- Quarterly Report (10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2012
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 x No o

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

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

(Do not check if a smaller reporting company)

Smaller reporting company o

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

As of September 04, 2012, there were 55,958,372 shares of our $.01 par value common stock outstanding.

SHUFFLE MASTER, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JULY 31, 2012

TABLE OF CONTENTS

		Page
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited):
	Condensed Consolidated Statements of Operations for the Three and Nine Months ended July 31, 2012 and 2011	3
	Condensed Consolidated Balance Sheets as of July 31, 2012 and October 31, 2011	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months ended July 31, 2012 and 2011	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43
Item 4.	Controls and Procedures	43
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds	44
Item 3.	Defaults Upon Senior Securities	44
Item 4.	Mine Safety Disclosures	44
Item 5.	Other Information	44
Item 6.	Exhibits	44
Signatures		45

P ART I

ITEM 1. FINANCIAL STATEMENTS

SHUFFLE MASTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended July 31,						Nine Months Ended July 31,
	2012			2011			2012			2011
Revenue:
Product leases and royalties	$	27,830		$	24,785		$	80,730		$	72,625
Product sales and service		35,556			33,542			104,763			89,400
Total revenue		63,386			58,327			185,493			162,025
Costs and expenses:
Cost of leases and royalties		9,475			8,970			27,853			24,506
Cost of sales and service		13,889			13,135			39,308			36,035
Gross profit		40,022			36,222			118,332			101,484
Selling, general and administrative		19,007			16,816			55,991			50,077
Research and development		7,622			6,695			23,074			19,494
Total costs and expenses		49,993			45,616			146,226			130,112

Income from operations		13,393			12,711			39,267			31,913

Other income (expense):
Interest income		116			177			429			429
Interest expense		(367	)		(659	)		(1,222	)		(2,031	)
Other, net		180			457			209			(504	)
Total other income (expense)		(71	)		(25	)		(584	)		(2,106	)
Income before income taxes		13,322			12,686			38,683			29,807
Income tax provision		2,898			3,560			10,875			7,931
Net income	$	10,424		$	9,126		$	27,808		$	21,876

Basic earnings per share:	$	0.19		$	0.17		$	0.50		$	0.40
Diluted earnings per share:	$	0.18		$	0.17		$	0.49		$	0.40

Weighted average shares outstanding:
Basic		56,284			54,446			55,700			54,317
Diluted		57,029			55,123			56,445			55,009

See Notes to Unaudited Condensed Consolidated Financial Statements.

SHUFFLE MASTER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

	July 31, 2012		October 31, 2011

ASSETS
Current assets:
Cash and cash equivalents	$	28,030	$	22,189
Accounts receivable, net of allowance for bad debts of $447 and $402		38,299		39,713
Investment in sales-type leases and notes receivable, net of allowance for bad debts of $26 and $44		7,939		5,006
Inventories		25,648		24,335
Prepaid income taxes		7,991		3,279
Deferred income taxes		5,072		4,911
Other current assets		6,753		4,291
Total current assets		119,732		103,724
Investment in sales-type leases and notes receivable, net of current portion and net of allowance for bad debts of $4 and $5		6,304		3,704
Products leased and held for lease, net		35,791		35,196
Property and equipment, net		15,860		12,849
Intangible assets, net		65,144		66,517
Goodwill		83,523		85,392
Deferred income taxes		2,863		3,038
Other assets		2,586		2,467
Total assets	$	331,803	$	312,887

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	5,995	$	5,001
Accrued liabilities and other current liabilities		19,618		21,135
Deferred income taxes		83		96
Customer deposits		3,480		3,407
Income tax payable		6,187		2,595
Deferred revenue		4,503		3,862
Current portion of long-term debt		500		508
Total current liabilities		40,366		36,604
Long-term debt, net of current portion		15,749		38,757
Other long-term liabilities		1,818		2,969
Deferred income taxes		2,953		942
Total liabilities		60,886		79,272
Commitments and Contingencies (See Note 11)
Shareholders' equity:
Common stock, $0.01 par value; 151,368 shares authorized; 55,900 and 54,196 shares issued and outstanding		559		542
Additional paid-in capital		134,321		114,306
Retained earnings		108,646		80,838
Accumulated other comprehensive income		27,391		37,929
Total shareholders' equity		270,917		233,615
Total liabilities and shareholders' equity	$	331,803	$	312,887

See Notes to Unaudited Condensed Consolidated Financial Statements.

