and its directors in Macau relating to this patent, although, at this time, no such proceedings have been commenced. Such proceedings, if initiated, would be for patent infringement, which we understand is a criminal matter in Macau. On October 27, 2009, the governmental official in charge of the investigation elected to dismiss the investigation based on a finding that no patent infringement existed based upon the report of the Macau customs officials.  In November 2010, the patent holder appealed this finding to the Macau Courts. On or about January 20, 2010, over our objection, the judge considering the patent holder’s appeal found that his appeal was timely filed.  The judge made no ruling on the patent holder’s appeal itself and thus no decision has yet been reached on whether a proceeding against SMAL will be opened. If the patent holder’s appeal to the Macau Courts is successful, then a criminal case for patent infringement against SMAL and its directors may be instituted.  We are not aware of any proceeding against SMAL or any of its directors yet being commenced.

On or about February 3, 2010, we filed an appeal (the “First SMAL Appeal”) to the judge’s decision that the patent holder’s appeal was timely.  On or about March 4, 2010, the judge declined to forward the First SMAL Appeal to a higher Macau Court. We filed a further appeal (the “Second SMAL Appeal”) to have the higher Macau court hear the First SMAL Appeal.   On June 2, 2010, the Judge denied the patent holder’s request to open a criminal proceeding and decided that the investigation should remain dismissed against SMAL and its directors.  The patent holder subsequently appealed the June 2, 2010, decision to a higher Macau court.  We believe that the claim is entirely without merit and we intend to continue to defend this matter vigorously.

Wright Matter – On November 7, 2009, Sam Wright was playing a Vegas Star® craps machine at the Harrah’s Casino New Orleans.  Mr. Wright played a game that ended in a losing result.  After the game concluded, as a result of a malfunction, a false credit meter value of approximately $42,000 appeared on the machine.  On April 26, 2010, we received notice for the first time that Mr. Wright had purported to file a patron dispute with the Louisiana State Police Gaming Division.  The purported patron dispute requests that Harrah’s New Orleans Casino and/or we acknowledge the gaming debt of $42,000 to Mr. Wright.  

On October 14, 2010, the Louisiana State Police Gaming Division concluded in regard to the patron dispute that there was no violation of state law, section rule or internal controls. Mr. Wright was unsuccessful in the patron dispute.

On November 5, 2010, Mr. Wright filed a Petition for Damages with the Civil District Court for the Parish of Orleans, State of Louisiana.  The defendants in the lawsuit are the Company, Jazz Casino Company, LLC d/b/a Harrah’s New Orleans Casino and Harrah’s New Orleans Management Company (collectively, “Harrah’s).  The Petition claims damages of approximately $43,000 plus possible treble damages, attorneys’ fees and costs.  The Company may have potential indemnity obligations to defendants Harrah’s if a judgment is entered against these defendants.  The Petition was served on us on January 11, 2011.  On February 9, 2011, all defendants answered the Petition and removed the case to the United States District Court for the Eastern District of Louisiana.   On July 1, 2011, the Court entered an order setting the trial date for May 7, 2012.  We believe that the claim is entirely without merit and we intend to continue to defend this matter vigorously.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (In thousands, except units/seats and per share amounts)

Cautionary Statement for Purposes of “Safe Harbor Provisions” of the Private Securities Litigation Reform Act of 1995

There are statements herein that are forward-looking statements that are based on management’s beliefs, as well as on assumptions made by and information available to management. We consider such statements to be made under the safe harbor created by the federal securities laws to which we are subject, and, other than as required by law, we assume no obligation to update or supplement such statements. These statements can be identified by the fact that they do not relate strictly to historical or current facts, and are based on management’s current beliefs and expectations about future events, as well as on assumptions made by and information currently available to management. These forward-looking statements include statements that reflect management’s beliefs, plans, objectives, goals, expectations, anticipations and intentions with respect to our financial condition, results of operations, future performance and business, including statements relating to our business strategy and our current and future development plans. When used in this report, words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “project,” “plan,” “predict,” “might,” “may,” “could,” and similar expressions or the negative thereof, as they relate to us or our management, identify forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part II, Item 1A, “Risk Factors.” The following discussion should be read in conjunction with “Item 8. Financial Statements and Supplementary Data” in the Annual Report on Form 10-K (“Form 10-K”) filed on January 13, 2011 and the Condensed Consolidated Financial Statements and notes thereto included elsewhere in this Form 10-Q. All information presented herein is based on our fiscal calendar. Unless otherwise stated, references in this report to particular years or quarters refer to our fiscal years ended in October and the associated quarters of those fiscal years. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.

Overview

We develop, manufacture and market technology and entertainment-based products for the gaming industry for placement on the casino floor. We specialize in providing licensed casino operators and other users with products and services that improve their speed, profitability, productivity and security.  Our products are offered in highly regulated markets throughout the world.  Our products are manufactured at our headquarters and manufacturing facility in Las Vegas, Nevada, at our Australian headquarters in Milperra, New South Wales, Australia, as well as outsourced for certain products and sub-assemblies in the United States, Europe and Australasia.

Our business is segregated into the following four product segments: Utility, Proprietary Table Games (“PTG”), Electronic Table Systems (“ETS”) and Electronic Gaming Machines (“EGM”). Each segment's activities include the design, development, acquisition, manufacturing, marketing, distribution, installation and servicing of a distinct product line.

See Note 1 to our Condensed Consolidated Financial Statements for a more detailed discussion of our four segments.

Strategy

We believe we are enhancing our customer and shareholder value through our execution of the following strategic priorities:

· An unwavering commitment to create innovative solutions and services for casino operators and compelling gaming experiences for players through enhanced customer centricity.

· Reinforce our true “strategic partner” relationships with our customers by providing enhanced efficiencies, security and profitability on the casino floor. We will continue to work on developing innovative products that anticipate and respond to their needs.

· Maintain a cost-conscious mindset, promote a lean culture, and serve as prudent stewards of shareholder capital.

· Create long-term profitability and sustainability through our recurring revenue model. We have and will continue to invest capital in our lease business to maximize our return and build on our economic engine.

· Foster the spirit of invention and the commitment to innovation that is at the heart of our success.  With nearly 2,400 patents and trademarks granted and pending, our pipeline for new intellectual property is robust. We believe our intellectual property collectively represents one of the strongest portfolios in the industry and our success depends upon our ability to preserve and protect our core assets.

· Capitalize on emerging markets and the worldwide proliferation of gaming.  A large part of our success in fiscal 2010 was turning opportunities into achievements.  As new markets continue to emerge across the globe and as existing gaming markets continue to evolve, we will be two steps ahead in making the most of every opportunity that arises.

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· Sound balance sheet management to fuel growth through:

o Continued investment in our recurring revenue model, global intellectual property and R&D. This will provide true growth on the Company’s top and bottom line without relying on the introduction of significant new markets.

o Continued examination of acquisitions.  We are seeking opportunities that are accretive to earnings, have strong existing recurring revenues, and merit our efforts of integration.

o Use of our financial resources to improve our return to shareholders through continued deleveraging.

· Promote and foster internal staff development and deepen our bench strength.  We know our success is directly attributable to the caliber of our workforce and we remain committed to each and every employee’s development.  We will continue to set the talent bar high.

· Drive margin improvement across all product categories. Our overall gross margin has shown continuous improvement over the past three fiscal years.  We will continue our process improvement initiatives and uncover greater operational efficiencies.  Our overall gross margin increases as lease revenue rises.  As we continue to grow these recurring revenues, we anticipate improved gross margins.

· Capitalize on opportunities created from existing online gaming markets and prepare ourselves for the potential legalization of internet gambling in the U.S.  The gaming landscape is quickly evolving and we will be proactive in ensuring we are a leading content-provider in this arena.  We believe online gaming represents a significant opportunity for our future growth.

We are focused on our customers and on value-creation for our shareholders.  We will maintain continuous improvement while keeping innovation at the core of our success. We expect that with the continued execution of our strategic plan, our business will continue to grow in fiscal 2011.

Sources of Revenue

We derive our revenue from the lease, license and sale of our products and by providing service to our leased and in some cases, previously sold units. Consistent with our strategy, we have a continuing emphasis on leasing or licensing our products.  When we lease or license our products, we generally negotiate month-to-month fixed fee contracts, or to a lesser extent, enter into participation arrangements whereby casinos pay us a fee based on a percentage of net win.  Product lease contracts typically include parts and service. When we sell our products, we offer casinos a choice between a cash sale or to a lesser extent, long-term financing. We also offer a majority of our products for sale with an optional parts and service contract.

Currently, Utility segment revenue is derived substantially from our automatic card shufflers. In addition to leasing shufflers, we also sell and service them. In the Proprietary Table Games (“PTG”) segment, the majority of games placed are licensed to our customers, which provides us with royalty revenue. In the Electronic Table Systems (“ETS”) segment, we derive revenue from leases, sales and service contracts. In the Electronic Gaming Machines (“EGM”) segment, we derive revenue from selling the full EGM complement, as well as game conversion kits.

