SHFL entertainment Inc. - FORM 10-Q

Attached files

file	filename
EX-10.1 - PREVIOUSLY FILED CREDIT AGREEMENT WITH EXHIBITS DATED NOVEMBER 30, 2006 - SHFL entertainment Inc.	exhibit10d1.htm
EX-31.2 - CFO 302 CERT - SHFL entertainment Inc.	exhibit31d2.htm
EX-32.2 - CFO 906 CERT - SHFL entertainment Inc.	exhibit32d2.htm
EX-31.1 - CEO 302 CERT - SHFL entertainment Inc.	exhibit31d1.htm
EX-32.1 - CEO 906 CERT - SHFL entertainment Inc.	exhibit32d1.htm

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 April 30, 2010
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 x No 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 o 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 June 4, 2010, there were 53,587,743 shares of our $.01 par value common stock outstanding.

SHUFFLE MASTER, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED APRIL 30, 2010

TABLE OF CONTENTS

			Page
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited):
		Condensed Consolidated Statements of Operations for the Three and Six Months ended April 30, 2010 and 2009	3
		Condensed Consolidated Balance Sheets as of April 30, 2010 and October 31, 2009	4
		Condensed Consolidated Statements of Cash Flows for the Six Months ended April 30, 2010 and 2009	5
		Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		57
Item 4.	Controls and Procedures		57
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings		58
Item 1A.	Risk Factors		58
Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds		58
Item 3.	Defaults Upon Senior Securities		59
Item 4.	(Removed and Reserved)		59
Item 5.	Other Information		59
Item 6.	Exhibits		59
Signatures			60

PART I

ITEM 1. FINANCIAL STATEMENTS

SHUFFLE MASTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended						Six Months Ended
	April 30,						April 30,
	2010			2009			2010			2009
Revenue:
Product leases and royalties	$	21,477		$	18,614		$	41,970		$	36,970
Product sales and service		29,339			26,684			49,182			42,794
Other		-			6			-			29
Total revenue		50,816			45,304			91,152			79,793
Costs and expenses:
Cost of leases and royalties		7,158			5,864			13,462			11,703
Cost of sales and service		11,359			13,742			20,544			21,831
Gross profit		32,299			25,698			57,146			46,259
Selling, general and administrative		15,702			18,360			30,059			34,011
Research and development		5,244			4,191			10,206			7,931
Total costs and expenses		39,463			42,157			74,271			75,476

Income from operations		11,353			3,147			16,881			4,317

Other income (expense):
Interest income		154			311			292			545
Interest expense		(960	)		(1,649	)		(2,016	)		(3,849	)
Other, net		473			1,317			1,127			468
Total other income (expense)		(333	)		(21	)		(597	)		(2,836	)
Gain on early extinguishment of debt		-			1,798			-			1,822
Income before income taxes		11,020			4,924			16,284			3,303
Income tax provision		3,135			519			4,720			167
Net income	$	7,885		$	4,405		$	11,564		$	3,136

Basic earnings per share:	$	0.15		$	0.08		$	0.22		$	0.06
Diluted earnings per share:	$	0.15		$	0.08		$	0.21		$	0.06

Weighted average shares outstanding:
Basic		53,251			53,087			53,234			53,073
Diluted		54,126			53,192			54,092			53,186

See notes to unaudited condensed consolidated financial statements

SHUFFLE MASTER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

	April 30,		October 31,
	2010		2009
ASSETS
Current assets:
Cash and cash equivalents	$	18,163	$	7,840
Accounts receivable, net of allowance for bad debts of $735 and $630		30,283		36,371
Investment in sales-type leases and notes receivable, net of allowance
for bad debts of $164 and $164		2,202		2,281
Inventories		23,275		27,639
Prepaid income taxes		4,693		5,893
Deferred income taxes		6,828		6,637
Other current assets		19,218		5,897
Total current assets		104,662		92,558
Investment in sales-type leases and notes receivable, net of current portion		1,522		1,295
Products leased and held for lease, net		30,606		23,653
Property and equipment, net		10,857		9,506
Intangible assets, net		67,128		71,338
Goodwill		72,468		74,662
Deferred income taxes		8,826		9,414
Other assets		2,489		3,043
Total assets	$	298,558	$	285,469

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	4,281	$	6,336
Accrued and other current liabilities		29,044		16,608
Deferred income taxes, current		56		62
Income tax payable		665		-
Customer deposits		3,116		2,828
Deferred revenue		4,265		6,802
Current portion of long-term debt		650		650
Total current liabilities		42,077		33,286
Long-term debt, net of current portion		88,924		92,560
Other long-term liabilities		3,069		3,549
Total liabilities		134,070		129,395
Commitments and contingencies (See Note 10)
Shareholders' equity:
Common stock, $0.01 par value; 151,368 shares authorized; 53,588
shares issued and outstanding		536		536
Additional paid-in capital		90,285		105,933
Retained earnings		53,846		25,326
Accumulated other comprehensive income		19,821		24,279
Total shareholders' equity		164,488		156,074
Total liabilities and shareholders' equity	$	298,558	$	285,469

See notes to unaudited condensed consolidated financial statements

SHUFFLE MASTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, except per share amounts)

(Unaudited)

	Six Months Ended
	April 30,
	2010			2009
Cash flows from operating activities:
Net income	$	11,564		$	3,136
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		11,950			11,227
Amortization of debt issuance costs and debt discount		515			1,229
Share-based compensation		1,855			5,333
Provision for bad debts		243			199
Write-down for inventory obsolescence		594			185
Gain on sale of leased assets		(3,346	)		(1,361	)
Loss (Gain) on sale of assets		(37	)		62
Excess tax benefit from exercise of stock options		(8	)		-
Gain on early extinguishment of debt		-			(1,822	)
Changes in operating assets and liabilities:
Accounts receivable		5,881			7,304
Investment in sales-type leases and notes receivable		(227	)		3,312
Inventories		2,900			(4,014	)
Accounts payable and accrued liabilities		9,423			(3,522	)
Customer deposits and deferred revenue		(2,270	)		38
Income taxes payable, net of stock option exercises		571			818
Deferred income taxes		(16	)		(1,307	)
Prepaid income taxes		1,253			(1,186	)
Other		(13,324	)		(534	)
Net cash provided by operating activities		27,521			19,097

Cash flows from investing activities:
Proceeds from security bonds posted with courts		-			3,050
Proceeds from sale of leased assets		4,953			2,360
Proceeds from sale of assets		38			16
Payments for products leased and held for lease		(13,139	)		(3,480	)
Purchases of property and equipment		(2,553	)		(425	)
Purchases of intangible assets		(2,171	)		(3,441	)
Other		(814	)		(307	)
Net cash used in investing activities		(13,686	)		(2,227	)

Cash flows from financing activities:
Proceeds from Revolver borrowings		8,245			50,400
Proceeds from issuances of common stock, net		43			-
Debt payments on Revolver		(7,365	)		(16,400	)
Debt payments on Term Loan		(4,494	)		(325	)
Debt payments on contingent convertible senior notes		-			(40,088	)
Excess tax benefit from exercise of stock options		8			-
Other		(97	)		(1,268	)
Net cash used in financing activities		(3,660	)		(7,681	)

Effect of exchange rate changes on cash and cash equivalents		148			339

Net increase in cash and cash equivalents		10,323			9,528
Cash and cash equivalents, beginning of period		7,840			5,374
Cash and cash equivalents, end of period	$	18,163		$	14,902

See notes to unaudited condensed consolidated financial statements

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. Our products primarily relate to licensed casino operators’ table game activities and focus on either increasing their profitability, productivity and security or expanding their gaming entertainment offerings. Our business is segregated into the following four 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 iShoe® 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 licensed casino operators’ and other users' table game operations. Products in this segment include our proprietary table games as well as proprietary features added to public domain games such as poker, baccarat, pai gow poker and blackjack table games.

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 the 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 a Shuffle Master card reading shoe or shuffler that is designed to dramatically 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 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 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.

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 offer our customers a choice between a sale and long-term financing. We offer our products worldwide in markets that are highly regulated. We manufacture our products at our headquarters and manufacturing facility in Las Vegas, Nevada, as well as at our office and manufacturing facility in Milperra, New South Wales, Australia. In addition, we outsource the manufacturing of certain of our 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. The unaudited condensed balance sheet as of October 31, 2009 was derived from the audited financial statements as of that date and was retrospectively adjusted to reflect the adoption of new authoritative guidance as further described in Note 11, but does not include all disclosures required by accounting principles generally accepted in the United States of America. All amounts are in thousands except unit/seat and per share amounts.

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 accounting principles generally accepted in the United States (“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 2009 Annual Report on Form 10-K filed with the SEC on January 14, 2010. The results of operations for the three and six months ended April 30, 2010 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. In October 2009, the FASB issued new revenue recognition accounting standards with respect to certain software-enabled products and multi-element arrangements. We elected to early adopt this new guidance prospectively effective November 1, 2009 (the first day of fiscal year 2010). For transactions entered into prior to November 1, 2009, revenues will continue to be recognized based on prior revenue recognition guidance. Under the new guidance, tangible products, containing both software and non-software components that function together to deliver a tangible product’s essential functionality is now considered to be a “non-software” element and, accordingly, will no longer be subject to software revenue accounting. The new guidance also established 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.

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 an undelivered element will no longer be deferred. Generally, revenues allocated to non-software elements will be recognized upon delivery and customer acceptance, and only revenues allocated to software elements may require deferral and recognition over the lease or license term.

The adoption of these new standards did not have a material impact on our operating results, financial position or cash flows for the period ended April 30, 2010. Although this new accounting guidance is not currently expected to have a significant effect on the timing or amount of revenues in periods after the initial adoption, the impact is dependent upon the prevalence of future multi-element arrangements and the evolution of new sales strategies.

Convertible debt instruments. Effective November 1, 2009, we adopted new authoritative guidance from the Financial Accounting Standards Board (“FASB”) related to the accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlements). The new guidance applies to convertible debt instruments that, by their stated terms, may be settled in cash (or other assets) upon conversion, including partial cash settlement of the conversion option. Even though we extinguished our contingent convertible senior notes (“Notes”) by May 2009, we were required to apply the new guidance retrospectively to our previously issued financial statements for the periods in which the Notes were outstanding. The new guidance requires bifurcation of the instrument into a debt component that is initially recorded at fair value and an equity component. The difference between the fair value of the debt component and the initial proceeds from issuance of the instrument is recorded as a component of equity. The liability component of the debt instrument is accreted to par using the effective interest rate method; accretion is reported as a non-cash component of interest expense. The equity component is not subsequently re-valued as long as it continues to qualify for equity treatment.

The effect and disclosures required by the adoption of the new guidance are included in Note 11. The retrospective application of this new accounting standard to our balance sheet at October 31, 2009, and our statements of operations and cash flows for the three month period ended January 31, 2009 were erroneously omitted from our first quarter financial statements. Accordingly, the effect of the adoption of this new authoritative guidance on our balance sheet at October 31, 2009, and our statements of operations and cash flows for the three month period ended January 31, 2009 is also presented in Note 11.

Participating securities in share-based payment transactions. For the period beginning November 1, 2009, we adopted new accounting guidance issued in June 2008 for determining whether instruments granted in share-based payment transactions are participating securities which should be included in the computation of EPS using the two-class method. Restricted stock granted under our share-based award plans is considered a participating security because it carries non-forfeitable rights to dividends. The adoption of the guidance did not have a material effect on our condensed consolidated financial statements.

Other recently adopted accounting standards. As of August 1, 2009, we adopted the new accounting guidance related to determining the useful life of intangible assets, which amended the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. This guidance is applied prospectively to intangible assets acquired after November 1, 2009. However, the disclosure requirements must be applied prospectively to all intangible assets recognized in the Company’s financial statements as of November 1, 2009. The adoption of the guidance did not have a material effect on our condensed consolidated financial statements.

As of November 1, 2009, we adopted the new accounting guidance which establishes two levels of GAAP: authoritative and nonauthoritative. The FASB Accounting Standards Codification (“ASC”) is now the single source of authoritative nongovernmental GAAP. All other literature is considered non-authoritative. The Company’s adoption of this statement did not have a material effect on the condensed consolidated results of operations, financial position and cash flows, but rather changes the reference used to cite specific FASB accounting literature.

As of November 1, 2009, we adopted new accounting guidance related to business combinations which clarifies the accounting for certain separately identifiable intangible assets which an acquirer does not intend to actively use. This guidance requires an acquirer in a business combination to account for a defensive intangible asset as a separate unit of accounting which should be amortized to expense over the period the asset diminishes in value. Future effects will be dependent upon acquisitions of defensive intangible assets, if any, at that time. In addition, there is new guidance for determining the useful life of a recognized intangible asset. This guidance is applied prospectively to intangible assets acquired after the effective date. However, the disclosure requirements are applied prospectively to all intangible assets recognized in financial statements. In addition, the new guidance requires that an acquiring entity recognize all of the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions, requires the expense of acquisition costs, and also includes a substantial number of new disclosure requirements. The adoption of the guidance did not have a material effect on our condensed consolidated financial statements.