SHUFFLE MASTER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, except per share amounts)

(Unaudited)

	Nine Months Ended July 31,
	2012			2011
Cash flows from operating activities:
Net income	$	27,808		$	21,876
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		18,657			17,951
Amortization of debt issuance costs		357			357
Share-based compensation		3,063			2,184
Provision for bad debts		113			140
Write-down for inventory obsolescence		533			626
Profit on sale of leased assets		(721	)		(4,182	)
Loss on sale of assets		231			238
Excess tax benefit from exercise of stock options		(1,370	)		(808	)
Changes in operating assets and liabilities:
Accounts receivable and investment in sales-type leases and notes receivable		(5,191	)		3,961
Inventories		(3,261	)		(3,948	)
Accounts payable and accrued liabilities		(2,658	)		(21,232	)
Customer deposits and deferred revenue		561			825
Income taxes payable		3,300			3,666
Deferred income taxes		2,590			1,036
Prepaid income taxes		(4,714	)		3,812
Other		(3,430	)		10,190
Net cash provided by operating activities		35,868			36,692

Cash flows from investing activities:
Proceeds from sale of leased assets		1,640			6,240
Proceeds from sale of assets		-			86
Payments for products leased and held for lease		(11,227	)		(11,608	)
Purchases of property and equipment		(5,852	)		(2,683	)
Purchases of intangible assets		(4,333	)		(6,269	)
Acquisition of business		(5,500	)		(6,499	)
Other		(690	)		(701	)
Net cash used in investing activities		(25,962	)		(21,434	)

Cash flows from financing activities:
Proceeds from Revolver		11,000			16,500
Debt payments on Revolver		(34,000	)		(15,000	)
Proceeds from issuances of common stock, net		16,238			2,156
Excess tax benefit from exercise of stock options		1,370			808
Other		(43	)		(41	)
Net cash provided by (used in) financing activities		(5,435	)		4,423

Effect of exchange rate changes on cash and cash equivalents		1,370			522

Net increase in cash and cash equivalents		5,841			20,203
Cash and cash equivalents, beginning of period		22,189			9,988
Cash and cash equivalents, end of period	$	28,030		$	30,191

See Notes to Unaudited Condensed Consolidated Financial Statements.

SHUFFLE MASTER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(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 lease, license and sell our products. When we lease or license our products, we generally negotiate a month-to-month operating lease. When we sell our products, we offer our customers a choice between a sale, a longer-term sales-type lease or other 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 Australian headquarters 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 Asia.

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

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

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

Electronic Gaming Machines . Our EGM segment develops and delivers our video slot machines into markets including Australia, New Zealand, Asia, Mexico and parts of South America. We offer a selection of video slot titles developed as stand-alone units or as link progressive machines. In addition to selling the full EGM complement, we sell software conversion kits that allow existing EGM terminals to be converted to other games that operate on the current PC4 operating platform. Popular titles for our EGMs include Cats Hats & Bats™, Eureka Gold Mine 2™ and Emerald Fortunes™. In addition, we continue to develop a popular range of games utilizing the Pink Panther™ brand, under license from Metro-Goldwyn-Mayer Studios, Inc. consumer products. In 2012 we released a range of games incorporating features and bonus rounds based on the popular 1960’s animated television series, The Flintstones TM & © Hanna-Barbera s12. Other key releases in 2012 include 88 Fortunes, Samurai Spirit and Epic Quest.

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.

In the opinion of our management, the accompanying Unaudited Condensed Consolidated Financial Statements include all adjustments necessary to fairly state, in all material respects, our results for the periods presented. These Condensed Consolidated Financial Statements have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and accompanying notes included in our 2011 Annual Report on Form 10-K filed with the SEC on January 5, 2012. The results of operations for the three and nine months ended July 31, 2012 are not necessarily indicative of results to be expected for the entire fiscal year.

Reclassification. The Company revised its October 31, 2011, condensed consolidated balance sheet to appropriately classify amounts that were previously included within accounts receivable as current investment in sales-type leases and notes receivable. This revision resulted in a $3.2 million increase in the current investment in sales-type leases and notes receivable with a corresponding reduction to accounts receivable. The revision, which the Company determined was not material, had no impact on total current assets, results of operations or cash flows.