The following points should be noted as they relate to each of our segments:

Utility

· We expect to continue increasing lease revenues in our Utility segment within the United States.  One of the current growth drivers for this segment has been the Ace® shuffler upgrade initiative. We expect the next revenue driver to be our new MD2CR® Linux.  The MD2CR® Linux is our next generation upgrade for the legacy MD series shufflers. As the MD1 reaches its end of life where replacement parts are no longer available, our strategy is to encourage our customers to upgrade the MD1 shufflers, both leased and previously sold, with the MD2CR® Linux shuffler. The majority of these placements are leases.

· Our markets for shuffler lease and sale revenue have grown recently in the United States with the approval of live table gaming in several jurisdictions such as Pennsylvania and Delaware.  

· We expect to continue seeing volatility in sales revenue in our Utility segment outside the United States.  While we encourage leasing outside the United States, a large majority of our international Utility product placements historically are sales.  We are starting to see increased lease activity in international markets such as Australia, Asia and Latin America. Growth drivers for the Utility segment outside the United States are the new jurisdictional openings, such as the new openings in Singapore and the Philippines during fiscal 2010, as well as the expansion of existing markets such as Macau.

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Proprietary Table Games

· Our lease model is strongest in our PTG segment with more than 95% of our total PTG revenue coming from royalties and leases.  While we have a strong leasing presence in the United States, we are constantly looking to expand our proprietary table games in other parts of the world where the current penetration of proprietary table games is lower.  With the opening of new casino markets in Asia, we have recently seen some successes with new lease placements of our premium table games as well as progressives and side bets.

· Although the majority of our PTG revenue comes from our premium table games, we also offer a number of progressive upgrades and side bets.  These products are available for our own proprietary table game titles as well as public domain games such as poker, blackjack, baccarat and pai gow poker.  These progressives and side bets, offered almost exclusively through leases, are providing a growing share of our total PTG revenue.

· We also aggressively pursue opportunities to place PTG products in new properties and jurisdictions in the United States.  As noted above, several states have approved live table games over the past year, and we have seen significant placements of our table game products in those new jurisdictions.

· We intend to increase our PTG content through development and acquisition of new proprietary titles. By increasing our footprint with new titles, we hope to increase our domestic market penetration and expand further into international markets.

Electronic Table Systems

· Although we continually pursue opportunities to increase lease revenues in our ETS segment within the United States, we have seen some of our leased ETS products returned from those same markets as some states approve live table games.  While this will cause some short-term setbacks in the growth of our domestic ETS business, we have been able to return some of these products to service in other markets such as Mexico and South America.  However, the new placements are not yet performing to the same revenue and profitability levels as the units that were removed.

· Outside the United States, we continue to realize a large portion of our ETS revenues from sales rather than leases.  Favorable regulatory changes in the prior year in some Australian jurisdictions allowed for significant placements of new Vegas Star® and Rapid Table Games® products during the prior year quarter.  We have seen new opportunities for lease placements with the opening of new casino properties in Singapore in the prior year, and we intend to continue pursuing new lease placements whenever possible.

· During the current year we have begun generating revenue from placements of our new i-Table® product.  We expect this product, which combines an electronic betting interface with a live table game, to provide us with substantial growth opportunities as it achieves acceptance in the market.

Electronic Gaming Machines

· Our EGM segment is primarily a sales model and we expect to continue to realize substantially all of our EGM revenues from sales of EGMs in our primary market, Australia.

· Initial deliveries of Equinox™ began in July 2010, and we experienced record placements during the fourth quarter of fiscal 2010.  We anticipate strong demand in future periods as Equinox™ gains broader market acceptance and have seen this continue through the third quarter of 2011.

· A portion of our EGM revenue base comes from conversions of existing units to new game titles.  We are continually developing new titles for our existing machines, and installation of these new titles provides us with an ongoing source of conversion revenue.

· In addition to our primary EGM market in Australia, we are pursuing opportunities for sales growth in Asia and Latin America.

Expenses

Our direct expenses primarily include cost of products sold, depreciation of leased assets, and amortization of product-related intangible assets, service, manufacturing overhead, shipping and installation.  Indirect expenses include other costs directly identified with each segment, such as R&D, product approval costs, product-related litigation expenses, amortization of patents and other product-related intellectual property, sales commissions and other directly-allocable sales expenses.  We continue to expend significant R&D efforts on the development of our newer generation shuffler products, such as the MD2CR® Linux and one2six® Plus, our card recognition products, as well as other table accessories, such as the i-Shoe™ and i-Score™. With our expansion into the e-Table markets, we continue to spend significant R&D dollars on developing and implementing new gaming mediums, such as the i-Table®, our newest e-Table that combines a variety of our products to create an exciting new table game experience. We are also spending increased R&D dollars on the new Equinox™ EGM cabinets and related game content.

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The amounts classified as unallocated corporate expenses consist primarily of costs related to overall corporate management and support functions. These include costs related to executive management, accounting and finance, general sales support, legal and compliance costs, office expenses and other amounts for which allocation to specific segments is not practicable.

Gross Margin

The number and mix of products placed and the average lease or sales price are the most significant factors affecting our gross margins. Our continuing emphasis on leasing versus selling, the shift in product mix, timing of installations and related upfront installation charges, as well as changes in non-cash depreciation and amortization expenses attributable to our acquisitions, impact our margins.

In general, lease gross margin is greater than the sales gross margin for the same products. However, total gross profit from leasing will be lower in a given reporting period than those of a sale due to the much higher price of a sale versus a lease.  A number of factors impact gross margins, including the number and mix of products placed and the average lease or sales price of those products. For example, in our PTG segment, premium table games warrant a higher average lease price than a PTG add-on such as a felt side-bet or a progressive. For Utility products, when a new shuffler is introduced into the market, we use introductory lease pricing. After the introductory pricing period expires, the price generally increases to the monthly “list” lease price, which we believe will increase future revenues because most customers keep the products beyond the introductory pricing period. Accordingly, we anticipate that gross margins will increase under our lease model.

Although our lease margins are generally very favorable, during the current period, we have experienced lower than normal margins on our ETS leases.  This margin reduction is primarily related to the removal of Table Master® seats from Pennsylvania and Delaware in the prior year as those jurisdictions converted to live table gaming.  As noted above, although we are returning those units to service in other markets such as Mexico and Latin America, the new placements are not yet generating revenues or margins as favorable as the original placements.  Additionally, we continue to record depreciation on the units that have not yet been placed back into service.  This depreciation has caused additional downward pressure on our ETS lease margins.

We occasionally record inventory adjustments related to obsolescence or declines in the net realizable value of some products.  While those adjustments occur in the normal course of business, it can cause negative pressure on our margins.

In addition to the lease versus sale strategy, we expect to see continual improvement in our gross margins through value engineering to reduce manufacturing costs. Our focus is currently on savings attributable to component parts, product redesign and lower cost manufacturing opportunities within each of our segments.  Our improved EGM margins are an example of success in this area.

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

CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended								Nine Months Ended
	July 31,								July 31,
	2011				2010				2011				2010
	(Dollars in thousands)
Revenue:
Utility	$	22,575		38.7%	$	19,807		38.4%	$	59,108		36.5%	$	58,554		41.0%
Proprietary Table Games		10,994		18.9%		10,949		21.3%		32,766		20.2%		30,154		21.2%
Electronic Table Systems		6,793		11.6%		11,607		22.5%		26,721		16.5%		32,426		22.7%
Electronic Gaming Machines		17,965		30.8%		9,184		17.8%		43,430		26.8%		21,565		15.1%
Total revenue		58,327		100.0%		51,547		100.0%		162,025		100.0%		142,699		100.0%
Cost of revenue		22,105		37.9%		19,880		38.6%		60,541		37.4%		53,886		37.8%
Gross profit		36,222		62.1%		31,667		61.4%		101,484		62.6%		88,813		62.2%
Selling, general and administrative		16,816		28.8%		17,514		34.0%		50,077		30.9%		47,573		33.3%
Research and development		6,695		11.5%		5,719		11.2%		19,494		12.0%		15,925		11.2%
Income from operations		12,711		21.8%		8,434		16.2%		31,913		19.7%		25,315		17.7%
Other income (expense):
Interest income		177		0.3%		158		0.3%		429		0.3%		450		0.3%
Interest expense		(659	)	(1.1%)		(1,023	)	(1.9%)		(2,031	)	(1.3%)		(3,039	)	(2.1%)
Other, net		457		0.8%		385		0.8%		(504	)	(0.3%)		1,512		1.1%
Total other income (expense)		(25	)	(0.0%)		(480	)	(0.8%)		(2,106	)	(1.3%)		(1,077	)	(0.7%)
						-
Income from operations before tax		12,686		21.8%		7,954		15.4%		29,807		18.4%		24,238		17.0%
Income tax provision		3,560		6.2%		2,112		4.1%		7,931		4.9%		6,832		4.8%
Net income	$	9,126		15.6%	$	5,842		11.3%	$	21,876		13.5%	$	17,406		12.2%

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The following table provides additional information regarding our revenue, gross profit and gross margin:

REVENUE AND GROSS MARGIN

	Three Months Ended									Nine Months Ended
	July 31,						Percentage			July 31,						Percentage
	2011			2010			Change			2011			2010			Change
	(Dollars in thousands)
Revenue:
Leases and royalties	$	24,785		$	22,043			12.4	%	$	72,625		$	64,013			13.5	%
Sales and service		33,542			29,504			13.7	%		89,400			78,686			13.6	%
Total	$	58,327		$	51,547			13.2	%	$	162,025		$	142,699			13.5	%
Cost of revenue:
Leases and royalties	$	8,970		$	6,932			29.4	%	$	24,506		$	20,394			20.2	%
Sales and service		13,135			12,948			1.4	%		36,035			33,492			7.6	%
Total	$	22,105		$	19,880			11.2	%	$	60,541		$	53,886			12.4	%
Gross profit:
Leases and royalties	$	15,815		$	15,111			4.7	%	$	48,119		$	43,619			10.3	%
Sales and service		20,407			16,556			23.3	%		53,365			45,194			18.1	%
Total	$	36,222		$	31,667			14.4	%	$	101,484		$	88,813			14.3	%
Gross margin:
Leases and royalties		63.8	%		68.6	%					66.3	%		68.1	%
Sales and service		60.8	%		56.1	%					59.7	%		57.4	%
Total		62.1	%		61.4	%					62.6	%		62.2	%

Three months ended July 31, 2011 compared to three months ended July 31, 2010

Revenue

Our revenue for the three months ended July 31, 2011 increased $6,780 over the same prior year period, primarily due to the following:

· Increase of $4,038  in our sales and service revenue:

o Increase most notably in our EGM segment attributable to a substantial increase in sold units driven by the launch of our Equinox™ cabinet:

Ø During the prior year, we experienced a downturn in EGM sales of approximately 18% below historical levels, which we attributed to customers delaying purchases in anticipation of the new Equinox™ cabinets introduction.  Since we began shipping Equinox™ in July 2010, we have seen a strong improvement in EGM sales.  During the current quarter, EGM unit sales were 69.5% above prior year levels driven almost entirely by Equinox™.  While we would not expect to see this record growth continue indefinitely, we do expect that EGM sales in fiscal 2011 will continue substantially above historical levels for the remainder of the year.

o Sales and service revenue in our PTG and ETS segments was down 58.6% collectively:

Ø Decrease in PTG sales revenue primarily due to a 40.8% reduction in sales of lifetime licenses; and

Ø Decreased ETS sales revenue driven primarily by an 82.3% decrease in sold seats. Prior year ETS sales were driven by a Rapid Table Games® seats sold to a single customer in Singapore of approximately $2,400 and favorable regulatory changes in Australia.

· Increase of $2,742 in our leases and royalties revenue was primarily due to our strategic focus on leasing as well as events such as new facility openings and favorable regulatory changes:

o Increased Utility lease revenue partially driven by new casino openings in Singapore in the prior year;

o Driven primarily by increased Utility lease revenue due to a 18.3% increase in shuffler units on lease;

o Increased PTG lease and royalty revenue due to a 11.0% increase in units on lease;

o Decreased ETS lease revenue driven by a 24.9% decrease in average monthly lease price, primarily due to Table Master® removals in Pennsylvania and Delaware in the prior year; and

o Decrease in ETS average monthly lease price partially offset by increased seats on lease due to favorable regulatory changes in the prior year in jurisdictions such as Maryland, Minnesota, Florida and New York.

· Impact of foreign currency fluctuations:

o Total revenue was positively impacted by approximately $4,200 due to the exchange effect of a weakening U.S. dollar.

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Gross margin

Our gross margin for the three months ended July 31, 2011 increased 70 basis points ("bps") to 62.1% as compared to the same prior year period, reflecting the following:

· Improved EGM margins due to increases in average sales prices and reductions in manufacturing costs for our new Equinox™ cabinet. Prior year sales were composed entirely of eStar™ cabinets, which had a higher production cost and lower margin than Equinox™. Current year sales are composed of approximately 94% Equinox™ cabinets.

· Decreased segment margin performance:

o ETS was unfavorably impacted by reductions in average monthly lease prices and number of units sold. Sales in the prior year included several large placements of Vegas Star® and Rapid Table Games® seats in Australia at favorable margins;

o Utility was unfavorably impacted by increased depreciation on leased units; and

o PTG was unfavorably impacted by a reduction in the number of conversions of leased to sold lifetime licenses. Conversion sales drive very high margins.

· Impact of foreign currency fluctuations:

o Total gross profit was positively impacted by approximately $1,700 due to the exchange effect of a weakening U.S. dollar.

Nine months ended July 31, 2011 compared to nine months ended July 31, 2010

Our revenue for the nine months ended July 31, 2011increased $19,326 over the same prior year period, primarily due to the following:

· Increase in our sales and service revenue:

o Increase most notably in our EGM segment driven by a substantial increase in sold units due to the launch of our Equinox™ cabinet:

Ø During the prior year, we experienced a downturn in EGM sales of approximately 20% below historical levels, which we attributed to customers delaying purchases in anticipation of the new Equinox™ cabinet’s introduction. Since we began shipping Equinox™ in July 2010, we have seen a strong improvement in EGM sales. During the current year, EGM unit sales were 96.6% above prior year levels driven almost entirely by Equinox™. While we would not expect to see this record growth continue indefinitely, we do expect that EGM sales in fiscal 2011 will continue substantially above historical levels for the remainder of the year.

o Sales and service revenue in our Utility, PTG and ETS segments was down 19.3% collectively:

Ø Decreased Utility sales revenue due primarily to our continued strategic focus on lease versus sales;

Ø Prior year Utility sales were high due to the effect of new facility openings in Singapore and favorable regulatory changes in the United States; and

Ø Decrease in ETS sales revenue driven by a 46.6% decrease in sold seats. Prior year ETS sales were driven by favorable regulatory changes in Australia.

· Increase of $8,612 in our leases and royalties revenue was primarily due to our strategic focus on leasing as well as events such as new facility openings and favorable regulatory changes:

o Increased Utility lease revenue partially driven by new casino openings in Singapore in the prior year;

o Driven primarily by increased Utility lease revenue due to a 18.3% increase in shuffler units on lease;

o Increased PTG lease and royalty revenue due to a 11.0% increase in units on lease;

o Decreased ETS lease revenue driven by a 26.1% reduction in average monthly lease price, primarily due to Table Master® removals in Pennsylvania and Delaware in the prior year; and

o Decrease in ETS average monthly lease price partially offset by increased seats on lease due to favorable regulatory changes in the prior year.

· Impact of foreign currency fluctuations:

o Total revenue was positively impacted by approximately $7,800 due to the exchange effect of a weakening U.S. dollar.

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Gross margin

Our gross margin for the nine months ended July 31, 2011 increased 40 bps to 62.6% as compared to the same prior year period, reflecting the following:

· Increased segment margin performance:

o Improved EGM margins due to increases in average sales prices and reductions in manufacturing costs; and

o ETS was unfavorably impacted by reductions in average monthly lease prices and number of units sold. Sales in the prior year included several large placements of Vegas Star® and Rapid Table Games® seats in Australia at favorable margins.

· Impact of foreign currency fluctuations:

o Total gross profit was positively impacted by approximately $4,500 due to the exchange effect of a weakening U.S. dollar.

28

The following table provides additional information regarding our operating expenses:

OPERATING EXPENSES

	Three Months Ended									Nine Months Ended
	July 31,						Percentage			July 31,						Percentage
	2011			2010			Change			2011			2010			Change
	(Dollars in thousands)
Selling, general and administrative	$	16,816		$	17,514			(4.0	%)	$	50,077		$	47,573			5.3	%
Percentage of revenue		28.8	%		34.0	%					30.9	%		33.3	%
Research and development	$	6,695		$	5,719			17.1	%	$	19,494		$	15,925			22.4	%
Percentage of revenue		11.5	%		11.1	%					12.0	%		11.2	%
Total operating expenses	$	23,511		$	23,233			1.2	%	$	69,571		$	63,498			9.6	%
Percentage of revenue		40.3	%		45.1	%					42.9	%		44.5	%

Three months ended July 31, 2011 compared to three months ended July 31, 2010

Selling, general & administrative (“SG&A”) expenses:

SG&A expenses decreased $698 for the three months ended July 31, 2011, as compared to the same prior year period. This decrease primarily reflects the following:

· Severance costs:

o Decrease of approximately $1,800 primarily due to higher severance costs in the prior year period, which included severance costs for the passing of our former CEO and the departure of a senior executive.

· Recruitment and related costs:

o Decrease of approximately $200 primarily driven by the search for a new CEO in the prior year.

These decreases were offset by:

· Impact of foreign currency fluctuations:

o Net increase of approximately $1,100 at our foreign subsidiaries due to the exchange effect of a weakening U.S. dollar.

· Patents and trademark expenses:

o Increase of approximately $600 in trademark, copyright and patent expenses relates to new products and expansion into new markets.

· Office expense:

o Increase in depreciation expense of approximately $450 driven by improvements to our information technology infrastructure during the prior year.

Research & development (“R&D”) expenses:

R&D expenses increased $976 for the three months ended July 31, 2011, as compared to the same prior year period. This increase primarily reflects the following:

· Impact of foreign currency fluctuations:

o Net increase of approximately $700 at our foreign subsidiaries due to the exchange effect of a weakening of U.S. dollar.