2. SELECTED BALANCE SHEET DATA

The following provides additional disclosure for selected balance sheet accounts:

	April 30,		October 31,
	2010		2009
	(In thousands)
Inventories:
Raw materials and component parts	$	14,242	$	13,668
Work-in-process		4,275		4,353
Finished goods		4,758		9,618
Total	$	23,275	$	27,639

	April 30,		October 31,
	2010		2009
	(In thousands)
Other current assets:
Other prepaid expenses	$	2,544	$	1,956
Other receivables		821		1,631
Other		15,853		2,310
Total	$	19,218	$	5,897

Included in each of other currents assets above and other accrued current liabilities below as of April 30, 2010 is an aggregate of $14,000 related to the pending settlement of our Class Action Lawsuits and Shareholder Derivative Suits. On February 4, 2010, we entered into settlement agreements, pending final court approval, to settle the Class Action Lawsuits and Shareholder Derivative Suits for $13,000 and $1,000, respectively. This amount is recorded under other accrued current liabilities as of April 30, 2010 below. Under our Directors and Officers ("D&O") insurance policy, the settlement amounts are fully insured and reimbursable, accordingly, we have recorded an insurance receivable in other current assets as we have determined that their recovery under our D&O insurance policy is probable. See Note 10 for more information related to these settlements.

	April 30,			October 31,
	2010			2009
	(In thousands)
Products leased and held for lease:
Utility	$	40,209		$	32,828
Less: accumulated depreciation		(25,529	)		(23,649	)
Utility, net		14,680			9,179

Proprietary Table Games		3,850			2,706
Less: accumulated depreciation		(1,781	)		(1,498	)
Proprietary Table Games, net		2,069			1,208

Electronic Table Systems		24,274			22,258
Less: accumulated depreciation		(10,417	)		(8,992	)
Electronic Table Systems, net		13,857			13,266

Total, net	$	30,606		$	23,653

	April 30,		October 31,
	2010		2009
	(In thousands)
Accrued and other current liabilities:
Accured compensation	$	8,366	$	10,137
Accrued taxes		1,538		2,083
Other accrued liabilities		19,140		4,388
Total	$	29,044	$	16,608

3. 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 $2,858 and $3,428 for the three months ended April 30, 2010 and 2009, respectively, and $6,128 and $6,631 for the six months ended April 30, 2010 and 2009, respectively.

Amortizable intangible assets are comprised of the following:

	Weighted Average	April 30,			October 31,
	Useful Life	2010			2009
		(In thousands)
Amortizable intangible assets:

Patents, games and products	10 years	$	63,104		$	65,345
Less: accumulated amortization			(42,940	)		(42,697	)
			20,164			22,648
Customer relationships	10 years		23,459			23,290
Less: accumulated amortization			(7,992	)		(6,704	)
			15,467			16,586
Licenses and other	6 years		13,137			12,722
Less: accumulated amortization			(3,752	)		(2,934	)
			9,385			9,788
Developed technology	4 years		10,188			9,934
Less: accumulated amortization			(10,188	)		(9,313	)
			-			621
Total		$	45,016		$	49,643

Tradenames. Intangibles with an indefinite life, consisting of the Stargames and CARD tradenames, are not amortized, and were $22,112 and $21,695 as of April 30, 2010 and October 31, 2009, respectively.

Goodwill. Changes in the carrying amount of goodwill as of April 30, 2010, are as follows:

				Proprietary		Electronic		Electronic
	Utility			Table Games		Table Systems		Gaming Machines		Total
	(In thousands)
Balance at October 31, 2009	$	44,135		$	8,317	$	11,131	$	11,079	$	74,662
Foreign currency translation adjustment		(3,574	)		-		284		283		(3,007	)
Other		246			567		-		-		813
Balance at April 30, 2010	$	40,807		$	8,884	$	11,415	$	11,362	$	72,468

The $567 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 quarter ended April 30, 2010, 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 10.

4. DEBT

Debt consisted of the following:

	April 30,			October 31,
	2010			2009
	(In thousands)
Term Loan	$	59,856		$	64,350
Senior secured revolving credit facility (the "Revolver")		28,880			28,000
Other debt		838			860
Total debt		89,574			93,210
Less: current portion		(650	)		(650	)
Total long-term debt	$	88,924		$	92,560

Senior Secured Credit Facility

Revolver. On November 30, 2006, we entered into a senior secured credit facility (the “Senior Secured Credit Facility”) with Deutsche Bank Trust Company Americas, as a Lender and as the Administrative Agent, Deutsche Bank Securities Inc. and Wells Fargo Bank, N.A., as Joint Lead Arrangers and Book Managers and Wells Fargo Bank, N.A., as Syndication Agent. The Senior Secured Credit Facility consisted of a $100,000 revolving credit facility (the “Revolver”), from which we initially drew $71,180 in order to repay in its entirety a bridge loan originally entered into on January 25, 2006 (the “Old Credit Agreement”). Loans under the Revolver bear interest at a margin over LIBOR or Base Rate, as elected by us. The applicable margins fluctuate based on our total leverage ratio from time to time. Our effective interest rate as of April 30, 2010 was 5.0% and as of October 31, 2009 was 4.8%. Borrowings under the Revolver may be used to make payments on the Term Loan, for working capital, capital expenditures and general corporate purposes (including share repurchases).

The amounts drawn under the Revolver were $28,880 as of April 30, 2010 and $28,000 as of October 31, 2009. As of April 30, 2010, we had approximately $71,120 of available remaining credit under the Revolver. The Revolver matures on November 30, 2011.

Second Amendment and Term Loan. On July 14, 2008, we entered into a second amendment (the “Second Amendment”) to our Senior Secured Credit Facility. Among other things, the Second Amendment provided for a new $65,000 term loan facility (the “Term Loan”), which was funded in full on August 25, 2008, resulting in net proceeds of $63,438. The amendment left in place our $100,000 Revolver discussed above. In addition to the Term Loan and Revolver, our amended Senior Secured Credit Facility provides a $35,000 incremental facility (the “Incremental Facility”) pursuant to which we may request (but no lender is committed to provide) additional loans under the facility, subject to customary conditions.

The Term Loan bears interest at 2.75% over the Base Rate or 3.75% over LIBOR, as elected by us. The Term Loan has scheduled amortization payments of 0.25% of the principal on the effective date of the loan, every quarter starting with the quarter ending on January 31, 2009. The mandatory prepayment provisions also require us to prepay the Term Loan with (i) up to 75% of our domestic excess cash flow (as defined) or up to 50% of our worldwide excess cash flow (as defined), whichever is less (with step-downs based on total leverage) (the “Excess Cash Flow Payment”); (ii) 100% of the proceeds of certain issuances of debt; and (iii) the proceeds of asset sales or recovery events in excess of $1,500, to the extent not reinvested. The scheduled amortization payments of 0.25% of the principal every quarter are classified as current portion of long-term debt as they are intended to be satisfied with cash on hand. The Excess Cash Flow Payment was intended to be satisfied through borrowings on our Revolver and was classified under long-term debt. The Excess Cash Flow Payment of $4,169 was made on January 29, 2010 through borrowings on our Revolver. The Term Loan matures on November 30, 2011.

Covenants. Our Senior Secured Credit Facility contains two financial maintenance covenants requiring us to maintain a Total Leverage Ratio, as defined therein, of not more than 4.0 to 1 and an Interest Coverage Ratio, as defined therein, of at least 3.0 to 1.0. The Total Leverage Ratio steps down to 3.75 to 1 in the quarter ending July 31, 2010. Our Total Leverage Ratio as of April 30, 2010 and October 31, 2009 was 1.3 to 1.0 and 1.52 to 1.0, respectively, and our Interest Coverage Ratio as of April 30, 2010 and October 31, 2009 was 20.3 to 1.0 and 14.8 to 1.0, respectively.

Guarantors and collateral. The Revolver and Term Loan obligations under our Senior Secured 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. If loans are ever made pursuant to our Incremental Facility, such loans would share such collateral equally and ratably with our Term Loan and Revolver.

5. SHAREHOLDERS’ EQUITY

Common stock repurchases. Our board of directors periodically authorizes us to repurchase shares of our common stock, however, we generally prioritize bank debt reduction over share repurchases. As such, for the three and six months ended April 30, 2010 and April 30, 2009, there were no common stock repurchases. As of April 30, 2010, $21,077 remained outstanding under our board authorization. We cancel shares that we repurchase.

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 (loss). For the three and six months ended April 30, 2010 and 2009, other comprehensive income consisted primarily of foreign currency translation adjustments. The following table provides information related to other comprehensive income:

	Three Months Ended				Six Months Ended
	April 30,				April 30,
	2010		2009		2010			2009
Net income	$	7,885	$	4,405	$	11,564		$	3,136
Currency translation adjustment		543		10,748		(4,458	)		8,453
Total comprehensive income	$	8,428	$	15,153	$	7,106		$	11,589

6. 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 and restricted stock units, individually or in any combination (collectively referred to as “Awards”). 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 immediately and expires in ten years, although initial equity grants to directors upon joining the Board can partially vest either immediately and/or partially over one or 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 April 30, 2010, 2,034 and 460 shares are available for grant under the Amended 2004 Plan and 2004 Directors’ Plan, respectively.

A summary of activity under our shared-based plans is presented below:

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
	Options			Price		Term		Value
	(thousands)			(per share)		(years)		(thousands)

Outstanding at October 31, 2009		4,365		$	14.56		6.2	$	4,520
Granted		691			7.54		9.8		1,421
Exercised		(10	)		4.21		-		-
Forfeited or expired		(95	)		24.07		-		-
Outstanding at April 30, 2010		4,951			13.42		7.0		8,353
Exercisable at April 30, 2010		3,167			15.30		6.4		3,635
Vested and expected to vest at April 30, 2010		4,889			10.22		8.5		8,160

For the three months ended April 30, 2010 and 2009, we issued 144 and 622 stock options, with an aggregate fair market value of $1,194 and $1,996, respectively. For the six months ended April 30, 2010 and 2009, we issued 691 and 1,041 stock options, with an aggregate fair market value of $5,217 and $3,792, respectively. For the three and six months ended April 30, 2010, 10 stock options were exercised and $8 of related tax benefit was recognized. For the three and six months ended April 30, 2009, there were no stock options exercised and therefore no related income tax benefit. As of April 30, 2010, there was approximately $4,511 of unamortized compensation expense related to stock options, which expense is expected to be recognized over a weighted-average period of 2.4 years.

A summary of activity related to restricted stock as of April 30, 2010 is presented below:

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
				Grant-Date		Vesting		Intrinsic
	Shares			Fair Value		Period		Value
	(thousands)			(per share)		(years)		(thousands)

Nonvested at October 31, 2009		442		$	19.55		1.91	$	3,452
Granted		68			7.75		2.77		653
Vested		(84	)		22.09		-		-
Forfeited		(35	)		26.21		-		-
Nonvested at April 30, 2010		391			16.36		2.39		3,756

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 April 30, 2010, there was approximately $1,359 of unamortized compensation expense related to restricted stock, which expense is expected to be recognized over a weighted-average period of 2.4 years.

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

	Three Months Ended						Six Months Ended
	April 30,						April 30,
	2010			2009			2010			2009
	(In thousands)						(In thousands)
Compensation costs:
Stock options	$	568		$	1,474		$	1,549		$	2,311
Restricted stock		279			1,648			306			3,022
Total compensation cost	$	847		$	3,122		$	1,855		$	5,333
Related tax benefit	$	(261	)	$	(1,091	)	$	(574	)	$	(1,780	)

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			Six Months Ended
	April 30, 2010			April 30, 2010
Option valuation assumptions:
Expected dividend yield	None			None
Expected volatility		64.6	%		67.8	%
Risk-free interest rate		2.3	%		2.1	%
Expected term	4.4 years			4.4 years

7. EARNINGS PER SHARE

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

	Three Months Ended				Six Months Ended
	April 30,				April 30,
	2010		2009		2010		2009

Net income available to common shares (1)	$	7,885	$	4,405	$	11,564	$	3,136

Basic
Weighted average shares		53,251		53,087		53,234		53,073

Diluted
Weighted average shares, basic		53,251		53,087		53,234		53,073
Dilutive effect of options and restricted stock		875		105		858		113
Weighted average shares, diluted		54,126		53,192		54,092		53,186

Basic earnings per share	$	0.15	$	0.08	$	0.22	$	0.06
Diluted earnings per share	$	0.15	$	0.08	$	0.21	$	0.06
Weighted average anti-dilutive shares excluded
from diluted EPS		2,893		4,727		3,005		7,553

(1) Net income available to participating securities was not significant.

8. 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, 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. The fair values of our Revolver and Term Loan have been calculated based on market borrowing rates available as of April 30, 2010 for debt with similar terms and maturities. These market assumptions include a LIBOR-based yield curve, interest rate spread based on our specific risk and an original issue discount. The following table provides the fair value measurement information about our long-term debt as of April 30, 2010.