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

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

persuasive evidence of an arrangement exists;

the price to the customer is fixed and determinable;

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

collection is reasonably assured.

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

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

Product sales and service revenue — We generate sales revenue through the sale of equipment in each product segment, including sales revenue from sales-type leases and the sale of lifetime licenses for our proprietary table games. Our credit sales terms are primarily 60 days or less. Financing for intangible property and sales-type leases for tangible property have payment terms ranging generally from 24 to 36 months and are interest-bearing at market interest rates. Revenue from the sale of equipment is recorded in accordance with the contractual shipping terms. Products placed with customers on a trial basis are not recognized as revenue until the trial period ends, the customer accepts the product and all other relevant criteria have been met. If a customer purchases existing leased equipment, revenue is recorded on the effective date of the purchase agreement. Revenue on service and warranty contracts is recognized as the services are provided over the term of the contracts, which are generally one year. Revenue from the sale of lifetime licenses, under which we have no continuing obligation, is recorded on the effective date of the license agreement.

Multiple element arrangements — Some of our revenue arrangements contain multiple deliverables, such as a product sale combined with a service element or the delivery of a future product. Most of our products and services qualify as separate units of accounting. When vendor specific objective evidence or third-party evidence is not available, the management's best estimate of selling price ("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. Revenues allocated to future performance obligations elements are deferred and will be recognized upon delivery and customer acceptance.

Fair value measurement disclosure. In the current year, we adopted an Accounting Standards Update (“ASU”) on how to measure fair value and on what disclosures to provide about fair value measurements, which expands disclosure requirements particularly for Level 3 inputs to include following:

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

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

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

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

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

Indefinite-Lived Intangible Asset impairment testing. In the current quarter, we adopted an ASU to amend and simplify the rules related to testing indefinite-lived intangible assets other than goodwill for impairment. The revised guidance allows an entity to make an initial qualitative evaluation, based on the entity’s events and circumstances, to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. The results of this qualitative assessment determine whether it is necessary to perform the currently required annual impairment test.

In accordance with the ASU, we will assess our intangible assets with an indefinite life, consisting of the Stargames™ and CARD™ tradenames to determine whether it is more likely than not that the tradenames are impaired and whether it is necessary to perform the annual impairment test.

Recently issued accounting standards or updates – not yet adopted

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

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

2. SELECTED BALANCE SHEET DATA

The following provides additional disclosures for selected balance sheet accounts:

	July 31, 2012		October 31, 2011
	(In thousands)
Net inventories:
Raw materials and component parts	$	14,433	$	12,984
Work-in-process		3,532		3,947
Finished goods		7,683		7,404
Total	$	25,648	$	24,335

	July 31, 2012		October 31, 2011
	(In thousands)
Other current assets:
Other prepaid expenses	$	4,236	$	2,302
Other receivables		1,868		1,271
Other		649		718
Total	$	6,753	$	4,291

	July 31, 2012			October 31, 2011
	(In thousands)
Products leased and held for lease:
Utility	$	49,910		$	47,073
Less: accumulated depreciation		(33,863	)		(29,891	)
Utility, net		16,047			17,182

Proprietary Table Games		8,878			6,158
Less: accumulated depreciation		(4,256	)		(2,496	)
Proprietary Table Games, net		4,622			3,662

Electronic Table Systems		28,461			28,749
Less: accumulated depreciation		(15,655	)		(15,571	)
Electronic Table Systems, net		12,806			13,178

Electronic Gaming Machines		3,061			1,266
Less: accumulated depreciation		(745	)		(92	)
Electronic Gaming Machines, net		2,316			1,174

Total, net	$	35,791		$	35,196

	July 31, 2012		October 31, 2011
	(In thousands)
Accrued and other current liabilities:
Accrued compensation	$	13,776	$	13,932
Accrued taxes		1,784		2,124
Other accrued liabilities		4,058		5,079
Total	$	19,618	$	21,135

3. INTANGIBLE ASSETS AND GOODWILL

Amortizable intangible assets. All of our recorded intangible assets, excluding goodwill and the Stargames TM and CARD TM tradenames, are subject to amortization. We amortize our intangible assets as the economic benefits of the intangible asset are consumed or otherwise used up. Amortization expense was $2.2 million and $2.5 million for the three months ended July 31, 2012 and 2011, respectively and $6.8 and $7.4 million for the nine months ended July 31, 2012 and 2011, respectively. Amortization expenses are included in cost of leases and royalties and cost of sales and service, except for customer relationships which are included in selling, general and administrative expenses.