29

The following projects have been the focus of our R&D efforts during the three months ended July 31, 2011:

· EGM:

o Additional R&D efforts were spent on expanding our range of EGM games for the new Equinox™ cabinet, as well as support of ongoing business growth and demand for Equinox.

· ETS:

o Expenses primarily related to the further development of the i-Table® and Rapid Table Games®, including the development of proprietary titles for our i-Table® and the development of the i-Table Roulette™.

· Utility:

o Expenses primarily related to development of the next generation MD2® shuffler, the MD2CR® Linux, as well as continuing development of our other Utility products.

· PTG:

o Ongoing enhancements to the successful progressive offering to our table game titles.

We believe that one of our strengths is identifying new product opportunities, developing new products and refining current products. We expect our R&D expense as a percentage of revenue to remain at current levels.

Nine months ended July 31, 2011 compared to nine months ended July 31, 2010

SG&A expenses:

SG&A expenses increased $2,504 for the nine months ended July 31, 2011, as compared to the same prior year period. This increase primarily reflects the following:

· Sales and profit-driven compensation expense:

o Increase of approximately $1,700 in compensation and related expenses driven by improved revenue and profitability at our United States, Australian and Macau locations.

· Impact of foreign currency fluctuations:

o Net increase of approximately $1,900 at our foreign subsidiaries due to the exchange effect of a weakening of U.S. dollar.

· Patents and trademark expenses:

o Increase of approximately $1,500 in trademark, copyright and patent expenses related to new products and expansion into new markets.

· Office expense:

o Increase in depreciation expense of approximately $1,300 driven by improvements to our information technology infrastructure during the prior year.

These increases were offset by:

· Severance costs:

o Decrease of approximately $1,800, mainly due to severance costs related to the passing of our former CEO and the departure of a senior executive in the prior year period.

· Professional fees:

o Decrease of approximately $1,000 due to higher legal expenses incurred in the prior year period related to the TableMAX litigation (see Note 12 of our Condensed Consolidated Financial Statements for more information).

· Recruitment and related costs:

o Decrease of approximately $200 primarily driven by the search for a new CEO in the prior year.

R&D expenses:

R&D expenses increased $3,569 for the nine months ended July 31, 2011, as compared to the same prior year period. This increase primarily reflects the following:

· Impact of foreign currency fluctuations:

o Net increase of approximately $1,400 at our foreign subsidiaries due to the exchange effect of a weakening of U.S. dollar.

30

The following projects have been the focus of our R&D efforts during the nine months ended July 31, 2011:

· EGM:

o Additional R&D efforts were spent on expanding our range of EGM games for the new Equinox™ cabinet, as well as support of ongoing business growth and demand for Equinox.

· ETS:

o Expenses primarily related to the further development of the i-Table® and Rapid Table Games®, including the development of proprietary titles for our i-Table® and i-Table Roulette™.

· Utility:

o Expenses primarily related to development of the next generation MD2® shuffler, the MD2CR® Linux, as well as continuing development of our other Utility products.

· PTG:

o Ongoing enhancements to the successful progressive offering to our table game titles.

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The following table provides additional information regarding our depreciation and amortization expenses:

DEPRECIATION AND AMORTIZATION EXPENSES

	Three Months Ended							Nine Months Ended
	July 31,				Percentage			July 31,				Percentage
	2011		2010		Change			2011		2010		Change
	(Dollars in thousands)
Gross margin:
Depreciation	$	2,521	$	2,130		18.4	%	$	7,528	$	6,589		14.3	%
Amortization		1,729		2,120		(18.4	%)		5,078		6,894		(26.3	%)
Total		4,250		4,250		0.0	%		12,606		13,483		(6.5	%)
Operating expenses:
Depreciation		1,021		716		42.6	%		3,011		2,079		44.8	%
Amortization		804		668		20.4	%		2,334		2,022		15.4	%
Total		1,825		1,384		31.9	%		5,345		4,101		30.3	%
Total:
Depreciation		3,542		2,846		24.5	%		10,539		8,668		21.6	%
Amortization		2,533		2,788		(9.1	%)		7,412		8,916		(16.9	%)
Total	$	6,075	$	5,634		7.8	%	$	17,951	$	17,584		2.1	%

Depreciation expense is primarily comprised of depreciation associated with products leased and held for lease and to a lesser extent depreciation of property, plant and equipment. Amortization expense is primarily comprised of amortization associated with intellectual property, acquired developed technology and customer relationships.

Three months ended July 31, 2011 compared to three months ended July 31, 2010

Total depreciation and amortization included in gross margin remained consistent as compared to the same prior year period. Increased depreciation in gross margin is attributable to increases in leased assets. Decreased amortization in gross margin is due to reduced amortization of intangible assets in our Utility segment as the underlying intangible assets reached the end of their estimated useful lives.

Total depreciation and amortization included in operating expenses increased 31.9% in the three months ended July 31, 2011, as compared to the same prior year period. Increased depreciation related to additions of property, plant and equipment in the normal course of business. The increase in amortization expense relates primarily to amortization of the intellectual property acquired from Newton Shufflers, LLC and related parties (“Newton”).

Nine months ended July 31, 2011 compared to nine months ended July 31, 2010

Total depreciation and amortization included in gross margin decreased 6.5% in the nine months ended July 31, 2011, as compared to the same prior year period. Increased depreciation in gross margin is attributable to increases in leased assets. Decreased amortization in gross margin is due to reduced amortization of intangible assets in our Utility, ETS and EGM segments as the underlying intangible assets reached the end of their estimated useful lives.

Total depreciation and amortization included in operating expenses increased 30.3% in the nine months ended July 31, 2011, as compared to the same prior year period. Increased depreciation relates to additions of property, plant and equipment in the normal course of business. The increase in amortization expense relates primarily to amortization of the intellectual property acquired from Newton.

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SEGMENT OPERATING RESULTS  

Utility Segment Operating Results

Three months ended July 31, 2011 compared to three months ended July 31, 2010

	Three Months Ended
	July 31,						Increase			Percentage
	2011			2010			(Decrease)			Change
	(In thousands, except for units/seats and per unit/seat amounts)
Utility Segment Revenue:
Lease	$	10,796		$	8,812		$	1,984			22.5	%
Sales - Shuffler		8,315			7,741			574			7.4
Sales - Chipper		537			446			91			20.4
Service		1,639			1,724			(85	)		(4.9	)
Other		1,288			1,084			204			18.8
Total sales and service		11,779			10,995			784			7.1
Total Utility segment revenue	$	22,575		$	19,807		$	2,768			14.0	%
Utility segment gross profit	$	12,852		$	11,803		$	1,049			8.9	%
Utility segment gross margin		56.9	%		59.6	%
Utility segment operating income	$	11,208		$	10,179		$	1,029			10.1	%
Utility segment operating margin		49.6	%		51.4	%
Shuffler unit information:
Lease units, end of quarter		7,795			6,588			1,207			18.3	%
Average monthly lease price	$	462		$	446		$	16			3.6	%
Sold units during the period		540			541			(1	)		(0.2	%)
Average sales price	$	15,398		$	14,309		$	1,089			7.6	%
Chipper unit information:
Lease units, end of quarter		209			176			33			18.8	%
Sold during quarter		28			22			6			27.3	%
Average sales price	$	19,179		$	20,273		$	(1,094	)		(5.4	%)

Our Utility segment revenue for the three months ended July 31, 2011 increased $2,768 as compared to the same prior year period, primarily due to the following:

· A 22.5% increase in lease revenue:

o An increase in the number of units on lease, driven primarily by our focus on leasing versus sales, and partly by new lease placements in Singapore and the Philippines in the prior year. We are starting to see increased lease activity in international markets such as Asia and Latin America; and

o Lease placements in the United States continue to be enhanced by the Ace® shuffler upgrade initiative:

Ø The i-Deal® shuffler is our next generation upgrade for the Ace® specialty shuffler. As the Ace® reaches its end of life and replacements parts are not available, our strategy is to encourage our customers to upgrade the Ace® shufflers (both leased and sold) with the i-Deal® shuffler. The Ace® shuffler upgrade initiative is beginning to slow down as we exhaust the supply of Ace® units available to be replaced.

· A 7.4% increase in shuffler sales revenue:

o An increase of 7.6% in the average sales price, driven primarily by increases on one2six® shufflers. The prior year period also included sales to Pennsylvania and Delaware due to favorable regulatory changes.

· A 18.8% increase in other Utility revenue:

o Driven primarily by increased sales of parts and peripherals as well as i-Shoe™ Auto and i-Score™ products.

· A 20.4% increase in chipper sales revenue:

o An increase of 27.3% in the number of units sold, also reflecting the focus on leasing versus sales; and

o Partially offset by a 5.4% decrease in the average sale price of units sold.

33

Utility gross profit increased 8.9% for the three months ended July 31, 2011, as compared to the same prior year period. Utility gross margin decreased 270 bps to 56.9% for the three months ended July 31, 2011, as compared to the same prior year period.

The increases in gross profit primarily relate to the following:

· The overall increase in total revenues as noted above; and

· Partially offset by increased depreciation on the newly installed leased shufflers.