	Carrying Value		Fair Value		Fair Value
	April 30, 2010		April 30, 2010		Hierarchy

Term Loan	$	59,856	$	58,419	Level 2
Revolver		28,880		26,108	Level 2
Total	$	88,736	$	84,527

9. OPERATING SEGMENTS

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

	Three Months Ended						Six Months Ended
	April 30,						April 30,
	2010			2009			2010			2009
	(In thousands)
Revenue:
Utility	$	21,130		$	19,986		$	38,746		$	35,737
Proprietary Table Games		10,170			8,852			19,205			18,513
Electronic Table Systems		12,444			5,730			20,819			9,699
Electronic Gaming Machines		7,072			10,704			12,382			15,789
Unallocated Corporate		-			32			-			55
	$	50,816		$	45,304		$	91,152		$	79,793
Gross profit (loss):
Utility	$	12,886		$	11,956		$	23,591		$	20,484
Proprietary Table Games		7,715			7,173			15,252			15,218
Electronic Table Systems		7,832			1,835			11,751			3,395
Electronic Gaming Machines		3,866			4,763			6,552			7,185
Unallocated Corporate		-			(29	)		-			(23	)
	$	32,299		$	25,698		$	57,146		$	46,259
Operating income (loss):
Utility	$	11,242		$	9,693		$	20,145		$	16,564
Proprietary Table Games		7,148			6,286			14,078			13,549
Electronic Table Systems		5,377			538			6,900			685
Electronic Gaming Machines		1,978			3,068			3,085			4,064
Unallocated Corporate		(14,392	)		(16,438	)		(27,327	)		(30,545	)
	$	11,353		$	3,147		$	16,881		$	4,317
Depreciation and amortization:
Utility	$	1,904		$	2,090		$	3,972		$	4,390
Proprietary Table Games		1,850			1,149			3,023			2,311
Electronic Table Systems		1,436			1,642			3,403			3,159
Electronic Gaming Machines		-			218			197			429
Unallocated Corporate		635			413			1,355			938
	$	5,825		$	5,512		$	11,950		$	11,227
Capital expenditures:
Utility	$	5,744		$	2,631		$	8,796		$	3,055
Proprietary Table Games		329			829			952			987
Electronic Table Systems		2,671			2,178			5,015			2,463
Electronic Gaming Machines		-			18			878			23
Unallocated Corporate		1,788			568			2,222			818
	$	10,532		$	6,224		$	17,863		$	7,346

Certain information for the three and six months ended April 30, 2009, above has been reclassified to conform to the current presentation.

REVENUE BY GEOGRAPHIC AREA

No individual customer accounted for more than 10% of consolidated revenue.

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

	Three Months Ended								Six Months Ended
	April 30,								April 30,
	2010				2009				2010				2009
	(In thousands)								(In thousands)
Revenue:
United States	$	24,988	49.2	%	$	20,836	46.0	%	$	47,478	52.1	%	$	40,710	51.0	%
Canada		1,884	3.7	%		2,991	6.6	%		4,664	5.1	%		6,221	7.8	%
Other North America		1,133	2.2	%		643	1.4	%		1,788	2.0	%		1,198	1.5	%
Europe		2,437	4.8	%		2,193	4.9	%		4,579	5.0	%		3,923	4.9	%
Australia		14,684	28.9	%		12,012	26.5	%		24,412	26.8	%		19,396	24.3	%
Asia		5,564	11.0	%		5,931	13.1	%		7,395	8.1	%		6,871	8.6	%
Other		126	0.2	%		698	1.5	%		836	0.9	%		1,474	1.9	%
	$	50,816	100.0	%	$	45,304	100.0	%	$	91,152	100.0	%	$	79,793	100.0	%

10. COMMITMENTS AND CONTINGENCIES

Employment agreements. We have entered into employment contracts with our Corporate Officers and certain other key employees with durations ranging from one to three years. Significant contract provisions include minimum annual base salaries, healthcare benefits, bonus compensation if performance measures are achieved and non-compete provisions. These contracts are primarily “at will” employment agreements, under which the employee or we may terminate employment. If we terminate any of these employees without cause, we are obligated to pay the employee severance benefits as specified in their individual contract. As of April 30, 2010 and October 31, 2009, minimum aggregate severance benefits totaled $6,670 and $6,063, respectively.

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 remaining principal and interest payment of $98 related to our initial estimated liability of $7,616 was paid in February 2009 and therefore no outstanding balance existed as of April 30, 2010. As of April 30, 2010, we paid approximately $9,100 of the $12,000 maximum amount since February 2004. Additional consideration up to $2,900 is contingently payable through 2014 based upon future revenue streams.

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 liability will be incurred and the amount of the related loss can be reasonably estimated. 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.

Class Action Lawsuits –

a. Stocke—On June 1, 2007, a putative class action complaint for violation of the federal securities laws against the Company and our Chief Executive Officer, Mark L. Yoseloff and former 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 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 12, 2007, announcement that we would restate our fiscal fourth quarter and full year financial results. The complaint seeks compensatory damages in an unstated amount. On or about August 4, 2007, four plaintiffs moved the Court for appointment as lead plaintiff.

b. Armistead—On June 12, 2007, a second putative class action complaint for violation of the federal securities laws against the Company and 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 lawsuit filed against these same defendants on June 1, 2007, except that the Armistead complaint was filed on behalf of persons who purchased our stock between March 20, 2006 and March 12, 2007.

c. Tempel—On June 25, 2007, a third putative class action complaint for violation of the 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 lawsuit filed against these same defendants on June 1, 2007.

d. Consolidated case of a - c above.

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. Grant & Eisenhofer is the lead plaintiffs' counsel.

A Consolidated Amended Class Action Complaint (“Consolidated Complaint”) was filed on February 5, 2008. The Consolidated Complaint asserts the same causes of action for violation of federal securities law as the initial lawsuits and applies to a class period of February 1, 2006 to March 12, 2007. The Consolidated Complaint contains essentially the same material allegations as in the initial lawsuits and also contains allegations arising out of the Company's acquisition of Stargames and disclosures concerning the Company's internal controls. This Consolidated Complaint supersedes all previously filed lawsuits covering this class period. On March 25, 2008, defendants filed a Motion to Dismiss. On March 23, 2009, the Court denied our Motion to Dismiss. The defendants answered on April 29, 2009. The case is presently pending.

On February 2, 2010, the lead plaintiffs filed a Motion for Preliminary Approval of Settlement. The Motion was granted on February 4, 2010, and the Court set a hearing in May 2010, subsequently rescheduled to June 8, 2010, where the Court will decide whether to give final approval for the settlement. Our D&O insurance carriers have escrowed the monetary settlement in full, equal to $13,000, subject to final court approval of the settlement, which, when obtained, will be paid to plaintiffs in full by our D&O insurance carriers, accordingly, we have recorded an insurance receivable in other current assets of $13,000 and accrued for the settlement of $13,000 in other accrued current liabilities as of April 30, 2010. See Note 2 for more information.

The Company believes that all of the above purported class action suits are without merit and intends to vigorously defend each of these cases. Due to the uncertainty of the ultimate outcome of these matters, the impact on future financial results is not subject to reasonable estimates. However, we have tendered these cases to our directors and officers insurance carriers. Thus far, reimbursement by our directors and officers insurance carriers for substantially all of the legal fees incurred for the cases (after our deductible was satisfied) has occurred in the ordinary course. While at this time, we believe that our directors and officers insurance carriers will continue to reimburse us for legal fees and pay any settlement or damages amounts subsequently agreed to or ordered, there can be no assurance that such reimbursement will continue in the future or actually occur.

We deny any liability or wrongdoing.

See also Subsequent Events.

Shareholder Derivative Suits –

a. Shareholder Derivative Lawsuit I (“Pirelli”) – On September 7, 2007, Pirelli Armstrong Tire Corporation Retiree Medical Benefits Trust filed a shareholder derivative complaint in the U.S. District Court for the District of Nevada against our then CEO, Mark Yoseloff, our former President, Paul Meyer, our former CFO, Richard Baldwin, our General Counsel, Jerome R. Smith and the then current members of our Board of Directors. The Company was also named as a nominal defendant. On September 24, 2007, plaintiffs voluntarily dismissed Mr. Smith from the case without prejudice. The complaint, on behalf of the Company, alleges breach of fiduciary duty and related causes of action against the defendants. The allegations generally relate to the restatement of the Company's fiscal 2006 annual results and our acquisition of Stargames and are very similar to the allegations in the class action suit, discussed above. The complaint seeks an unspecified amount of damages.

A consolidated amended complaint was filed on October 2, 2009, and a corrected version thereof was filed on October 26, 2009. The Special Demand Review Committee of the Board of Directors of Nominal Defendant Shuffle Master, Inc. filed a Motion to Dismiss in the consolidated Pirelli case on November 2, 2009. This Motion has not been ruled upon.

The case is presently pending.

b. Shareholder Derivative Lawsuit II—On September 17, 2007, Chad Hodgkins filed a shareholder derivative complaint against our then CEO, Mark Yoseloff, our former CFO, Richard Baldwin, former Board of Directors member Todd Jordan and current Board of Directors members Mr. Saunders and Mr. Castle. The Company was also named as a nominal defendant. The complaint was filed in the U.S. District Court for the District of Nevada. The complaint, on behalf of the Company, alleges breach of fiduciary duty and related causes of action against the defendants. The allegations generally relate to the restatement of the Company's fiscal 2006 annual results and our acquisition of Stargames and are very similar to the allegations in the three class actions suits and/or the Shareholder Derivative Lawsuit I described above Pirelli case. The complaint seeks an unspecified amount of damages.

On October 24, 2007, the Court approved a stipulation to transfer the Hodgkins case to Judge Dawson, who had already been assigned the Pirelli case. On November 9, 2007, the Court ordered the Hodgkins case to be consolidated into the Pirelli case.

Additionally, any future federal court derivative actions alleging similar facts and legal theories will be consolidated into the Pirelli case.

c. Shareholder Derivative Lawsuit III (the “State Derivative Lawsuit”)

On November 9, 2009, Gerard Denham, derivatively on behalf of Nominal Defendant Shuffle Master, Inc., filed a lawsuit in the Eighth Judicial District Court, Clark County, Nevada, against the following defendants: Mark L. Yoseloff, Richard L. Baldwin, Garry W. Saunders, Louis Castle, Phillip Peckman, John Bailey, Todd D. Jordan, Ken Robson, William Warner and Nominal Defendant, Shuffle Master, Inc. The claims in this case are substantively similar to Shareholder Derivative Lawsuit I and II, discussed above. Defendant Yoseloff is our former CEO. Defendant Baldwin is our former CFO. Defendants Saunders, Castle, Peckman and Bailey are current members of our Board of Directors. Defendants Jordan, Robson and Warner are former members of our Board of Directors. The claims stem from a demand made by the plaintiff on our Board of Directors in July 2007 and the September 2009 rejection of the demand in a letter by a Special Demand Review Committee created by our Board. The Complaint contains the following claims against all defendants:

1.	Breach of fiduciary duties for disseminating false and misleading statements.

2.	Breach of fiduciary duties for failing to maintain internal controls.

3.	Unjust enrichment.

4.	Abuse of control.

5.	Gross mismanagement.

On December 21, 2009, a Special Demand Review Committee of the Company’s Board filed a motion to dismiss the State Derivative Lawsuit based upon its investigation and business judgment. A hearing on that motion is presently set for June 17, 2010.

We deny any liability or wrongdoing. We believe that the claims in Shareholder Derivative Lawsuits I and II and the State Derivative Lawsuit are without merit and intend to vigorously defend the cases. Due to the uncertainty of the ultimate outcome of these matters, the impact, if any, on future financial results is not subject to reasonable estimates. However, we have tendered the cases to our directors and officers insurance carriers. Thus far, reimbursement by our directors and officers insurance carriers for substantially all of the legal fees incurred for the cases has occurred in the ordinary course. While at this time we believe that our directors and officers insurance carriers will continue to reimburse us for legal fees, there can be no assurance that such reimbursement will continue in the future.

See also Subsequent Events.

Prime Table Games, et al. vs. Shuffle Master –

On August 25, 2008, Prime Table Games LLC, Derek Webb, Hannah O’Donnell and Prime Table Games UK (collectively, “Prime Table”) filed suit against the Company in the United States District Court for the Southern District of Mississippi. The complaint primarily involves our Three Card Poker game and alleges that certain alleged conduct of the Company constitutes a violation of various federal antitrust laws and also asserts related claims. Other claims include the following (some of which are related to Three Card Poker and others related to other games): breach of contract (including certain equitable claims), breach of the duty of good faith and fair dealing, patent infringement, patent misuse and unfair trade practices. Prime Table is seeking in excess of $15,000 in damages, plus various equitable remedies, including without limitation, rescission or reformation of the non-competition and first right of refusal provisions of our Three Card Poker purchase agreement with plaintiffs and a ruling that the Three Card Poker patents are unenforceable.

On August 29, 2008 and October 22, 2008, respectively, Prime Table filed amended complaints. The amended complaints do not materially modify the allegations made in the complaint referenced above and filed on August 25, 2008.

On October 24, 2008, we filed a Motion to Transfer Venue pursuant to 28 U.S.C. § 1404(a). The Motion asks the Court to transfer venue to the United States District Court for the District of Nevada, Southern Division. On November 17, 2008, we filed a Motion to Dismiss several of Prime Table’s causes of action pursuant to Federal Rule of Civil Procedure 12(b)(6). The Motion asks the Court to dismiss certain counts of the Second Amended Complaint, which include most of the antitrust claims. We have not yet received a ruling on either of these Motions.