Amortizable intangible assets are comprised of the following:

	Weighted Average Useful Life (years)			July 31, 2012			October 31, 2011
				(In thousands)
Amortizable intangible assets:

Patents, games and products		10		$	65,807		$	68,999
Less: accumulated amortization					(51,068	)		(52,145	)
					14,739			16,854
Customer relationships		10			26,702			25,688
Less: accumulated amortization					(14,571	)		(12,829	)
					12,131			12,859
Licenses and other	6	-	9		22,971			18,925
Less: accumulated amortization					(9,377	)		(7,581	)
					13,594			11,344
Total				$	40,464		$	41,057

Acquired Intangible Assets. In the current year, we acquired certain intangible assets relating to the purchase of table game intellectual property and acquisition of licenses to be used in our EGM segment. We allocated the purchase price to patents, games and products for $0.9 million and to customer relationships for $1.6M, both of which have a weighted-average amortization period of ten years. We allocated $3.6 million to licenses and other with a weighted-average amortization period of seven years. Total intangible assets acquired during the nine months ended July 31, 2012 are being amortized over a weighted-average useful life of approximately 8 years.

Tradenames. Intangibles with an indefinite life, consisting of the Stargames™ and CARD™ tradenames, are not amortized, and were $24.7 million and $25.5 million as of July 31, 2012 and October 31, 2011, respectively.

Goodwill. Changes in the carrying amount of goodwill for the years ended October 31, 2010, 2011 and the nine months ended July 31, 2012, are as follows:

Activity by Segment	Utility			Proprietary Table Games		Electronic Table Systems			Electronic Gaming Machines			Total
	(In thousands)

Goodwill	$	42,560		$	9,326	$	34,188		$	11,995		$	98,069
Accumulated impairments		-			-		(22,137	)		-			(22,137	)
Balance as of October 31, 2010	$	42,560		$	9,326	$	12,051		$	11,995		$	75,932

Foreign currency translation adjustment		1,459			-		1,140			1,135		$	3,734
Acquisition		4,799			-		-			-			4,799
Other		-			927		-			-			927
Balance as of October 31, 2011	$	48,818		$	10,253	$	13,191		$	13,130		$	85,392

Foreign currency translation adjustment		(4,863	)				(348	)		(348	)	$	(5,559	)
Acquisition					3,000								3,000
Other					690								690
Balance as of July 31, 2012	$	43,955		$	13,943	$	12,843		$	12,782		$	83,523

The $3.0 million of additional goodwill in our PTG segment relates to the acquisition of intellectual property that was treated as a business acquisition for accounting purposes.

The $0.7 million 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 $7.6 million 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 $12.0 million. The final principal and interest payment related to our initial estimated liability of $7.6 million was paid in February 2009 and all payments made subsequently have been recorded as additional goodwill. As of July 31, 2012, we have paid approximately $11.2 million of the $12.0 million maximum amount.

4. DEBT

Debt consisted of the following:

	July 31, 2012			October 31, 2011
	(In thousands)
Revolver	$	14,446		$	37,446
Other debt		1,803			1,819
Total debt		16,249			39,265
Less: current portion		(500	)		(508	)
Total long-term debt	$	15,749		$	38,757

$200.0 million senior secured revolving credit facility. On October 29, 2010, we entered into a senior secured credit agreement (the “Senior Secured Revolving Credit Facility”) with Wells Fargo Securities, LLC and Banc of America Securities LLC, as joint lead arrangers and joint lead bookrunners, Bank of America, N.A., as syndication agent, and Union Bank, N.A., as documentation agent. The Senior Secured Revolving Credit Facility provides for senior secured credit facilities in an aggregate principal amount of $200.0 million consisting of a 5-year revolving credit facility (the “Revolver”) in an aggregate principal amount of $200.0 million with a sub-facility for letters of credit of $25.0 million, a sub-facility for multicurrency borrowings in Euros, Australian dollars and Canadian dollars of $25.0 million, and a sub-facility for swing line loans of $20.0 million, each on customary terms and conditions. The Senior Secured Revolving Credit Facility includes an option to increase the Revolver to $300.0 million, which would require syndication approval.