The decrease in gross margin primarily relates to the following:

· The increased depreciation on the newly installed leased shufflers.

Utility operating income increased 10.1% for the three months ended July 31, 2011, as compared to the same prior year period. Utility operating margin decreased 180 bps to 49.6%.

The increase in operating income primarily relates to the following:

· The overall increases in gross profits as discussed above.

The decrease in operating margin primarily relates to the following:

· The increase in amortization of intangible assets.

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Nine months ended July 31, 2011 compared to nine months ended July 31, 2010

	Nine Months Ended
	July 31,						Increase			Percentage
	2011			2010			(Decrease)			Change
	(In thousands, except for units/seats and per unit/seat amounts)
Utility Segment Revenue:
Lease	$	31,077		$	25,053		$	6,024			24.0	%
Sales - Shuffler		18,007			23,553			(5,546	)		(23.5	)
Sales - Chipper		1,010			1,525			(515	)		(33.8	)
Service		4,951			5,220			(269	)		(5.2	)
Other		4,063			3,203			860			26.8
Total sales and service		28,031			33,501			(5,470	)		(16.3	)
Total Utility segment revenue	$	59,108		$	58,554		$	554			0.9	%
Utility segment gross profit	$	35,284		$	35,394		$	(110	)		(0.3	%)
Utility segment gross margin		59.7	%		60.4	%
Utility segment operating income	$	30,294		$	30,324		$	(30	)		(0.1	%)
Utility segment operating margin		51.3	%		51.8	%
Shuffler unit information:
Lease units, end of period		7,795			6,588			1,207			18.3	%
Average monthly lease price	$	443		$	423			20			4.7	%
Sold units during the period		1,159			1,669			(510	)		(30.6	%)
Average sales price	$	15,537		$	14,112		$	1,425			10.1	%
Chipper unit information:
Lease units, end of period		209			176			33			18.8	%
Sold during period		51			65			(14	)		(21.5	%)
Average sales price	$	19,804		$	23,462		$	(3,658	)		(15.6	%)

Our Utility segment revenue for the nine months ended July 31, 2011 increased $554 as compared to the same prior year period, primarily due to the following:

· A 24.0% increase in lease revenue:

o An increase in the number of units on lease, driven primarily by our focus on leasing versus sales, and partly by new lease placements in Singapore and the Philippines in the prior year. We are starting to see increased lease activity in international markets such as Asia and Latin America; and

o Lease placements in the United States continue to be enhanced by the Ace® shuffler upgrade initiative:

Ø The i-Deal® shuffler is our next generation upgrade for the Ace® specialty shuffler. As the Ace® reaches its end of life and replacements parts are no longer available, our strategy is to encourage our customers to upgrade the Ace® shufflers (both leased and sold) with the i-Deal® shuffler. Current year i-Deal® placements totaled approximately 450 units, leading to a net revenue increase of approximately $2,000.

· A 26.8% increase in other revenue:

o Driven primarily by increased sales of parts and peripherals as well as i-Shoe™ Auto and i-Score™ products.

These decreases were offset by:

· A 23.5% decrease in shuffler sales revenue:

o A decrease of 30.6% in the number of units sold, driven primarily by our strategic focus on leasing versus sales. The prior year period also included a large sale of shufflers related to the opening of a new casino in Singapore and sales of shufflers in Pennsylvania and Delaware due to favorable regulatory changes; and

o Partially offset by a 10.1% increase in average sales price, driven primarily by increases on one2six® shufflers.

· A 33.8% decrease in chipper sales revenue:

o A decrease of 21.5% in the number of units sold, also reflecting the focus on leasing versus sales; and

o A 15.6% decrease in the average sale price of units sold.  The prior year period included several sales of Chipmaster™ units, which have a higher average sales price than our Easy Chipper® units.

35

Utility gross profit and gross margin were relatively unchanged for the nine months ended July 31, 2011, as compared to the same prior year period, reflecting the overall revenue trend. 

Utility operating income and operating margin were also relatively unchanged for the nine months ended July 31, 2011, as compared to the same prior year period, again reflecting the overall revenue trend.

Proprietary Table Games Segment Operating Results

Three months ended July 31, 2011 compared to three months ended July 31, 2010

	Three Months Ended
	July 31,						Increase			Percentage
	2011			2010			(Decrease)			Change
	(In thousands, except for units/seats and per unit/seat amounts)
PTG segment revenue:
Royalties and leases	$	10,543		$	9,492		$	1,051			11.1	%
Sales		331			1,331			(1,000	)		(75.1	)
Service		29			35			(6	)		(17.1	)
Other		91			91			-			-
Total sales and service revenue		451			1,457			(1,006	)		(69.0	)
Total PTG segment revenue	$	10,994		$	10,949		$	45			0.4	%
PTG segment gross profit	$	8,671		$	8,858		$	(187	)		(2.1	%)
PTG segment gross margin		78.9	%		80.9	%
PTG segment operating income	$	7,445		$	8,297		$	(852	)		(10.3	%)
PTG segment operating margin		67.7	%		75.8	%
PTG unit information:
Premium units, end of quarter		2,451			2,384			67			2.8	%
Side bet units, end of quarter		1,999			1,823			176			9.7	%
Progressive units, end of quarter		783			552			231			41.8	%
Add-on units, end of quarter		181			119			62			52.1	%
Total revenue generating lease base		5,414			4,878			536			11.0	%
Average monthly lease/license price	$	649		$	649			0			0.0	%
Sold during quarter		29			49			(20	)		(40.8	%)
Average sales price	$	11,414		$	27,163			(15,749	)		(58.0	%)

Total PTG segment revenue increased $45 for the three months ended July 31, 2011, as compared to the same prior year period. The PTG segment revenue increase was primarily due to the following:

· A 11.1% increase in royalties and leases revenue:

o Increased placements of premium table games, progressive units and side bets in the United States, primarily Three Card Poker®, Ultimate Texas Hold ‘em®, Mississippi Stud®, Blackjack Switch®, Dragon Bonus®, Fortune Pai Gow Poker Progressive®, and Three Card Poker Progressive®; and

o New placements of premium table games and progressives in Singapore drove increased revenues of approximately $50.

· Offset by a 75.1% decrease in PTG sales revenue:

o Driven by a 40.8% decrease in sold units in keeping with our focus on lease versus sale strategy. The prior year period included conversions of leased to sold lifetime licenses of premium table games in the United States, primarily Three Card Poker® and Let it Ride Bonus® and the current year consisted primarily of Royal Match 21® side bet sales.

36

PTG gross profit decreased 2.1% for the three months ended July 31, 2011, as compared to the same prior year period.  PTG gross margin decreased 200 bps, to 78.9% for the three months ended July 31, 2011, as compared to the same prior year period.  The decreases in gross profit and gross margin primarily relates to the following:

· The decrease in conversions of leased to sold lifetime licenses of premium table games as mentioned above. These conversions drive very high profit margins.

PTG operating income decreased 10.3% for the three months ended July 31, 2011, as compared to the same prior year period.  Operating margin decreased 810 bps, to 67.7% for the three months ended July 31, 2011, as compared to the same prior year period.  The decreases in operating income and operating margin primarily relates to the following:

· The overall decrease in gross profit; and

· Increase in amortization of intangible assets.

Nine months ended July 31, 2011 compared to nine months ended July 31, 2010

	Nine Months Ended
	July 31,						Increase			Percentage
	2011			2010			(Decrease)			Change
	(In thousands, except for units/seats and per unit/seat amounts)
PTG segment revenue:
Royalties and leases	$	31,204		$	27,602		$	3,602			13.0	%
Sales		1,225			2,210			(985	)		(44.6	)
Service		86			107			(21	)		(19.6	)
Other		251			235			16			6.8
Total sales and service revenue		1,562			2,552			(990	)		(38.8	)
Total PTG segment revenue	$	32,766		$	30,154		$	2,612			8.7	%
PTG segment gross profit	$	26,338		$	24,111		$	2,227			9.2	%
PTG segment gross margin		80.4	%		80.0	%
PTG segment operating income	$	23,205		$	22,375		$	830			3.7	%
PTG segment operating margin		70.8	%		74.2	%
PTG unit information:
Premium units, end of period		2,451			2,384			67			2.8	%
Side bet units, end of period		1,999			1,823			176			9.7	%
Progressive units, end of period		783			552			231			41.8	%
Add-on units, end of period		181			119			62			52.1	%
Total revenue generating lease base		5,414			4,878			536			11.0	%
Average monthly lease/license price	$	640		$	629		$	11			1.7	%
Sold during period		48			75			(27	)		(36.0	%)
Average sales price	$	25,521		$	29,467		$	(3,946	)		(13.4	%)

Total PTG segment revenue increased $2,612 for the nine months ended July 31, 2011, as compared to the same prior year period. The PTG segment revenue increase was primarily due to the following:

· A 13.0% increase in royalties and leases revenue:

o Increased placements of premium table games, progressive units and side bets in the United States, primarily Three Card Poker®, Ultimate Texas Hold ‘em®, Mississippi Stud®, Blackjack Switch®, Dragon Bonus®, Fortune Pai Gow Poker Progressive® and Three Card Poker Progressive®; and

o New placements of premium table games and progressives in Singapore drove increased revenues of approximately $400.