We deny any liability or wrongdoing. We believe that the above claims and litigation are without merit and intend to vigorously defend the case. Due to the uncertainty of the ultimate outcome of this matter, the impact, if any, on future financial results is not subject to reasonable estimates.

At this time, subject to judicial and other risks beyond our control, we do not believe that we will suffer any loss, but if we did, such loss, at this time, cannot be reasonably estimated. Further, subject to judicial and other risks beyond our control, we do not believe that the loss, if any, would be material.

TableMAX –

On April 14, 2009, TableMAX IP Holdings, Inc. and TableMAX Gaming, Inc. filed a 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 the following U.S. Patents: 5,688,174, 6,921,337 and 7,201,667. The Complaint seeks injunctive relief and an unspecified amount of damages including claims for attorney’s 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. and TableMAX Gaming, Inc. and Vegas Amusement, Inc. (the alleged owner of U.S. Patents: 5,688,174, 6,921,337 and 7,201,667) (hereinafter collectively “TableMAX”) filed a new complaint (the “New Complaint”) making allegations materially the same as the allegations in the First Complaint. On August 19, 2009, TableMAX filed an amended complaint (the “Second Complaint”). The Second Complaint 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. U.S. Patent 7,575,512 was issued on August 18, 2009. On August 19, 2009, the plaintiffs filed a Motion for Preliminary Injunction in the Second Complaint based on U.S. Patent 7,575,512. The Motion for Preliminary Injunction sought to enjoin future sales of our Table Master® product. On October 26, 2009, the Court denied the Motion for Preliminary Injunction without hearing oral argument. The Court also denied without prejudice various motions for summary judgment which we filed. During the discovery process, TableMAX had made new allegations that certain of our Vegas Star® products infringe one of the patents in the Second Complaint. We deny these allegations and believe that these allegations are untrue. On January 15, 2010, TableMax filed a Second Amended Complaint (the "Third Complaint") which has materially the same allegations as the Second Complaint, except that it now alleges that our Vegas Star® allegedly infringes all of the patents in suit which are the following US Patents: 5,688,174, 6,921,337, 7,201,661 and 7,575,51.

See also Subsequent Events.

Smart Shoes, Inc. (the “SSI Case”) –

On April 22, 2009, we filed a Complaint for declaratory relief against Smart Shoes, Inc. and Otho D. Hill (hereafter collectively “SSI”), in the Eighth Judicial District Court, Clark County, Nevada. The declaratory relief claim seeks a judicial finding that we do not owe any money concerning SSI’s claim that we owe approximately $1,100 in regards to certain known material patents which we had acquired (hereinafter “Hill Patents”). We believe that the approximate amount of $1,100, if it is owed, is owed by Progressive Gaming International Corporation (hereinafter “PGIC”) or possibly others, but not us. On May 26, 2009, the defendants removed the matter to the United States District Court for the District of Nevada. On June 9, 2009, the defendants filed an Answer and Counterclaims which included the following claims: rescission of the assignment agreements between the defendants and PGIC for certain patents and imposition of a constructive trust; declaration of priority of rights as to the certain patents under the Federal Patent Laws; the defendants’ priority of rights as to the certain patents based on prior recorded assignments; the defendants’ priority of rights as to the certain patents based on prior assignments; and the defendants’ priority of rights in the certain patents based on the Nevada Uniform Commercial Code. On July 2, 2009, we filed a Motion to Remand the entire case to the Eighth Judicial District Court, Clark County, Nevada, and a Motion to Dismiss all of the defendants’ counterclaims. On October 14, 2009, the Court granted our Motion to Remand and denied the Motion to Dismiss as moot. The case is no longer pending in Federal Court.

In an adversary proceeding by SSI in the United States Bankruptcy Court District of Nevada against the trustee of PGIC, the trustee filed Motions to (“Trustee’s Motions”): (1) approve compromise and settlement pursuant to Bankruptcy Rule 9019 approving settlement between Smart Shoes, Inc. and Otho D. Hill and Progressive Gaming International Corporation fdba Mikohn Gaming Corporation; and (2) approve conferral of derivative rights to sue on Smart Shoes, Inc. and Otho D. Hill. The Trustee’s Motions were set for hearing on January 26, 2010 and were eventually continued to April 6, 2010. If the Trustee’s Motions are granted by the Court then: (1) SSI’s agreement with PGIC regarding the Hill Patents would be rescinded; (2) SSI would have the right to try and bring an avoidance action against us and others regarding the earlier foreclosure of the assets of PGIC (hereinafter “Foreclosure”) which among other assets allegedly transferred to IGT the Hill Patents and the Binding Term Sheet of February 17, 2009 between us and IGT relating to the Hill Patents and related issues (hereinafter “Binding Term Sheet”). If the court grants the Trustee’s Motions and SSI were able to succeed in an avoidance action against us then: (i) we may have to pay approximately $1,530 in additional royalties; and (ii) the rights that we received in regards to the known material patents that are part of the PGIC Table Games Division acquisition and the associated patent license agreement may be adversely affected; and (iii) our agreement with IGT, as reflected in the Binding Term Sheet and another agreement with IGT, could be modified, terminated or otherwise adversely impact.

On February 12, 2010, for certain immaterial monetary and non-monetary consideration, we settled all of SSI’s claims in its case against us, which case was pending in the Eighth Judicial District Court, Clark County, Nevada. The case was dismissed with prejudice on February 22, 2010, with all parties to bear their attorney’s fees and costs. This settlement also removes all of SSI’s claims that could have affected our legal title to the Hill Patents.

In February 2010, we also reached a separate settlement in principle with PGIC’s trustee in its bankruptcy case (the “Trustee”) on behalf of the Estate of PGIC, over related claims which could have also affected our legal title to the Hill Patents. The settlement is subject to the Bankruptcy Court’s approval and finalization with the Trustee. The proposed settlement would settle any claims that the Estate of PGIC/Trustee may have against us as a result of: the Foreclosure; the Hill Patents; our acquisition of the PGIC Table Games Division in September 2007, including but limited to claims for $1,530 in additional royalties, the rights that we received in regards to the known material patents that are part of the acquisition of PGIC’s Table Game Division in September 2007, and the associated patent license agreement; and other issues. The settlement will involve an immaterial cash payment by us to the Estate. If approved by the Bankruptcy Court and not overturned on any appeal, all potential claims related to this matter should be materially resolved. We expect a Bankruptcy Court ruling on the settlement during our 3rd fiscal quarter of the year. Additionally, on March 8, 2010, the Trustee’s Motions, the outcome of which motions could have affected our settlement with SSI or the Trustee, were withdrawn and the hearing set for April 6, 2010 was vacated.

Macau Rapid Baccarat Patent Issue –

On or about June 3, 2009, at the G2E Asia Gaming Show, customs officials from the Macau SAR seized our one Rapid Baccarat ® unit related to a claim of patent infringement by an alleged Macau patent owner of an alleged Macau patent. There is the 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, a criminal matter in Macau. On October 27, 2009, the governmental official in charge of the investigation elected to dismiss the investigation based on there being no patent infringement and also based on the report of the Macau Customs SAR. 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 our subsidiary SMAL will be opened. If the patent holder’s appeal to the Macau Court System is successful, then a criminal case for patent infringement against SMAL and its directors, could be instituted (i.e., the case being opened). No proceeding against either SMAL or any of its directors has yet been commenced. We deny any liability or wrongdoing. We believe the claim is without merit. If any legal proceedings were to be commenced against us, we would vigorously contest such proceedings. Due to the uncertainty of the ultimate outcome of this matter, the impact, if any, on future financial results is not subject to reasonable estimates.

On or about February 3, 2010, we filed an appeal (the “First SMI Appeal”) to the judge’s decision of January 20, 2010 that the patent holder’s appeal was timely. On or about March 4, 2010, the judge declined to forward the First SMI Appeal to a higher Macau Court. We filed a further appeal (the “Second SMI Appeal”) to have the higher Macau Court hear the First SMI Appeal. In the meantime, the judge has still not decided whether or not to open a proceeding against SMAL and its directors. We expect that the judge will make a decision whether or not to open a proceeding during our 3rd fiscal quarter of the year.

See also Subsequent Events.

Wright Matter –

On November 7, 2009, Sam Wright was playing our Vegas Star® craps machine at the Harrah’s Casino New Orleans. Mr. Wright played a game which was 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. If Mr. Wright wins this purported patron dispute then: (1) we may have potential indemnity obligations to Harrah’s New Orleans Casino in the amount of approximately $42,000 plus attorney’s fees and costs; or (2) we may be liable to Mr. Wright for approximately $42,000. We believe that Mr. Wright’s claims are without any basis or merit, at law or in fact. We intend to vigorously defend this matter. We deny any liability or wrongdoing.

Subsequent Events.

Timothy Parrott –

On May 6, 2010, Timothy Parrott, our former CEO, passed away. Under his employment agreement dated January 28, 2009, Mr. Parrott would be paid a lump sum payment equal to 6 months of his then base salary upon his departure from the Company, either upon death, total disability or without just cause. Mr. Parrott's employment agreement also provided for a grant of 300 stock options which would 100% accelerate vest in the case of a total disability or death. Accordingly, in May 2010, we will record a compensation charge of $250 for the lump sum payment equal to 6 months of his base salary and a stock compensation charge equal to $410 related to the 100% accelerated vesting of his outstanding stock options.

Class Action Lawsuits –

At the June 8, 2010 hearing, the court gave its final approval to this settlement. The cases will be dismissed with prejudice, and the settlement funds will be released to the plaintiffs once the court’s approval and judgment are final and any appeal period has expired. All settlement funds will be paid by our D&O insurance carriers. We continue to deny any wrongdoing.

Shareholder Derivative Suits –

In May 2010, the parties agreed upon a settlement in principle, subject to documentation and court approval with the following material terms if the settlement is approved: (i) the case would be dismissed with prejudice and all defendants released in exchange for payment of the plaintiffs' attorneys' fees of $1,000 by our D&O insurance carriers; (ii) we will not be paying any amounts in the settlement; (iii) we have made and will make certain corporate governance changes; and (iv) we continue to deny any wrongdoing. Accordingly, we have recorded an insurance receivable in other current assets of $1,000 and accrued for the settlement of $1,000 in other accrued current liabilities as of April 30, 2010. See Note 2 for more information.

TableMAX –

On June 1, 2010, in a document produced in the discovery process, it appears that TableMAX’s allegations of infringement in regards to our Vegas Star® product is limited to US Patent 5,688,174. We continue to deny any liability or wrongdoing.

Macau Rapid Baccarat Patent Issue –

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 may appeal this decision. We continue to deny any liability or wrongdoing.

11. RETROSPECTIVE APPLICATION OF NEW ACCOUNTING STANDARDS ADOPTED AT THE BEGINNING OF FISCAL 2010

As mentioned in Note 1, we were required to retrospectively change our method of accounting for the Notes during the period they were outstanding to comply with the new authoritative guidance. We separated the Notes into two accounting components:

1. a debt component, representing the fair value of the Notes as if they had no conversion rights, and

2. an equity component, representing the difference between the proceeds from the issuance of the Notes and their fair value.

The amount allocated to the equity component was accounted for as debt discount. We also allocated the transaction costs to the liability and equity components in proportion to the allocation of proceeds and accounted for them as debt issuance costs and equity issuance costs, respectively. Debt discount and debt issuance costs not allocated to equity were amortized over the period to the first conversion date (5 years) using the effective interest rate method and recorded as interest expense.

The retrospective application of this new accounting standard to our balance sheet at October 31, 2009, and our statements of operations and cash flows for the three month period ended January 31, 2009 were erroneously omitted from our first quarter financial statements. Accordingly, the effect of the adoption of this new authoritative guidance on our balance sheet at October 31, 2009, and our statements of operations and cash flows for the three month period ended January 31, 2009 is included in the table below.