Loans under the Revolver (other than Swing Line Loans, as defined) bear interest at the Base Rate, as defined, or LIBOR, as elected by us. Base Rate interest is calculated at the Base Rate plus the applicable margin and the Base Rate is the highest of:

the Federal Funds Rate plus .50%;

the prime commercial lending rate of the Administrative Agent, as defined; and

the one month LIBOR rate for such day plus 2.00%.

Swing Line Loans bear interest at the Base Rate plus the applicable margin. Our effective interest rate as of July 31, 2012 was 2.0%. Borrowings under the Revolver may be used for working capital, capital expenditures and general corporate purposes (including share repurchases).

As of July 31, 2012, the amount drawn under the Revolver was $14.4 million and after considering restrictive financial covenants under the Senior Secured Revolving Credit Facility, we had approximately $185.6 million of available remaining credit under the Revolver. The Revolver matures on October 29, 2015.

On May 31, 2012 the Senior Secured Revolving Credit Facility was amended to clarify and define certain restrictive covenants.

Covenants. Our Senior Secured Revolving Credit Facility contains three financial maintenance covenants requiring us to maintain a Total Leverage Ratio, as defined therein, of not more than 3.75 to 1.0, a Senior Leverage Ratio, as defined therein, of not more than 3.0 to 1.0 until October 31, 2013 and not more than 2.75 to 1.00 after October 31, 2013 and Interest Expense Coverage Ratio, as defined therein, in excess of 3.0 to 1.0 at the end of any fiscal quarter. As of July 31, 2012, our Total Leverage Ratio, Senior Leverage Ratio and Interest Expense Coverage Ratio were 0.19 to 1.0, 0.17 to 1.0 and 63.36 to 1.0, respectively.

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

5. SHAREHOLDERS’ EQUITY

Common stock repurchases. Our board of directors periodically authorizes us to repurchase shares of our common stock. As of July 31, 2012, $21.1 million remained outstanding under our board authorization. We cancel shares that are repurchased. No shares were repurchased during the three and nine months ended July 31, 2012. Although we generally prioritize bank debt reduction over share repurchases we may consider share repurchases when there are anomalies in the share value created by, but not limited to, market conditions.

The timing of our common stock repurchases pursuant to our board of directors’ authorization is dependent on future opportunities and on our views, as they may change from time to time, as to the most prudent uses of our capital resources, including cash and borrowing capacity.

Other comprehensive income. For the three and nine months ended July 31, 2012 and 2011, other comprehensive income consisted primarily of foreign currency translation adjustments. The following table provides information related to other comprehensive income:

	Three Months Ended July 31,						Nine Months Ended July 31,
	2012			2011			2012			2011
	( In thousands)
Net income	$	10,424		$	9,126		$	27,808		$	21,876
Currency translation adjustment		(3,436	)		(2,136	)		(10,538	)		13,965
Total comprehensive income	$	6,988		$	6,990		$	17,270		$	35,841

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

Additional paid in capital. For the nine months ended July 31, 2012, the activity in additional paid in capital consisted of $16.2 million in proceeds received from stock option exercises and $3.1 million in share-based compensation expense and $0.7 million of related tax effect/benefit from stock option activity.

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. In addition, the 2004 Plan provides for the grant of restricted stock units. Awards granted under the plans (collectively “Awards”) may be granted individually or in any combination. Stock options may not be granted at an exercise price less than the market value of our common stock on the date of grant and may not be subsequently repriced. Equity granted under the 2004 Plan generally vests in equal increments over four years and stock options expire in ten years. Equity granted under the 2004 Directors’ Plan generally vests over periods of one to two years.

The 2004 Plan provides for the grants of Awards to our officers, other employees and contractors. The maximum number of Awards which may be granted is 2.7 million of which no more than 1.9 million 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 1.1 million of which no more than 0.8 million 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 5.2 million shares of which no more than 2.6 million shares may be granted as restricted stock.