· Offset by a 44.6% decrease in PTG sales revenue:

o Driven by a 36.0% decrease in sold units in keeping with our focus on lease versus sale strategy.  The prior year period included conversions of leased to sold lifetime licenses of premium table games in the United States, primarily Three Card Poker® and Let it Ride Bonus®.

PTG gross profit increased 9.2% for the nine months ended July 31, 2011, as compared to the same prior year period. PTG gross margin was relatively unchanged.  The increase in gross profit primarily related to the following:

· The overall increase in total revenues; and

· The prior year period included the write-off of certain intangible licenses and related equipment totaling approximately $500.

37

PTG operating income increased 3.7% year over year, although operating margin decreased 340 bps to 70.8% as compared to the same prior year period.  The increase in operating income primarily related to the following:

· The increase in gross profit referred to above.

The decrease in operating margin is primarily related to the following:

· Increase in amortization of intangible assets.

Electronic Table Systems Segment Operating Results

Three months ended July 31, 2011 compared to three months ended July 31, 2010

	Three Months Ended
	July 31,						Increase			Percentage
	2011			2010			(Decrease)			Change
	(In thousands, except for units/seats and per unit/seat amounts)
ETS segment revenue:
Royalties and leases	$	3,354		$	3,661		$	(307	)		(8.4	%)
Sales		2,577			7,426			(4,849	)		(65.3	)
Service		153			182			(29	)		(15.9	)
Other		709			338			371			109.8
Total sales and service revenue		3,439			7,946			(4,507	)		(56.7	)
Total ETS segment revenue	$	6,793		$	11,607		$	(4,814	)		(41.5	%)
ETS segment gross profit	$	3,197		$	6,212		$	(3,015	)		(48.5	%)
ETS segment gross margin		47.1	%		53.5	%
ETS segment operating income	$	328		$	3,786		$	(3,458	)		(91.3	%)
ETS segment operating margin		4.8	%		32.6	%
ETS unit information:
Lease seats, end of quarter		2,552			2,094			458			21.9	%
Average monthly lease price	$	438		$	583			(145	)		(24.9	%)
Sold seats during quarter		78			441			(363	)		(82.3	%)
Average sales price	$	33,038		$	16,839			16,199			96.2	%

Total ETS segment revenue decreased $4,814 for the three months ended July 31, 2011, as compared to the same prior year period. The decrease was primarily due to the following:

· A decrease of 65.3% in sales revenue:

o Decrease of 77.4% in Vegas Star® and Rapid Table Games® seats sold in Australia, resulting in a net revenue reduction of approximately $2,500. Prior year revenues included several large sales to Australian casinos driven by favorable regulatory changes; and

o Decrease of 100% in Rapid Table Games® seats sold in Singapore due primarily to a prior year sale of approximately $2,400 to a single customer.

· A decrease of 8.4% in royalties and leases revenue:

o A decrease of 24.9% in average monthly lease price, driven primarily by the return of approximately 420 Table Master® seats previously leased in Pennsylvania and Delaware in the prior year. This resulted in a decrease in ETS lease revenue of approximately $700 during the three months ended July 31, 2011;

o We have begun to return these Table Master® units to active service in other markets such as Mexico and South America, however the new placements are not yet generating average monthly lease prices and margins equivalent to the units removed in the prior year; and

o The decrease in average monthly lease prices was partially offset by a 21.9% increase in seats on lease, driven primarily by Vegas Star® seats in New York, as well as Table Master® seats in Florida due to favorable regulatory changes in the prior year.

38

· These decreases were partially offset by an increase of 109.8% in other revenue, driven by increased sales of conversion kits and peripherals.

· Impact of foreign currency fluctuations.

o Total revenue was positively impacted by approximately $300 due to the exchange effect of a weakening U.S. dollar.

ETS gross profit decreased 48.5% for the three months ended July 31, 2011, as compared to the same prior year period.  ETS gross margin decreased 640 bps to 47.1% for the three months ended July 31, 2011, as compared to the same prior year period.  These decreases are due to the following:

· The overall decrease in revenue as noted above;

· The unfavorable margin effect from the Table Master® units removed from Pennsylvania and Delaware. The removed units were generating average monthly lease prices and margins among the highest in our lease installed base; and

· The Vegas Star® units sold in Australia in the prior year were at substantially favorable margins compared to current year sales.

ETS operating income decreased 91.3% for the three months ended July 31, 2011, as compared to the same prior year period. ETS operating margin decreased 2,780 bps for the three months ended July 31, 2011, as compared to the same prior year period. These decreases in both operating income and operating margin primarily related to the following:

· The decreases in gross profit and gross margin noted above; and

· An increase in R&D costs associated with the ETS segment.

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Nine months ended July 31, 2011 compared to nine months ended July 31, 2010

	Nine Months Ended
	July 31,						Increase			Percentage
	2011			2010			(Decrease)			Change
	(In thousands, except for units/seats and per unit/seat amounts)
ETS segment revenue:
Royalties and leases	$	10,062		$	11,171		$	(1,109	)		(9.9	%)
Sales		13,348			18,750			(5,402	)		(28.8	)
Service		433			480			(47	)		(9.8	)
Other		2,878			2,025			853			42.1
Total sales and service revenue		16,659			21,255			(4,596	)		(21.6	)
Total ETS segment revenue	$	26,721		$	32,426		$	(5,705	)		(17.6	%)
ETS segment gross profit	$	12,684		$	17,963		$	(5,279	)		(29.4	%)
ETS segment gross margin		47.5	%		55.4	%
ETS segment operating income	$	3,860		$	10,686		$	(6,826	)		(63.9	%)
ETS segment operating margin		14.4	%		33.0	%
ETS unit information:
Lease seats, end of period		2,552			2,094			458			21.9	%
Average monthly lease price	$	438		$	593			(155	)		(26.1	%)
Sold seats during period		558			1,045			(487	)		(46.6	%)
Average sales price	$	23,921		$	17,943			5,978			33.3	%

Total ETS segment revenue decreased $5,705 for the nine months ended July 31, 2011, as compared to the same prior year period. The decrease was primarily due to the following:

· A 28.8% decrease in sales revenue:

o Decrease of 40.2% in Vegas Star® and Rapid Table Games® seats sold in Australia, resulting in a net revenue reduction of approximately $4,500. Prior year revenues included large sales to Australian casinos driven by favorable regulatory changes; and

o Decrease of approximately $2,100 in Rapid Table Games® sales revenue in Singapore. The prior year period included a large sale of Rapid Table Games® seats in Singapore.

· A decrease of 9.9% in royalties and leases revenue:

o A decrease of 26.1% in average monthly lease price, driven primarily by the return of approximately 420 Table Master® seats previously leased in Pennsylvania and Delaware in the prior year. This resulted in a decrease in ETS lease revenue of approximately $3,200 during the nine months ended July 31, 2011;

o We have begun to return these Table Master® units to active service in other markets such as Mexico and South America, however the new placements are not yet generating average monthly lease prices equivalent to the units removed in the prior year; and

o The decrease in average monthly lease prices was partially offset by a 21.9% increase in seats on lease, driven primarily by Vegas Star® seats in New York, as well as Table Master® seats in Florida due to favorable regulatory changes in the prior year.

· These decreases were partially offset by a 42.1% increase in other revenue, driven by increased sales of peripherals and conversion kits for installed products in Macau.

· Impact of foreign currency fluctuations:

o Total revenue was positively impacted by approximately $1,100 due to the exchange effect of a weakening U.S. dollar.

ETS gross profit decreased 29.4% for the nine months ended July 31, 2011, as compared to the same prior year period.  ETS gross margin decreased 790 bps to 47.5% for the nine months ended July 31, 2011, as compared to the same prior year period.  These decreases are due to the following:

· The overall decrease in revenue as noted above;

· The unfavorable margin effect from the Table Master® units removed from Pennsylvania and Delaware. The removed units were generating average monthly lease prices and margins among the highest in our lease installed base;

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· The Vegas Star® units sold in Australia in the prior year were at substantially favorable margins compared to current year sales; and

· Partially offset by a decrease of approximately $500 in amortization expense associated with Vegas Star® and Rapid Table Games® product lines as the underlying intangible assets became fully amortized during the three months ended January 31, 2010.

ETS operating income decreased 63.9% for the nine months ended July 31, 2011, as compared to the same prior year period. ETS operating margin decreased 1,860 bps for the nine months ended July 31, 2011, as compared to the same prior year period. These decreases in both operating income and operating margin primarily related to the following:

· The decreases in gross profit and gross margin noted above; and

· An increase in R&D costs associated with the ETS segment.