The effect of the adoption of the new authoritative guidance on our balance sheet at October 31, 2009, and our statements of operations and cash flows for the three month period ended January 31, 2009 for the three and six-month periods ended April 30, 2009 are as follows:

				Adjustments
	As previously reported			Convertible Debt			As Currently Presented
	(In thousands, except per share amounts)

INCOME STATEMENTS
For the Three Months Ended January 31, 2009
Interest expense	$	(1,872	)	$	(328	)	$	(2,200	)
Total other income (expense)		(2,487	)		(328	)		(2,815	)
Gain on early extinguishment of debt		163			(139	)		24
Income before tax		(1,154	)		(467	)		(1,621	)
Income tax provision		(181	)		(171	)		(352	)
Net income		(973	)		(296	)		(1,269	)

Basic and diluted EPS	$	(0.02	)	$	-		$	(0.02	)

Basic and diluted weighted average shares outstanding		53,058			-			53,058

For the Three Months Ended April 30, 2009
Interest expense	$	(1,384	)	$	(265	)	$	(1,649	)
Total other income (expense)		244			(265	)		(21	)
Income before tax		5,189			(265	)		4,924
Income tax provision		612			(93	)		519
Net income		4,577			(172	)		4,405

Basic EPS	$	0.09		$	(0.01	)	$	0.08
Diluted EPS	$	0.09		$	(0.01	)	$	0.08

Basic weighted average shares outstanding		53,087			-			53,087
Diluted weighted average shares outstanding		53,192			-			53,192

For the Six Months Ended April 30, 2009
Interest expense	$	(3,256	)	$	(593	)	$	(3,849	)
Total other expense		(2,243	)		(593	)		(2,836	)
Gain on early extinguishment of debt		1,961			(139	)		1,822
Income before tax		4,035			(732	)		3,303
Income tax provision		431			(264	)		167
Net income		3,604			(468	)		3,136

Basic EPS	$	0.07		$	(0.01	)	$	0.06
Diluted EPS	$	0.07		$	(0.01	)	$	0.06

Basic weighted average shares outstanding		53,073			-			53,073
Diluted weighted average shares outstanding		53,186			-			53,186

BALANCE SHEET
At October 31, 2009
Paid-in capital		88,977			16,956			105,933
Retained earnings		42,282			(16,956	)		25,326

STATEMENT OF CASH FLOWS
For the Three Months Ended January 31, 2009
Operations
Net income	$	(973	)	$	(296	)	$	(1,269	)
Adjustments:
Amortization of debt issuance costs and debt discount		325			328			653
Gain on early extinguishment of debt		(163	)		139			(24	)
Deferred income taxes		(354	)		(171	)		(525	)

For the Six Months Ended April 30, 2009
Operations
Net income	$	3,604		$	(468	)	$	3,136
Adjustments:
Amortization of debt issuance costs and debt discount		636			593			1,229
Gain on early extinguishment of debt		(1,961	)		139			(1,822	)
Deferred income taxes		(1,043	)		(264	)		(1,307	)

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 14, 2010 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 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 are proud of the products that we develop and market and believe we can have continued growth and expansion. To that end, we have devised and are implementing the following ongoing strategic plan:

Develop a true “strategic partner” relationship with our customers

Our first strategic goal focuses on partnering with our customers, not only to provide enhanced efficiencies, maximize security and maximize profitability on the casino floor, but also working diligently to develop innovative products that anticipate and respond to their needs. To demonstrate our top strategic initiative, we rolled out a 12 Point Pledge that outlines our commitment to our customers:

We will be a strategic partner to our customers.

We will work diligently to meet our customers’ needs.

We will provide solutions, not just products.

We will never forget: we’re in the business of fun.

We will foster trust from the very first handshake.

We will provide innovative products.

We will be tireless in our pursuit of excellence.

We will provide answers, not excuses.

We will set a high bar for service.

We will identify creative ways to improve our customers’ performance.

We will collaborate with our customers to fuel their profitability.

We will know we’ve reached our full potential when we’ve enabled our customers to reach theirs.

Continued emphasis on leasing versus selling

We intend to continue executing this strategy primarily in North America although we will encourage leasing programs in other parts of the world.

Continued development of technology to drive new products across all product lines

This strategic initiative includes our card reading shoes and shufflers, shuffler interface with table systems, live and electronic table game progressive systems and the development of new titles for all of our e-Table platforms on a worldwide basis.

Value engineering to reduce manufacturing costs across all product lines

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

Continued commitment to reduce expenses throughout the Company without compromising the quality of our products or service

Our goal is to reduce expenses through cost savings initiatives as well as thoroughly examining our infrastructure to improve our operating margins without compromising the quality of our products or service.

This ongoing strategic plan assists us in defining and implementing our specific product strategies for the future are:

·	To focus on developing, manufacturing and marketing products that increase the speed, profitability, productivity and security of licensed casino operators and other licensed operators in their table game operations.

·	To develop and market shufflers with advanced features and capabilities, such as optical card recognition and deck validation, to replace older generation shufflers and to further penetrate domestic and foreign markets.

To broaden our PTG segment by developing or acquiring additional table game content to increase our penetration of licensed casino operators’ table game operations. In addition, our analysis has shown that there exists a strong correlation between proprietary table game growth and demand for automatic shufflers.

·	To develop a variety of felt-based and e-Table solutions to increase revenue from existing assets in the field by adding new proprietary features such as progressives and side bets.

·	To market our e-Table platforms to provide a cost-effective brand extension of our PTG content to existing casino and new licensed casino operators and to explore other venues in which the platforms could be reasonably modified to fulfill market demands.

·	To continue our commitment to develop new and exciting titles for our EGM products, allowing us to maintain our niche product offering.

·	To develop or acquire patents, licenses and other intellectual property both to broaden our product offerings and to vigorously protect our patents and products from potential infringement.

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 a fee to us based on a percentage of net win. Product lease contracts typically include parts and service. When we sell our products, we offer our customers a choice between a sale or long-term financing. We also offer a majority of our products for sale with an optional parts and service contract.

The following points should be noted as they relate to our strategy to emphasize leasing over selling as this strategy can differ by segment and geography:

We expect to continue to increase our lease revenues in our Utility segment within the United States. Outside of the United States, we expect to continue to realize a large proportion of our Utility revenues from sales rather than leases. This segment has a planned replacement cycle which, under normal circumstances, will typically drive a certain level of sales activity in any one period.

·	Our lease model is strongest in our PTG segment. While we have strong leasing in the United States, we are looking to expand our proprietary table games in other parts of the world where the current penetration of proprietary table games is lower.

·	We expect to continue to increase our lease revenues in our ETS segment within the United States. Outside of the United States, we expect to continue to realize a large proportion of our ETS revenues from sales rather than leases.

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

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 PTG segment, the majority of games placed are licensed to our customers, which provides us with royalty revenue. In the ETS segment, we derive revenue from leases, sales and service contracts. In the EGM segment, we derive revenue from selling the full EGM complement and conversion kits which allow existing EGM terminals to be converted to other games on the PC3 and PC4 platform.

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 consume significant R&D efforts on the development of our newer generation shuffler products, such as the iDeal® and one2six® Plus, our card recognition products, as well as other table accessories, such as the iShoe® 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.

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 increases 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. This is consistent with our rollout strategy whereby we provide very favorable lease rates at the inception of a lease to entice the customer to try our new product. 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.

In addition to the lease versus sell strategy, we expect to improve 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.

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

CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended										Six Months Ended
	April 30,										April 30,
	2010					2009					2010					2009
	(In thousands)
Revenue:
Utility	$	21,130		41.6	%	$	19,986		44.1	%	$	38,746		42.5	%	$	35,737		44.8	%
Proprietary Table Games		10,170		20.0	%		8,852		19.5	%		19,205		21.1	%		18,513		23.2	%
Electronic Table Systems		12,444		24.5	%		5,730		12.7	%		20,819		22.8	%		9,699		12.1	%
Electronic Gaming Machines		7,072		13.9	%		10,704		23.6	%		12,382		13.6	%		15,789		19.8	%
Other		-		0.0	%		32		0.1	%		-		0.0	%		55		0.1	%

Total revenue		50,816		100.0	%		45,304		100.0	%		91,152		100.0	%		79,793		100.0	%
Cost of revenue		18,517		36.4	%		19,606		43.3	%		34,006		37.3	%		33,534		42.0	%

Gross profit		32,299		63.6	%		25,698		56.7	%		57,146		62.7	%		46,259		58.0	%
Selling, general and administrative		15,702		30.9	%		18,360		40.5	%		30,059		33.0	%		34,011		42.6	%
Research and development		5,244		10.3	%		4,191		9.3	%		10,206		11.2	%		7,931		9.9	%

Income from operations		11,353		22.4	%		3,147		6.9	%		16,881		18.6	%		4,317		5.5	%
Other income (expense):
Interest income		154		0.3	%		311		0.7	%		292		0.3	%		545		0.7	%
Interest expense		(960	)	(1.9	%)		(1,649	)	(3.6	%)		(2,016	)	(2.2	%)		(3,849	)	(4.8	%)
Other, net		473		0.9	%		1,317		2.9	%		1,127		1.2	%		468		0.6	%
Total other income (expense)		(333	)	(0.7	%)		(21	)	(0.0	%)		(597	)	(0.7	%)		(2,836	)	(3.6	%)
Gain on early extinguishment of debt		-		0.0	%		1,798		4.0	%		-		0.0	%		1,822		2.2	%

Income from operations before tax		11,020		21.7	%		4,924		10.9	%		16,284		17.9	%		3,303		4.1	%
Income tax provision		3,135		6.2	%		519		1.2	%		4,720		5.2	%		167		0.2	%
Net income	$	7,885		15.5	%	$	4,405		9.7	%	$	11,564		12.7	%	$	3,136		3.9	%

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

REVENUE AND GROSS MARGIN

	Three Months Ended									Six Months Ended
	April 30,						Percentage			April 30,						Percentage
	2010			2009			Change			2010			2009			Change
	(In thousands)
Revenue:
Leases and royalties	$	21,477		$	18,614			15.4	%	$	41,970		$	36,970			13.5	%
Sales and service		29,339			26,684			9.9	%		49,182			42,794			14.9	%
Other		-			6			(100.0	%)		-			29			(100.0	%)
Total	$	50,816		$	45,304			12.2	%	$	91,152		$	79,793			14.2	%

Cost of revenue:
Leases and royalties	$	7,158		$	5,864			22.1	%	$	13,462		$	11,703			15.0	%
Sales and service		11,359			13,742			(17.3	%)		20,544			21,831			(5.9	%)
Total	$	18,517		$	19,606			(5.6	%)	$	34,006		$	33,534			1.4	%

Gross profit:
Leases and royalties	$	14,319		$	12,750			12.3	%	$	28,508		$	25,267			12.8	%
Sales and service		17,980			12,942			38.9	%		28,638			20,963			36.6	%
Other		-			6			(100.0	%)		-			29			(100.0	%)
Total	$	32,299		$	25,698			25.7	%	$	57,146		$	46,259			23.5	%

Gross margin:
Leases and royalties		66.7	%		68.5	%					67.9	%		68.3	%
Sales and service		61.3	%		48.5	%					58.2	%		49.0	%
Total		63.6	%		56.7	%					62.7	%		58.0	%

Three months ended April 30, 2010 compared to three months ended April 30, 2009

Revenue

Our revenue for the three months ended April 30, 2010 increased $5,512 over the same prior year period, primarily due to the following:

·	Impact of foreign currency fluctuations

o	Total revenue was positively impacted by approximately $3,900 due to the exchange effect of a weakening U.S. dollar

·	Increase in our leases and royalties revenue

o	Driven primarily by increased ETS lease revenue due to a 41.0% increase in seats on lease

o	Increased PTG lease and royalty revenue due to a 12.7% increase in units on lease

o	Increased Utility lease revenue driven by a 8.9% increase in units on lease

·	Increase in our sales and service revenue

o	Increase most notably in our ETS segment driven by a 191.8% increase in sold seats

o	Partially offset by a decrease in our EGM segment due to a 50.1% decline in the number of sold units

·	Market expansion and favorable regulatory changes

o	Opening of two casinos in Singapore drove increased sales revenue of $3,100 and increased lease revenue of $500 in our Utility, PTG and ETS segments

o	Casino opening in the Philippines drove increased Utility lease revenue

o	Regulatory changes in United States jurisdictions, such as Indiana and Florida, allowed for the placement of Table Master® seats which led to increased ETS lease and sales revenue

o	Favorable regulatory changes in certain Australian jurisdictions which substantially drove increased ETS sales revenue of approximately $4,300

Gross margin

Our gross margin for the three months ended April 30, 2010 increased 690 basis points (“bps”) to 63.6% as compared to the same prior year period, reflecting the following:

·	Increased segment margin performance

o	ETS was favorably impacted by high margin sales of Rapid Table Games® and Vegas Star®

o	Utility was favorably impacted by reduced amortization

o	EGM was favorably impacted by sales of higher margin hardware conversion kits

o	Partially offset by reduced PTG margins due to a write-off of certain tangible and intangible assets

Six months ended April 30, 2010 compared to six months ended April 30, 2009

Revenue

Our revenue for the six months ended April 30, 2010 increased $11,359 over the same prior year period, primarily due to the following:

·	Impact of foreign currency fluctuations

o	Total revenue was positively impacted by approximately $6,700 due to the exchange effect of a weakening U.S. dollar

·	Increase in our sales and service revenue

o	Increase most notably in our ETS segment driven by a 197.5% increase in sold seats

o	Utility sales revenue was driven by a 12.7% increase in shuffler sold units

o	Partially offset by a decrease in our EGM segment, driven by a 45.3% decline in sold units

·	Increase in our leases and royalties revenue

o	Driven primarily by increased ETS lease revenue due to a 41.0% increase in seats on lease

o	Increased Utility lease revenue driven by a 8.9% increase in shuffler leased units

·	Market expansion and favorable regulatory changes

o	Opening of two casinos in Singapore drove increased sales revenue of $3,100 and increased lease revenue of $500 in our Utility, PTG and ETS segments

o	Casino opening in the Philippines drove increased Utility lease revenue

o	Regulatory changes in United States jurisdictions, such as Indiana and Florida, allowed for the placement of Table Master seats which led to increased ETS lease and sales revenue

o	Favorable regulatory changes in certain Australian jurisdictions which substantially drove increased ETS sales revenue of approximately $4,300

Gross margin

Our gross margin for the six months ended April 30, 2010 increased 470 bps to 62.7% as compared to the same prior year period, reflecting the following:

·	Increase segment margin performance

o	ETS was favorably impacted by high margin sales of Rapid Table Games and Vegas Star

o	Utility was favorably impacted by greater conversion sales and reduced amortization

o	EGM was favorably impacted by sales of higher margin hardware conversion kits

o	Partially offset by reduced PTG margins due to a write-off of certain tangible and intangible assets

The following table provides additional information regarding our operating expenses:

OPERATING EXPENSES

	Three Months Ended									Six Months Ended
	April 30,						Percentage			April 30,						Percentage
	2010			2009			Change			2010			2009			Change
	(In thousands)

Selling, general and administrative	$	15,702		$	18,360			(14.5	%)	$	30,059		$	34,011			(11.6	%)
Percentage of revenue		30.9	%		40.5	%					33.0	%		42.6	%

Research and development	$	5,244		$	4,191			25.1	%	$	10,206		$	7,931			28.7	%
Percentage of revenue		10.3	%		9.3	%					11.2	%		9.9	%

Total operating expenses	$	20,946		$	22,551			(7.1	%)	$	40,265		$	41,942			(4.0	%)
Percentage of revenue		41.2	%		49.8	%					44.2	%		52.5	%

Three months ended April 30, 2010 compared to three months ended April 30, 2009

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

SG&A expenses decreased $2,658 for the three months ended April 30, 2010 as compared to the same prior year period. This decrease primarily reflects the following:

·	Severance costs

o	Severance costs decreased $4,000 primarily due to the retirement of our former CEO in the prior year period

The decrease in SG&A expenses was partially offset by the following increases:

·	Impact of foreign currency fluctuations

o	Net increases of approximately $1,090 at our foreign subsidiaries due to the exchange effect of a weakening U.S. dollar

·	Professional fees

Increase in legal expenses of approximately $200. Corporate legal expenses increased as a result of higher legal expenses incurred on our TableMax and SSI Case litigations offset by a reduction in costs related to the Elixir Gaming purchase and settlement agreement incurred during the same prior year period (See Note 10 Legal Proceedings for further discussion)

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

R&D expenses increased $1,053 for the three months ended April 30, 2010 as compared to the same prior year period. This increase primarily reflects:

·	Impact of foreign currency fluctuations

o	Net increases of approximately $808 at our foreign subsidiaries due to the exchange effect of a weakening U.S. dollar

Overall increase in R&D expenses related to the following projects which have been the focus of our R&D efforts during the three months ended April 30, 2010:

PTG

o	Expenses primarily related to development of implementing progressives onto existing proprietary games

o	Additional R&D efforts were spent on developing the Video Progressive Display System (“ViPS”) to support our PTG progressive products

ETS

o	Expenses primarily related to the further development of the i-Table, including the development of PTG based i-Table products

o	Additional R&D efforts continue to be spent on creating and implementing new game content for our Table Master, Vegas Star and Rapid Table Games

Six months ended April 30, 2010 compared to six months ended April 30, 2009

Selling, general & administrative expenses:

SG&A expenses decreased $3,952 for the six months ended April 30, 2010 as compared to the same prior year period. This decrease primarily reflects the following:

·	Severance costs

o	Severance costs decreased $6,500 primarily due to the retirement of our former CEO and the departure of several senior executives in the prior year period

The decrease in SG&A expenses was partially offset by the following increases:

·	Impact of foreign currency fluctuations

o	Net increases of approximately $2,060 at our foreign subsidiaries due to the exchange effect of a weakening U.S. dollar

·	Professional fees

Increase in legal expenses of approximately $450. Corporate legal expenses increased as a result of higher legal expenses incurred on our TableMax and SSI Case litigations offset by a reduction in costs related to the Elixir Gaming purchase and settlement agreement incurred during the same prior year period

Research & development expenses:

R&D expenses increased $2,275 for the six months ended April 30, 2010 as compared to the same prior year period. This increase primarily reflects:

·	Impact of foreign currency fluctuations

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

Overall increase in R&D expenses related to the following projects which have been the focus of our R&D efforts during the six months ended April 30, 2010:

PTG

o	Expenses primarily related to development of implementing progressives onto existing proprietary games

o	Additional R&D efforts were spent on developing the ViPS to support our PTG progressive products

ETS

o	Expenses primarily related to the further development of the i-Table, including the development of PTG based i-Table products.

o	Additional R&D efforts continue to be spent on creating and implementing new game content for our Table Master, Vegas Star and Rapid Table Games

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

DEPRECIATION AND AMORTIZATION EXPENSES

	Three Months Ended							Six Months Ended
	April 30,				Percentage			April 30,				Percentage
	2010		2009		Change			2010		2009		Change
	(In thousands)
Gross margin:
Depreciation	$	2,304	$	1,415		62.8	%	$	4,459	$	3,374		32.2	%
Amortization		2,173		2,606		(16.6	%)		4,774		5,151		(7.3	%)
Total		4,477		4,021		11.3	%		9,233		8,525		8.3	%

Operating expenses:
Depreciation		663		669		(0.9	%)		1,363		1,222		11.5	%
Amortization		685		822		(16.7	%)		1,354		1,480		(8.5	%)
Total		1,348		1,491		(9.6	%)		2,717		2,702		0.6	%

Total:
Depreciation		2,967		2,084		42.4	%		5,822		4,596		26.7	%
Amortization		2,858		3,428		(16.6	%)		6,128		6,631		(7.6	%)
Total	$	5,825	$	5,512		5.7	%	$	11,950	$	11,227		6.4	%

Three months ended April 30, 2010 compared to three months ended April 30, 2009

Depreciation and amortization included in gross margin increased 1,130 bps for the three months ended April 30, 2010 as compared to the same prior year period. Increased depreciation in gross margin is attributable to increases in leased assets, primarily driven by increases in shuffler units and ETS seats on lease. Decreased amortization in gross margin is due to a decrease in amortization expense associated with developed technology becoming fully amortized in the three months ended January 31, 2010.

Depreciation and amortization included in operating expenses decreased 960 bps for the three months ended April 30, 2010 as compared to the same prior year period. The decreased amortization primarily related to a reduction in the amount of fixed amortization of intangible assets related to the PTG segment.

Six months ended April 30, 2010 compared to six months ended April 30, 2009

Depreciation and amortization included in gross margin increased 830 bps for the six months ended April 30, 2010 as compared to the same prior year period due to increases in leased assets discussed above.

Depreciation and amortization included in operating expenses remained consistent with the same prior year period.

SEGMENT OPERATING RESULTS

Utility Segment Operating Results

Three months ended April 30, 2010 compared to three months ended April 30, 2009

	Three Months Ended
	April 30,						Increase			Percentage
	2010			2009			(Decrease)			Change
	(In thousands, except for units/seats and per unit/seat amounts)
Utility Segment Revenue:
Lease	$	8,295		$	7,558		$	737			9.8	%
Sales - Shuffler		9,183			9,882			(699	)		(7.1	)
Sales - Chipper		543			65			478			735.4
Service		1,751			1,764			(13	)		(0.7	)
Other		1,358			717			641			89.4
Total sales and service		12,835			12,428			407			3.3
Total Utility segment revenue	$	21,130		$	19,986		$	1,144			5.7	%

Utility segment gross profit	$	12,886		$	11,956		$	930			7.8	%
Utility segment gross margin		61.0	%		59.8	%

Utility segment operating income	$	11,242		$	9,693		$	1,549			16.0	%
Utility segment operating margin		53.2	%		48.5	%


Shuffler unit information:
Lease units, end of quarter		6,062			5,565			497			8.9	%
Average monthly lease price	$	456		$	453		$	3			0.7	%

Sold units during quarter		674			672			2			0.3	%
Average sales price	$	13,625		$	14,705		$	(1,080	)		(7.3	%)

Chipper unit information:
Lease units, end of quarter		125			24			101			420.8	%

Sold during quarter		25			4			21			525.0	%
Average sales price	$	21,720		$	16,250		$	5,470			33.7	%

Our Utility segment revenue for the three months ended April 30, 2010 increased $1,144 as compared to the same prior year period, primarily due to the following:

·	A 9.8% increase in lease revenue

o	An increase in the number of units on lease, driven primarily by new lease placements in Singapore and the Philippines

o	Lease placements continue to be partially driven by the Ace® shuffler replacement cycle

Ø	The iDeal shuffler is our next generation replacement for the Ace specialty shuffler. As the Ace reaches its end of life where we cannot provide replacement parts, our strategy is to encourage our customers to replace the Ace shufflers with the iDeal shuffler

·	A 89.4% increase in other revenue

o	An increase in the number of sold iShoe and i-Score units, representing a large sale to a single customer

·	A 735.4% increase in chipper sales revenue

o	An increase in the number of sold Easy Chipper C™ units, driven by increased placements in the European market

o	An increase in the average sales price driven partially by increased sales of hold 'em™ units, which have a higher average sales price than our Easy Chipper C

These increases were impacted by the following decrease:

·	A 7.1% decrease in shuffler sales revenue, driven by a decline in the average sales price due to a shift in product mix

·	The three months ended April 30, 2010 included 86 conversions from leased to sold shufflers as compared to 45 conversions in the same prior year period

Utility gross profit increased 7.8% for the three months ended April 30, 2010 as compared to the same prior year period. Utility gross margin also increased 120 bps, to 61.0% for the three months ended April 30, 2010 as compared to the same prior year period.

The increases in gross profit and gross margin primarily relate to the following:

·	Increase in leased shuffler units—leased units generally drive higher gross margins than sales

·	The increase in shuffler conversion sales from leased to sold shufflers. Shuffler conversions traditionally generate higher gross margins

·	Non-cash charges—a reduction of approximately $300 in amortization expense associated with the one2six shuffler and Easy Chipper C as the underlying intangible assets approach the end of their original estimated lives

Utility operating income increased 16.0% for the three months ended April 30, 2010 as compared to the same prior year period. Utility operating margin also increased 470 bps to 53.2% for the three months ended April 30, 2010 as compared to the same prior year period. The increases in operating income and operating margin primarily relate to the following:

·	The overall increases in sales revenues and gross profits as discussed above

·	A slight reduction in the amount of R&D expense associated with the Utility segment

·	The prior year period included a $400 charge to the Utility segment related to the Elixir Gaming purchase and settlement agreement

Utility Segment Operating Results

Six months ended April 30, 2010 compared to six months ended April 30, 2009

	Six Months Ended
	April 30,						Increase			Percentage
	2010			2009			(Decrease)			Change
	(In thousands, except for units/seats and per unit/seat amounts)
Utility Segment Revenue:
Lease	$	16,241		$	15,011		$	1,230			8.2	%
Sales - Shuffler		15,812			14,947			865			5.8
Sales - Chipper		1,079			798			281			35.2
Service		3,496			3,516			(20	)		(0.6	)
Other		2,118			1,465			653			44.6
Total sales and service		22,505			20,726			1,779			8.6
Total Utility segment revenue	$	38,746		$	35,737		$	3,009			8.4	%

Utility segment gross profit	$	23,591		$	20,484		$	3,107			15.2	%
Utility segment gross margin		60.9	%		57.3	%

Utility segment operating income	$	20,145		$	16,564		$	3,581			21.6	%
Utility segment operating margin		52.0	%		46.3	%


Shuffler unit information:
Lease units, end of period		6,062			5,565			497			8.9	%
Average monthly lease price	$	447		$	450		$	(3	)		(0.7	%)

Sold units during period		1,127			1,000			127			12.7	%
Average sales price	$	14,030		$	14,947		$	(917	)		(6.1	%)

Chipper unit information:
Lease unit, end of period		125			24			101			420.8	%

Sold during period		42			37			5			13.5	%
Average sales price	$	25,690		$	21,568		$	4,122			19.1	%

Utility segment revenue for the six months ended April 30, 2010 increased $3,009 as compared to the same prior year period, primarily due to the following:

·	An 8.2% increase in lease revenue

o	An increase in the number of units on lease, driven primarily by new lease placements in Singapore and the Philippines

o	Lease placements continue to be partially driven by the Ace shuffler replacement cycle

Ø	The iDeal shuffler is our next generation replacement for the Ace specialty shuffler. As the Ace reaches its end of life where we cannot provide replacement parts, our strategy is to encourage our customers to replace the Ace shufflers with the iDeal shuffler

·	A 5.8% increase in shuffler sales revenue

o	An increase in the number of sold units, partially offset by a reduction in average sales price due to a shift in product mix

Ø	Sold units consist of one2six, iDeal and Deck Mate®

o	The six months ended April 30, 2010 included 179 conversions from leased to sold shufflers as compared to 64 conversions in the same prior year period

·	A 44.6% increase in other revenue

o	An increase in the number of sold iShoe and i-Score units, representing a large sale to a single customer

·	A 35.2% increase in chipper sales revenue

o	An increase in the number of sold Easy Chipper C units, driven by increased placements in the European market

o	An increase in the average sales price driven partially by increased sales of Chipmaster units, which have a higher average sales price than our Easy Chipper C

Utility gross profit increased 15.2% for the six months ended April 30, 2010 as compared to the same prior year period. Utility gross margin also increased 360 bps, to 60.9% for the six months ended April 30, 2010 as compared to the same prior year period.