Electronic Gaming Machines Segment Operating Results

Three months ended July 31, 2011 compared to three months ended July 31, 2010

	Three Months Ended
	July 31,						Increase			Percentage
	2011			2010			(Decrease)			Change
	(In thousands, except for units/seats and per unit/seat amounts)
EGM segment revenue:
Lease revenue	$	92		$	78		$	14			17.9	%
Sales		16,348			6,965			9,383			134.7
Other		1,525			2,141			(616	)		(28.8	)
Total sales and service revenue		17,873			9,106			8,767			96.3
Total EGM segment revenue	$	17,965		$	9,184		$	8,781			95.6	%
EGM segment gross profit	$	11,502		$	4,794		$	6,708			139.9	%
EGM segment gross margin		64.0	%		52.2	%
EGM segment operating income	$	8,336		$	2,865		$	5,471			191.0	%
EGM segment operating margin		46.4	%		31.2	%
EGM unit information:
Lease seats, end of quarter		27			17			10			58.8	%
Sold during quarter		863			509			354			69.5	%
Average sales price	$	18,943		$	13,684		$	5,259			38.4	%

Total EGM segment revenue increased $8,781 for the three months ended July 31, 2011, as compared to the same prior year period, primarily due to the following:

· A 134.7% increase in sales revenue:

o Driven by the 69.5% increase in units sold;

o The increase in units sold is the result of the introduction of our new Equinox™ cabinet. Equinox™ offers widescreen displays and substantially improved graphics and user interfaces over older-style EGM machines. Placements of Equinox™ units began in July 2010 and totaled approximately 800 units in the current quarter as compared to 100 units sold in the prior year quarter;

o Prior year sales revenue was down from historical levels due to market anticipation of the new Equinox™ cabinet; and

o The 38.4% increase in average sales price was partially due to foreign exchange effects. The average sales price in Australian dollars increased 10.8%, reflecting higher sales prices for Equinox™ units.

· Impact of foreign exchange fluctuations:

o Total revenue was positively impacted by approximately $3,400 due to the exchange effect of a weakening U.S. dollar.

· The increases above were partially offset by a decrease of 28.8% in other revenue, driven by a decrease in sales of conversion kits and other parts and peripherals.

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EGM gross profit increased 139.9% for the three months ended July 31, 2011, as compared to the same prior year period. EGM gross margin increased 1,180 bps to 64.0% for the three months ended July 31, 2011, as compared to the same prior year period. The increases in gross profit and gross margin primarily related to the following:

· The increase in EGM sales revenues as noted above, driven primarily by the increase in units sold and in average sales price for the new Equinox™ cabinet;

· Prior year sales were composed primarily of eStar™ cabinets, which had a higher production cost and lower margin than Equinox™. Current year sales are composed of approximately 94% Equinox™ cabinets; and

· Improvements in material and production costs, due primarily to value engineering on the new Equinox™ cabinet.

EGM operating income increased 191.0% for the three months ended July 31, 2011, as compared to the same prior year period. EGM operating margin also increased 1,520 bps for the three months ended July 31, 2011, as compared to the same prior year period. The increases in operating income and operating margin primarily related to the following:

· The increases in total EGM revenue and gross profit as noted above; and

· Partially offset by increased R&D costs related to the development of the new Equinox™ cabinet and related game content.

Nine months ended July 31, 2011 compared to nine months ended July 31, 2010

	Nine Months Ended
	July 31,						Increase			Percentage
	2011			2010			(Decrease)			Change
	(In thousands, except for units/seats and per unit/seat amounts)
EGM segment revenue:
Lease revenue	$	281		$	187		$	94			50.3	%
Sales		39,642			15,642			24,000			153.4
Other		3,507			5,736			(2,229	)		(38.9	)
Total sales and service revenue		43,149			21,378			21,771			101.8
Total EGM segment revenue	$	43,430		$	21,565		$	21,865			101.4	%
EGM segment gross profit	$	27,178		$	11,345		$	15,833			139.6	%
EGM segment gross margin		62.6	%		52.6	%
EGM segment operating income	$	18,493		$	5,950		$	12,543			210.8	%
EGM segment operating margin		42.6	%		27.6	%
EGM unit information:
Lease seats, end of period		27			17			10			58.8	%
Sold during period		2,155			1,096			1,059			96.6	%
Average sales price	$	18,395		$	14,272			4,123			28.9	%

Total EGM segment revenue increased $21,865 for the nine months ended July 31, 2011, as compared to the same prior year period, primarily due to the following:

· A 153.4% increase in sales revenue:

o Driven by the 96.6% increase in units sold;

o The increase in units sold is the result of the introduction of our new Equinox™ cabinet. Equinox™ offers widescreen displays and substantially improved graphics and user interfaces over older-style EGM machines. Placements of Equinox™ units began in July 2010 and totaled approximately 2,000 units in the current period as compared to approximately 100 units sold in the prior year period;

o Prior year sales revenue was down from historical levels due to market anticipation of the new Equinox™ cabinet; and

o The 28.9% increase in average sales price was partially due to foreign exchange effects. The average sales price in Australian dollars increased 10.2%, reflecting higher sales prices for Equinox™ units.

· Impact of foreign exchange fluctuations:

o Total revenue was positively impacted by approximately $6,000 due to the exchange effect of a weakening U.S. dollar.

· A decrease of 38.9% in other revenue, driven by a decrease in sales of conversion kits and other parts and peripherals. The prior year period included large sales of conversion kits.

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EGM gross profit increased 139.6% for the nine months ended July 31, 2011, as compared to the same prior year period. EGM gross margin increased 1,000 bps to 62.6% for the nine months ended July 31, 2011, as compared to the same prior year period. The increases in gross profit and gross margin primarily related to the following:

· The increase in EGM sales revenues as noted above, driven primarily by the increase in units sold and in average sales price for the new Equinox™ cabinet;

· Prior year sales were composed primarily of eStar™ cabinets, which had a higher production cost and lower margin than Equinox™. Current year sales are composed of approximately 92% Equinox™ cabinets; and

· Improvements in material and production costs, due primarily to value engineering on the new Equinox™ cabinet.

EGM operating income increased 210.8% for the nine months ended July 31, 2011, as compared to the same prior year period. EGM operating margin also increased 1,500 bps for the nine months ended July 31, 2011, as compared to the same prior year period. The increases in operating income and operating margin primarily related to the following:

· The increases in total EGM revenue and gross profit as noted above;

· Partially offset by increased R&D costs related to the development of the new Equinox™ cabinet and related game content.

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LIQUIDITY AND CAPITAL RESOURCES

(In thousands, except ratios and per share amounts)

Our primary historical source of liquidity and capital resources has been cash on hand, cash from operations and various forms of debt. We use cash to fund growth in our operating assets, including inventory, products leased and held for lease and sales-type leases and to fund new products through both research and development and strategic acquisitions of businesses and intellectual property. Based on past performance and current expectations, we believe these resources will satisfy our needs for working capital, capital expenditures, debt service, and other liquidity requirements associated with our existing operations for the foreseeable future.

Our Senior Secured Revolving Credit Facility contains three financial maintenance covenants: a Total Leverage Ratio, Senior Leverage Ratio and an Interest Expense Coverage Ratio.  Under the facility, we are required to maintain a Total Leverage Ratio, as defined therein, of not more than 3.75 to 1.0.  Our Total Leverage Ratio as of July 31, 2011 was 1.00 to 1.0.  Furthermore, we are required to maintain a Senior Leverage Ratio, as defined therein, of not more than 3.0 to 1.0 until October 31, 2013 and not more than 2.75 to 1.00 after October 31, 2013. Our Senior Leverage Ratio as of July 31, 2011 was 0.97 to 1.0. We are also required to maintain an Interest Coverage Ratio, as defined therein, in excess of 3.0 to 1.0 at the end of any fiscal quarter. Our Interest Coverage Ratio as of July 31, 2011 was 28.77 to 1.0.

Cash and cash equivalents at our foreign subsidiaries were $27,082 as of July 31, 2011 and $8,535 as of October 31, 2010. We constantly evaluate our cash position in each territory and look for ways to efficiently deploy capital to markets where it is most needed.

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

	July 31,		October 31,		Increase		Percentage
	2011		2010		(Decrease)		Change
	(In thousands, except ratios)
Cash and cash equivalents	$	30,191	$	9,988	$	20,203		202.3	%
Working capital	$	84,992	$	58,628	$	26,364		45.0	%
Current ratio	3.5 : 1		2.2 : 1

CASH FLOWS SUMMARY

	Nine Months Ended
	July 31,						Increase			Percentage
	2011			2010			(Decrease)			Change
	(In thousands)
Net cash provided by operating activities	$	36,692		$	38,634		$	(1,942	)		(5.0	%)
Net cash used in investing activities		(21,434	)		(16,947	)		4,487			26.5	%
Net cash provided by (used in) financing activities		4,423			(2,810	)		7,233			257.4	%
Effects of exchange rates		522			(239	)		761			318.4	%
Net change in cash and cash equivalents	$	20,203		$	18,638

Capital Expenditures. We expect our capital expenditures to grow in a proportionate ratio to our revenue and/or mix of revenue, as our leasing model extends into our more capital-intensive products. Significant items included in cash flows related to capital expenditures are as follows:

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	Nine Months Ended
	July 31,						Increase			Percentage
	2011			2010			(Decrease)			Change
	(In thousands)
Payments for products leased and held for lease	$	(11,608	)	$	(16,706	)	$	(5,098	)		(30.5	%)
Purchases of property and equipment		(2,683	)		(4,314	)		(1,631	)		(37.8	%)
Purchases of intangible assets		(6,269	)		(2,298	)		3,971			172.8	%
Total capital expenditures	$	(20,560	)	$	(23,318	)