The increases in gross profit and gross margin primarily relate to the following:

·	Increase in leased shuffler units—leased units generally drive higher gross margins than sales

·	Shuffler sales revenue

o	The overall increase in sales revenues which generally generate a higher initial gross profit

o	The increase in shuffler conversion sales from leased to sold shufflers. Shuffler conversions traditionally generate higher gross margins

·	Non-cash charges

o	Slightly offset by a reduction of approximately $550 in amortization expense associated with the one2six shuffler and Easy Chipper C as the underlying intangible assets approach the end of their original estimated lives

Utility operating income increased 21.6% for the six months ended April 30, 2010 as compared to the same prior year period. Utility operating margin also increased 570 bps to 52.0% for the six months ended April 30, 2010 as compared to the same prior year period. The increases in operating income and operating margin primarily relate to the following:

·	The overall increases in sales revenues and gross profits as discussed above

·	A slight reduction in the amount of R&D expense associated with the Utility segment

·	The prior year period included a $400 charge to the utility segment related to the Elixir Gaming purchase and settlement agreement

Proprietary Table Games Segment Operating Results

Three months ended April 30, 2010 compared to three months ended April 30, 2009

	Three Months Ended
	April 30,						Increase			Percentage
	2010			2009			(Decrease)			Change
	(In thousands, except for units/seats and per unit/seat amounts)

PTG segment revenue:
Royalties and leases	$	9,228		$	8,385		$	843			10.1	%
Sales		854			321			533			166.0
Service		30			47			(17	)		(36.2	)
Other		58			99			(41	)		(41.4	)
Total sales and service revenue		942			467			475			101.7
Total PTG segment revenue	$	10,170		$	8,852		$	1,318			14.9	%

PTG segment gross profit	$	7,715		$	7,173		$	542			7.6	%
PTG segment gross margin		75.9	%		81.0	%

PTG segment operating income	$	7,148		$	6,286		$	862			13.7	%
PTG segment operating margin		70.3	%		71.0	%


PTG unit information:
Premium units, end of quarter		2,288			2,148			140			6.5	%
Side bet units, end of quarter		1,769			1,696			73			4.3	%
Progressive units, end of quarter		513			238			275			115.5	%
Add-on units, end of quarter		74			38			36			94.7	%
Total revenue generating lease base		4,644			4,120			524			12.7	%

Average monthly lease/license price	$	662		$	678		$	(16	)		(2.4	%)

Sold during quarter		24			90			(66	)		(73.3	%)
Average sales price	$	35,583		$	3,567		$	32,016			897.6	%

Total PTG segment revenue increased $1,318 for the three months ended April 30, 2010, as compared to the same prior year period. The PTG segment revenue increase was primarily due to the following:

·	A 10.1% increase in royalties and leases revenue

o	Increased placements of premium table games and progressive units, specifically Ultimate Texas Hold ’em® table games and Three Card Poker Progressive®

o	Offset by a slight decrease in the average monthly lease / license price. Progressives, add-ons and side bets have lower average lease price than premium titles

·	A 166.0% increase in PTG sales revenue

o	An increase of 897.6% in PTG average sale price, driven by sales of our Three Card Poker® premium table game in the current period

o	There were 11 premium table game conversion sales from leased units to lifetime licenses in the current period, compared to 4 in the same prior year period

o	Prior year unit sales were comprised primarily of side bet lifetime licenses, which have a lower average sales price compared to our premium table games. Excluding these sales, average sales price in the prior year period would have been approximately $18,000

PTG gross profit increased 7.6% year over year, although gross margin decreased 510 bps to 75.9% as compared to the same prior year period. The increase in gross profit primarily related to the following:

·	The overall increase in total revenues

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

·	The write-off of certain intangible licenses and related equipment totaling approximately $500.

PTG operating income increased 13.7% year over year. The increase in operating income primarily related to the following:

·	The increase in gross profit referred to above

·	A reduction in the amount of fixed amortization of intangible assets related to the PTG segment

Proprietary Table Games Segment Operating Results

Six months ended April 30, 2010 compared to six months ended April 30, 2009

	Six Months Ended
	April 30,						Increase			Percentage
	2010			2009			(Decrease)			Change
	(In thousands, except for units/seats and per unit/seat amounts)

PTG segment revenue:
Royalties and leases	$	18,110		$	16,843		$	1,267			7.5	%
Sales		879			851			28			3.3
Service		72			90			(18	)		(20.0	)
Other		144			729			(585	)		(80.2	)
Total sales and service revenue		1,095			1,670			(575	)		(34.4	)
Total PTG segment revenue	$	19,205		$	18,513		$	692			3.7	%

PTG segment gross profit	$	15,252		$	15,218		$	34			0.2	%
PTG segment gross margin		79.4	%		82.2	%

PTG segment operating income	$	14,078		$	13,549		$	529			3.9	%
PTG segment operating margin		73.3	%		73.2	%


PTG unit information:
Premium units, end of period		2,288			2,148			140			6.5	%
Side bet units, end of period		1,769			1,696			73			4.3	%
Progressive units, end of period		513			238			275			115.5	%
Add-on units, end of period		74			38			36			94.7	%
Total revenue generating lease base		4,644			4,120			524			12.7	%

Average monthly lease/license price	$	650		$	681		$	(31	)		(4.6	%)

Sold during period		26			108			(82	)		(75.9	%)
Average sales price	$	33,808		$	7,880		$	25,928			329.1	%

Total PTG segment revenue increased $692 for the six months ended April 30, 2010, as compared to the same prior year period. The PTG segment revenue increase was primarily due to the following:

·	A 7.5% increase in royalties and leases revenue

o	Increased placements of premium table games and progressive units, specifically our Ultimate Texas Hold ’em table games, Three Card Poker Progressive and Fortune Pai Gow Poker Progressive™

o	Offset by a slight decrease in the average monthly lease / license price. Progressives, add-ons and side bets have lower average lease price than premium titles

·	A 3.3% increase in PTG sales revenue

o	An increase of 329.1% in PTG average sale price, driven by sales of our Three Card Poker premium table game in the current period

o	Increased table game conversion sales as discussed above

o	Increased premium table games sales with higher average sales prices discussed above

These increases were partially offset by the following:

·	A decrease of 80.2% in PTG other revenue

o	$580 of revenue was included in the same prior year period from our Three Card Poker World Championship® Tournament. No such tournament was held in the current period

PTG gross profit was essentially constant year over year, although gross margin decreased 280 bps to 79.4% as compared to the same prior year period. The decrease in gross margin primarily related to the following:

·	The write-off of certain intangible licenses and related equipment totaling approximately $500.

PTG operating income increased 3.9% year over year. The increase in operating income primarily related to the following:

·	A reduction in the amount of fixed amortization of intangible assets related to the PTG segment

Electronic Table Systems Segment Operating Results

Three months ended April 30, 2010 compared to three months ended April 30, 2009

	Three Months Ended
	April 30,						Increase		Percentage
	2010			2009			(Decrease)		Change
	(In thousands, except for units/seats and per unit/seat amounts)
ETS segment revenue:
Royalties and leases	$	3,896		$	2,659		$	1,237		46.5	%
Sales		7,513			2,456			5,057		205.9
Service		151			115			36		31.3
Other		884			500			384		76.8
Total sales and service revenue		8,548			3,071			5,477		178.3
Total ETS segment revenue	$	12,444		$	5,730		$	6,714		117.2	%

ETS segment gross profit	$	7,832		$	1,835		$	5,997		326.8	%
ETS segment gross margin		62.9	%		32.0	%

ETS segment operating income	$	5,377		$	538		$	4,839		899.4	%
ETS segment operating margin		43.2	%		9.4	%

ETS unit information:
Lease seats, end of quarter		2,352			1,668			684		41.0	%
Average monthly lease price	$	552		$	531		$	21		4.0	%

Sold during quarter		426			146			280		191.8	%
Average sales price	$	17,636		$	16,822		$	814		4.8	%

Total ETS segment revenue increased $6,714 for the three months ended April 30, 2010, as compared to the same prior year period. The increase was primarily due to the following:

·	Impact of foreign exchange fluctuations

o	Total revenue was positively impacted by approximately $1,800 due to the exchange effect of a weakening U.S. dollar

·	A 205.9% increase in sales revenue

o	A 175.7% increase in Vegas Star and Rapid Table Games seats sold primarily to several large casinos in Australia. These sales were driven primarily by favorable regulatory changes in certain Australian jurisdictions which substantially drove increased ETS sales revenue of approximately $4,300

o	A 242.9% increase in sold Table Master seats, characterized by sales to several large customers in the United States. These sales were the result of the opening of new geographic jurisdictions, such as Florida and Indiana

o	A 4.8% increase in the average sales price. The increase in average sales price was primarily driven by the increased sales of Vegas Star seats. Vegas Star games are generally sold at a higher average sales price per seat than Table Master

·	A 76.8% increase in other revenue

o	An increase in parts and peripherals, as the current quarter includes a large sale of hardware combined with software conversion kits to a single customer

·	A 46.5% increase in royalties and lease revenue

o	A 41.0% increase in seats on lease, driven primarily by Table Master seats in the United States and Rapid Table Games seats in Singapore

o	The increased lease placements in the United States were driven primarily by the opening of new geographical jurisdictions such as Florida

ETS gross profit increased 326.8% for the three months ended April 30, 2010, as compared to the same prior year period. ETS gross margin also increased 3,090 bps to 62.9% for the three months ended April 30, 2010, as compared to the same prior year period. These increases are due to the following:

·	Mix of revenue

o	The significant increase in sales revenues which drove proportionate increases in gross profit

o	Improvements in average sales price which drove margin improvements on all products

o	The increased amount of parts and peripheral sales, which have a substantially higher margin than completed units. As noted above, the current quarter includes a large sale of hardware combined with software conversion kits to a single customer

·	Fixed amortization

o	A reduction of approximately $360 in amortization expense associated with the Vegas Star and Rapid Table Games product line as the underlying intangible assets became fully amortized in the three months ended January 31, 2010

ETS operating income increased 899.4%, to $5,377 for the three months ended April 30, 2010, as compared to $538 for the same prior year period. ETS operating margin also increased 3,380 bps for the three months ended April 30, 2010, as compared to the same prior year period. These increases in both operating income and operating margin primarily related to the following:

·	The increases in gross profit and gross margin noted above

·	Offset partially by an increase in R&D costs associated with the ETS segment

Electronic Table Systems Segment Operating Results

Six months ended April 30, 2010 compared to six months ended April 30, 2009

	Six Months Ended
	April 30,						Increase		Percentage
	2010			2009			(Decrease)		Change
	(In thousands, except for units/seats and per unit/seat amounts)
ETS segment revenue:
Royalties and leases	$	7,510		$	5,105		$	2,405		47.1	%
Sales		11,324			3,507			7,817		222.9
Service		298			276			22		8.0
Other		1,687			811			876		108.0
Total sales and service revenue		13,309			4,594			8,715		189.7
Total ETS segment revenue	$	20,819		$	9,699		$	11,120		114.7	%

ETS segment gross profit	$	11,751		$	3,395		$	8,356		246.1	%
ETS segment gross margin		56.4	%		35.0	%

ETS segment operating income	$	6,900		$	685		$	6,215		907.3	%
ETS segment operating margin		33.1	%		7.1	%

ETS unit information:
Lease seats, end of period		2,352			1,668			684		41.0	%
Average monthly lease price	$	532		$	510		$	22		4.3	%

Sold during period		604			203			401		197.5	%
Average sales price	$	18,748		$	17,276		$	1,472		8.5	%

Total ETS segment revenue increased $11,120 for the six months ended April 30, 2010, as compared to the same prior year period. The increase was primarily due to the following:

·	Impact of foreign exchange fluctuations

o	Total revenue was positively impacted by approximately $2,700 due to the exchange effect of a weakening U.S. dollar

·	A 222.9% increase in sales revenue

o	A 158.3% increase in Vegas Star and Rapid Table Games seats sold primarily to several large casinos in Australia. These sales were driven primarily by favorable regulatory changes in certain Australian jurisdictions which substantially drove increased ETS sales revenue of approximately $4,300

o	A 385.7% increase in sold Table Master seats, typically characterized by sales to several large customers in the United States. These sales were the result of the opening of new geographic jurisdictions, such as Florida and Indiana

o	An 8.5% increase in the average sales price. The increase in average sales price was primarily driven by the increased sales of Vegas Star and Rapid Table Game seats, which are generally sold at a higher average sales price per seat than Table Master

·	A 108.0% increase in parts and peripherals. The current quarter includes a large sale of hardware combined with software conversion kits to a single customer

·	A 47.1% increase in royalties and lease revenue

o	A 41.0% increase in seats on lease, driven primarily by Table Master and Rapid Table Games seats

o	The increased lease placements in the United States were driven primarily by the opening of new geographical jurisdictions such as Florida

ETS gross profit increased 246.1% for the six months ended April 30, 2010, as compared to the same prior year period. ETS gross margin also increased 2,140 bps to 56.4% for the six months ended April 30, 2010, as compared to the same prior year period. These increases are due to the following:

·	Mix of revenue

o	The significant increase in sales revenues which drove proportionate increases in gross profit

o	Improvements in average sales price which drove margin improvements on all products

o	The increased amount of parts and peripheral sales, which have a substantially higher margin than completed units. As noted above, the current year period includes a large sale of hardware combined with software conversion kits to a single customer

·	Fixed amortization

o	A reduction of approximately $230 in amortization expense associated with the Vegas Star and Rapid Table Games product line as the underlying intangible assets became fully amortized in the three months ended January 31, 2010

ETS operating income increased 907.3% to $6,900 for the six months ended April 30, 2010, as compared to $685 for the same prior year period. ETS operating margin also increased 2,600 bps for the six months ended April 30, 2010, as compared to the same prior year period. These increases in both operating income and operating margin primarily related to the following:

·	The increases in gross profit and gross margin noted above

·	Offset partially by an increase in R&D costs associated with the ETS segment

Electronic Gaming Machines Segment Operating Results

Three months ended April 30, 2010 compared to three months ended April 30, 2009

	Three Months Ended
	April 30,						Increase			Percentage
	2010			2009			(Decrease)			Change
	(In thousands, except for units/seats and per unit/seat amounts)

EGM segment revenue:
Lease revenue	$	58		$	-		$	58			100.0	%
Sales		5,222			8,500			(3,278	)		(38.6	)
Other		1,792			2,204			(412	)		(18.7	)
Total sales and service revenue		7,014			10,704			(3,690	)		(34.5	)
Total EGM segment revenue	$	7,072		$	10,704		$	(3,632	)		(33.9	%)

EGM segment gross profit	$	3,866		$	4,763		$	(897	)		(18.8	%)
EGM segment gross margin		54.7	%		44.5	%

EGM segment operating income	$	1,978		$	3,068		$	(1,090	)		(35.5	%)
EGM segment operating margin		28.0	%		28.7	%

EGM unit information:
Lease seats, end of quarter		18			-			18			100.0	%

Sold during quarter		370			742			(372	)		(50.1	%)
Average sales price	$	14,114		$	11,456		$	2,658			23.2	%

Total EGM segment revenue decreased $3,632 for the three months ended April 30, 2010, as compared to the same prior year period, primarily due to the following:

·	Impact of foreign exchange fluctuations

o	Total revenue was positively impacted by approximately $1,800 due to the exchange effect of a weakening U.S. dollar

·	A 38.6% decrease in sales revenue

o	Driven by the 50.1% decrease in sold units

o	The 23.2% increase in average sales price was mostly due to the foreign exchange effect noted above. The average sales price in Australian dollars decreased 8.2%

o	The decrease in units is partly the result of the market’s anticipation of our new Equinox cabinet as customers postponed spending to receive the latest product

o	A decrease of 18.7% in other revenue, driven by a decrease of 45.8% in conversion kits and other parts and peripherals

EGM gross profit decreased 18.8% for the three months ended April 30, 2010, as compared to the same prior year period. EGM gross margin increased 1,020 bps to 54.7% for the three months ended April 30, 2010, as compared to the same prior year period. The decrease in gross profit primarily related to the following:

·	The decreases in total EGM revenue as noted above, driven primarily by the decrease in units sold

The increase in gross margin primarily related to the following:

·	Sales of refurbished units, which typically drive higher gross margins than new units

·	Higher margins on sales of new units

·	Fixed amortization

o	A reduction of approximately $100 in amortization expense associated with EGM products as the underlying intangible assets became fully amortized in the three months ended January 31, 2010

EGM operating income decreased 35.5% for the three months ended April 30, 2010, as compared to the same prior year period, while EGM operating margin remained relatively flat. The decreases in operating income primarily related to the following:

·	The decreases in total EGM revenue as noted above, driven primarily by the decrease in units sold

·	The increases in gross profit noted above

·	Decreased R&D costs related to EGM products

Electronic Gaming Machines Segment Operating Results

Six months ended April 30, 2010 compared to six months ended April 30, 2009

	Six Months Ended
	April 30,						Increase			Percentage
	2010			2009			(Decrease)			Change
	(In thousands, except for units/seats and per unit/seat amounts)

EGM segment revenue:
Lease revenue	$	109		$	-		$	109			100.0	%
Sales		8,678			12,369			(3,691	)		(29.8	)
Other		3,595			3,420			175			5.1
Total sales and service revenue		12,273			15,789			(3,516	)		(22.3	)
Total EGM segment revenue	$	12,382		$	15,789		$	(3,407	)		(21.6	%)

EGM segment gross profit	$	6,552		$	7,185		$	(633	)		(8.8	%)
EGM segment gross margin		52.9	%		45.5	%

EGM segment operating income	$	3,085		$	4,064		$	(979	)		(24.1	%)
EGM segment operating margin		24.9	%		25.7	%

EGM unit information:
Lease seats, end of period		18			-			18			100.0	%

Sold during period		588			1,074			(486	)		(45.3	%)
Average sales price	$	14,759		$	11,517		$	3,242			28.1	%

Total EGM segment revenue decreased $3,407 for the six months ended April 30, 2010, as compared to the same prior year period, primarily due to the following:

·	Impact of foreign exchange fluctuations

o	Total revenue was positively impacted by approximately $3,100 due to the exchange effect of a weakening U.S. dollar

·	A 29.8% decrease in sales revenue

o	Driven by the 45.3% decrease in sold units

o	The 28.1% increase in average sales price was mostly due to the foreign exchange effect noted above. The average sales price in Australian dollars decreased 4.0%

o	The decrease in units is partly the result of the market’s anticipation of our new Equinox cabinet as customers postponed spending to receive the latest product

EGM gross profit decreased 8.8% for the six months ended April 30, 2010, as compared to the same prior year period. EGM gross margin increased 740 bps to 52.9% for the six months ended April 30, 2010, as compared to the same prior year period. The decreases in gross profit primarily related to the following:

·	The decrease in EGM sales revenue as noted above

The increase in gross margin primarily related to the following:

·	Sales of refurbished units, which typically drive higher gross margins than new units

·	Higher margins on sales of new units

·	The impact of a $150 refund of previously assessed import duties in Australia, which is not expected to have a recurring impact

·	Fixed amortization

o	A reduction of approximately $100 in amortization expense associated with EGM products as the underlying intangible assets became fully amortized in the three months ended January 31, 2010

EGM operating income decreased 24.1% for the six months ended April 30, 2010, as compared to the same prior year period. EGM operating margin remained relatively flat as compared to the same prior year period. The decreases in both operating income primarily related to the following:

·	The decrease in EGM sales revenue as noted above

·	Decreased R&D costs related to EGM products

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.

Cash and cash equivalents at our foreign subsidiaries were $16,123 as of April 30, 2010 and $7,026 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:

	April 30,		October 31,		Increase		Percentage
	2010		2009		(Decrease)		Change
	(In thousands, except ratios)

Cash and cash equivalents	$	18,163	$	7,840	$	10,323		131.7	%
Working capital	$	62,585	$	59,272	$	3,313		5.6	%
Current ratio	2.5 : 1		2.8 : 1

CASH FLOWS SUMMARY

	Six Months Ended
	April 30,						Increase			Percentage
	2010			2009			(Decrease)			Change
	(In thousands)

Operating	$	27,521		$	19,097		$	8,424			44.1	%
Investing		(13,686	)		(2,227	)		(11,459	)		(514.5	%)
Financing		(3,660	)		(7,681	)		4,021			52.3	%
Effects of exchange rates		148			339			(191	)		(56.3	%)
Net Change	$	10,323		$	9,528		$	795			8.3	%

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:

	Six Months Ended
	April 30,						Increase			Percentage
	2010			2009			(Decrease)			Change
	(In thousands)

Payments for products leased and held for lease	$	(13,139	)	$	(3,480	)	$	(9,659	)		(277.6	%)
Purchases of property and equipment		(2,553	)		(425	)		(2,128	)		(500.7	%)
Purchases of intangible assets		(2,171	)		(3,441	)		1,270			36.9	%
Total capital expenditures	$	(17,863	)	$	(7,346	)	$	(10,517	)		(143.2	%)

Operating

Cash flows provided by operating activities increased $8,424 year over year, primarily due to the following:

·	An increase in net income of approximately $7,900

A decrease in cash provided by accounts receivable of approximately $1,400. Average days sales outstanding (“DSO”) for the six-months ended April 30, 2010 increased to approximately 53 days from approximately 43 days in the same prior year period, due primarily to heavy sales volume in the last month of the quarter

An increase in cash used for accounts payable, accrued liabilities, deferred revenue and customer deposits of approximately $10,600. This increase was primarily due to the pending settlement of our Class Action Lawsuits and Shareholder Derivative Suits. The increase was also driven by a net decrease in trade payables, year-end compensation accruals, and the recognition of revenue on a large transaction for which revenue was deferred until regulatory approval was granted

A decrease in cash used for inventory of approximately $6,900. We intend to focus our operational efforts in fiscal 2010 to optimize inventory levels. We also intend to improve our operational efficiencies surrounding inventory management through continued value engineering of our more popular products. Inventory turns improved slightly to 3.2 as of April 30, 2010 from 2.9 in the same prior year period

Investing

Cash flows used for investing activities increased $11,459 year over year, primarily due to the following:

·	Increase in cash used for products leased and held for lease of approximately $9,600. This increase was primarily driven by the increase in ETS seats and shufflers on lease as well as seats / units expected to be placed over the next three months

·	Increase in cash used for purchases of property and equipment of approximately $2,100 primarily related to internal systems improvements being implemented at each of our subsidiaries during the six months ended April 30, 2010

·	Offset by an increase in cash proceeds from the sale of leased assets of approximately $2,600. This increase was primarily driven by an increase in shuffler conversion sales during the six months ended April 30, 2010

Financing

Cash flows used in financing activities decreased $4,021, primarily due to the following:

In 2009, we were in the final stages of a multi-step refinancing plan (the “Refinancing”) that involved a public offering of our common stock, a second amendment to our senior secured credit facility and a cash tender offer for our Notes. In the prior year period, we repurchased approximately $40,000 of our contingent convertible senior notes. We borrowed on our Revolver to fund this repurchase

Cash used for debt payments was approximately $11,900 during the six months ended April 30, 2010 as compared to approximately $58,000 in the same prior year period. Debt payments in the current period primarily related to the excess cash flow payment made on our Term Loan, as required by our Credit Agreement, of approximately $4,200. The excess cash flow payment was made through borrowings on our Revolver. No such payment was made in the prior year period. Debt payments in the same prior year period primarily related to the repurchase of our contingent convertible senior notes, as discussed above, and payments on our Revolver

·	Net debt, total debt less cash and cash equivalents, decreased by approximately $14,000 to approximately $71,400 as of April 30, 2010 compared to $85,400 as of October 31, 2009

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 LIABILITES AND CONTRACTUAL OBLIGATIONS

Our contractual obligations have not changed materially from the amounts disclosed in our Form 10-K as of October 31, 2009. We do not have material off-balance sheet arrangements. See Note 4 to our condensed consolidated financial statements for further discussion.

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, 2009.

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 April 30, 2010, we had approximately $90,000 of variable rate debt. Assuming a 1% change in the average interest rate as of April 30, 2010, our annual interest cost would change by approximately $900.

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 six months ended April 30, 2010 and 2009, 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 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 April 30, 2010, 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 April 30, 2010.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during our fiscal quarter ended April 30, 2010, 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, 2009, see Notes 11 and 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, 2009.

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, 2009. For the six months ended April 30, 2010, there were no additional 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)
February 1 through February 28, 2010		-	$	-		-	$	21,077
March 1 through March 31, 2010		-		-		-		21,077
April 1 through April 30, 2010		-		-		-		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; however, we generally prioritize bank debt reduction over share repurchases. There were no common stock repurchases during the period. As of April 30, 2010, $21,077 remained outstanding under our board authorization. We cancel shares that we repurchases.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. (Removed and Reserved)

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

10.1	Credit Agreement with exhibits and schedules, dated November 30, 2006, among Shuffle Master, Inc., Deutsche Bank Trust Company Americas, as a lender and other lenders party thereto from time to time, Deutsche Bank Trust Company Americas, as administrative agent, Deutsche Bank Securities Inc. and Wells Fargo Bank, N. A., as joint lead arrangers and book managers and Wells Fargo Bank, N.A., as syndication agent. The Credit Agreement was previously filed with the SEC on December 6, 2006 without the exhibits and schedules. (Please note the information in the exhibits and schedules was accurate as of the date the Credit Agreement was executed. Certain information has been subsequently updated and modified and may, in certain situations, no longer be applicable.)
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.

* 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.

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: June 9, 2010
/s/ PHILLIP C. PECKMAN
Phillip C. Peckman Chief Executive Officer (Principal Executive Officer)
/s/ LINSTER W. FOX
Linster W. Fox Chief Financial Officer (Principal Financial Officer)

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