Operating

Cash flow provided by operating activities decreased $1,942 for the nine months ended July 31, 2011 compared to the same prior year period, primarily due to following:

· An increase in cash used for inventory of approximately $4,300. Inventory increased by approximately $1,200 due to the exchange effect of a weakening U.S. dollar. The remaining increase in inventory is related to our expansion into new markets, pending installations across all segments globally and an increase of approximately $2,600 in trial inventory in Australia and Asia. As a result, inventory turns decreased from 3.0 times for the nine months ended July 31, 2010 to 2.6 times as of July 31, 2011;

· The decrease in accrued liabilities related to settlement of our class action lawsuits and shareholder derivative lawsuits that was offset by a decrease in other current assets representing payment to the beneficiaries, see Note 12 to our Condensed Consolidated Financial Statements for more information. The remaining decrease in accrued and other current liabilities is mainly due to the decrease in inventory purchases and settlement of pending litigation as of October 31, 2010 with Prime Table Games, see Note 2 to our Condensed Consolidated Financial Statements for more information;

· An increase in cash provided by accounts receivable of approximately $1,800. Average days sales outstanding (“DSO”) for the nine months ended July 31, 2011 increased to approximately 66 days from approximately 63 days in the same prior year period, due primarily to heavy sales volume in the last month of the quarter;

· Offset by stronger operating performance that led to an increase in net income of approximately $4,500; and

· Offset by an increase in the change in customer deposits and deferred revenue of approximately $2,900, primarily due to prior year period balance which included the recognition of revenue on a large transaction for which revenue was deferred until regulatory approval was granted.

Investing

Cash used in investing activities increased $4,487 for the nine months ended July 31, 2011 compared to the same prior year period, primarily due to following:

· Increased cash used for the acquisition of a business of approximately $6,500 related to the Newton acquisition, see Note 2 of our Condensed Consolidated Financial Statements for more information;

· Increased cash used for purchases of intangible assets of approximately $4,000 primarily related to the acquisition of intellectual property from Prime Table Games, see Note 2 to our Condensed Consolidated Financial Statements for more information; and

· Offset by a decrease in payments for products leased and held for lease of approximately $5,100. The prior balance was primarily driven by the opening of two casinos in Singapore.

Financing

Cash flows provided by financing activities increased $7,233 for the nine months ended July 31, 2011 compared to the same prior year period, primarily due to following:

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· For the nine months ended July 31, 2011, we received approximately $16,500 proceeds from our Revolver which was primarily used for Newton and Prime Table Games acquisition, as described above, compared to the prior year period where we received approximately $12,000 from our $100,000 senior secured credit facility (the “Deutsche Bank Senior Secured Credit Facility”). Our Deutsche Bank Senior Secured Credit Facility was satisfied and terminated in October 2010; and

· Increased proceeds from issuances of common stock, net of $2,100, as more options were exercised in the current year period compared to the prior year period.

Indebtedness (See Note 5 of our Notes to Condensed Consolidated Financial Statements)

$200,000 senior secured revolving credit facility. On October 29, 2010, we entered into a new senior secured credit agreement (the “Senior Secured Revolving Credit Facility”) with Wells Fargo Securities, LLC and Banc of America Securities LLC, as joint lead arrangers and joint lead bookrunners, Bank of America, N.A. as syndication agent and Union Bank, N.A. as documentation agent. The Senior Secured Revolving Credit Facility provides for senior secured credit facilities in an aggregate principal amount of $200,000 consisting of a 5-year revolving credit facility (the “Revolver”) in an aggregate principal amount of $200,000 with a sub-facility for letters of credit of $25,000, a sub-facility for multicurrency borrowings in Euros, Australian dollars and Canadian dollars of $25,000, and a sub-facility for swing line loans of $20,000, each on customary terms and conditions. The Senior Secured Revolving Credit Facility includes an option to increase the Revolver to $300,000, which would require syndication approval.

Loans under the Revolver (other than Swing Line Loans, as defined) bear interest based on the Base Rate, as defined, or LIBOR, as elected by us. Base Rate interest is calculated at the Base Rate plus the applicable margin and the Base Rate is the highest of (a) the Federal Funds Rate plus .50%, (b) the prime commercial lending rate of the Administrative Agent, as defined, and (c) the one month LIBOR rate for such day plus 1.00%. Swing Line Loans bear interest at the Base Rate plus the applicable margin. Our effective interest rate as of July 31, 2011 was 2.19%. Borrowings under the Revolver may be used for working capital, capital expenditures and general corporate purposes (including share repurchases).

The amount drawn under the Revolver was $66,946 as of July 31, 2011, after considering restrictive financial covenants under the Senior Secured Revolving Credit Facility, we had approximately $133,000 of available remaining credit under the Revolver as of July 31, 2011. The Revolver matures on October 29, 2015.

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 at least the next twelve months. 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.

DEBT, OTHER LONG-TERM LIABILITIES AND CONTRACTUAL OBLIGATIONS

Our contractual obligations have not changed materially from the amounts disclosed in our Form 10-K as of October 31, 2010.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have material off-balance sheet arrangements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We prepare our Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States. Our critical accounting policies are discussed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Critical Accounting Policies and Estimates” in our Form 10-K for the year ended October 31, 2010.  

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks, which arise during the normal course of business from changes in interest rates and foreign exchange rates. A discussion of our primary market risks is presented below.

Interest rate risk. As of July 31, 2011, we had approximately $67,000 of variable rate debt. Assuming a 1% change in the average interest rate as of July 31, 2011, our annual interest cost would change by approximately $670.

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Foreign currency risk. We are exposed to foreign currency exchange rate risk inherent in our leases and sales commitments, anticipated leases and sales, anticipated purchases and assets, liabilities and debt denominated in currencies other than the U.S. dollar. We transact business in numerous countries around the world using numerous currencies, of which the most significant to our operations for the three and nine months ended July 31, 2011and 2010, were the Australian dollar and the Euro.  We settle inter-company trade balances, which results in the recognition of foreign currency fluctuations.  We expect that a significant portion of the volume of our business will continue to be denominated in foreign currencies. As such, we expect our cash flows and earnings to continue to be exposed to the risks that may arise from fluctuations in foreign currency exchange rates.

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted  under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time period specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by Rule 13a-15(b) promulgated under the Exchange Act, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the design and operating effectiveness as of July 31, 2011, of our disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Exchange Act.  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of July 31, 2011. 

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the nine months ended July 31, 2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS

For information on Legal Proceedings and significant developments in any of the cases disclosed in our Form 10-K for the year ended October 31, 2010, see Note 12 to our Condensed Consolidated Financial Statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

For a complete description of the facts and circumstances surrounding material litigation to which we are a party, see our Form 10-K for the year ended October 31, 2010.

ITEM 1A. RISK FACTORS

A complete description of certain factors that may affect our future results and risk factors is set forth in our Form 10-K for the year ended October 31, 2010.  For the nine months ended July 31, 2011, there were no material changes to our risk factors.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program		Maximum Value of Shares That May Yet Be Purchased Under the Stock Buyback Program (1)
May 1 through May 31, 2011		-	$	-		-	$	21,077
June 1 through June 30, 2011		-		-		-		21,077
July 1 through July 31, 2011		-		-		-		21,077
Total		-	$	-		-

(1) In September 2006, our board of directors authorized a stock buyback program for up to $30,000 of the Company’s shares; as of July 31, 2011, $21,077 remained outstanding under our board authorization.  We cancel shares that we repurchase.  Although we generally prioritize bank debt reduction over share repurchases we may consider share repurchase when there are anomalies in the value created by, but not limited to, market conditions.

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. (Removed and Reserved)

ITEM 5. OTHER INFORMATION

None.

ITEM 6.  EXHIBITS

10.1	Employment Agreement by and between Shuffle Master, Inc. and Kathryn S. Lever dated May 2, 2011 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed May 6, 2011)
10.2	Amended and Restated Employment Agreement by and between Shuffle Master, Inc. and David Lopez dated May 24, 2011 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed May 25, 2011)
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*
101.INS	XBRL Instance**
101.SCH	XBRL Taxonomy Extension Schema**
101.CAL	XBRL Taxonomy Extension Calculation**
101.DEF	XBRL Taxonomy Extension Definition**
101.LAB	XBRL Taxonomy Extension Labels**
101.PRE	XBRL Taxonomy Extension Presentation**

*           Exhibits 32.1 and 32.2 are furnished to accompany this report on Form 10-Q but shall not be deemed filed for the purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise and shall not be deemed incorporated by reference into any registration statements filed under the Securities Act of 1933.

**           XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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SIGNATURES

Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

SHUFFLE MASTER, INC.

(Registrant)

Date: August 31, 2011

 /s/ MICHAEL GAVIN ISAACS 

Michael Gavin Isaacs

Chief Executive Officer

(Principal Executive Officer)

 /s/ LINSTER W. FOX 

Linster W. Fox

Chief Financial Officer

(Principal Financial Officer)

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