As of July 31, 2012, under the Amended 2004 Plan and 2004 Directors’ Plan, there were 1.0 million and 0.2 million shares available for grant, respectively.

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

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
	(In thousands, except per share amount)
Outstanding at November 1, 2011		4,638		$	14.04
Granted		440			12.20
Exercised		(1,495	)		10.86
Forfeited or expired		(338	)		17.51

Outstanding at July 31, 2012		3,245		$	14.90		5.6	$	12,093

Fully vested and expected to vest at July 31, 2012		3,213		$	14.93		5.5	$	11,991

Exercisable at July 31, 2012		2,165		$	17.29		4.1	$	7,209

For the three and nine months ended July 31, 2012, we granted 0.01 million and 0.4 million stock options with a weighted average grant date fair value of $7.39 and $6.26, respectively. The weighted average grant date fair value of stock options granted during the three and nine months ended July 31, 2011 was $5.53 and $10.86, respectively.

For the three and nine months ended July 31, 2012, 0.2 million and 1.5 million stock options were exercised, respectively. The tax effect/benefit from stock option exercises affected our deferred tax asset or income tax payable as well as our additional paid-in capital by an equal amount and had no effect on our income tax provision. As of July 31, 2012, there was approximately $4.1 million of unamortized compensation expense related to stock options, which expense is expected to be recognized over a weighted-average period of 1.8 years.

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

	Shares			Weighted Average Grant-Date Fair Value		Remaining Vesting Period		Aggregate Intrinsic Value
	(In thousands, except per share amount)
Nonvested at November 1, 2011		394		$	10.53
Granted		455			12.35
Vested		(136	)		11.40
Forfeited		(50	)		9.23

Nonvested at July 31, 2012		663		$	11.70		1.6	$	9,679

Expected to vest		636		$	11.69		1.6	$	9,297

The total value of each restricted stock grant, based on the fair market value of the stock on the date of grant, is amortized to compensation expense over the related vesting period. As of July 31, 2012, there was approximately $6.0 million of unamortized compensation expense related to restricted stock, which expense is expected to be recognized over a weighted-average period of 1.9 years.

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

	Three Months Ended July 31,						Nine Months Ended July 31,
	2012			2011			2012			2011
	(In thousands)
Compensation costs:
Stock options	$	363		$	483		$	1,366		$	1,471
Restricted stock		651			223			1,697			713
Total compensation cost	$	1,014		$	706		$	3,063		$	2,184
Related tax benefit	$	(375	)	$	(245	)	$	(1,088	)	$	(761	)

Option valuation models require the input of certain assumptions and changes in assumptions used can materially affect the fair value estimate. Expected volatility is based on a combination of implied and historical factors related to our common stock. Expected term represents the estimated weighted-average time between grant date and its exercise date and is based on historical factors. Expected dividend yield is based on our expectation that dividends will not be paid within the average expected life of existing options. 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 July 31, 2012			Nine Months Ended July 31, 2012
Option valuation assumptions:
Expected dividend yield	None			None
Expected volatility		62.2	%		64.8	%
Risk-free interest rate		0.6	%		0.7	%
Expected term (in years)	4.4			4.5

7. INCOME TAXES

Our effective income tax rate from continuing operations for the three and nine months ended July 31, 2012 was 21.8% and 28.1%, respectively. Our effective income tax rate from continuing operations for the three and nine months ended July 31, 2011 was 28.1% and 26.6%, respectively. The lower effective income tax rate for the three months ended July 31, 2012 compared to the prior year period is primarily attributable to due diligence and transaction costs incurred in the prior quarter which became deductible in the current quarter due to our decision not to proceed with the acquisition of Ongame Network Ltd (“Ongame”). The rate was also favorably impacted by the recognition of certain unrecognized tax benefits for which the statute of limitations expired. The higher effective income tax rate for the nine months ended July 31, 2012 compared to the prior year period is primarily attributable to the changes in geographic income before taxes. Our effective income tax rate may fluctuate due to changes in the amount and mix of domestic and foreign income, changes in tax legislation, changes in valuation allowances and changes in assessments of uncertain tax positions and related accumulated interest and penalties.

8. EARNINGS PER SHARE

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

	Three Months Ended July 31,				Nine Months Ended July 31,
	2012		2011		2012		2011
	(In thousands, except per share amount)
Net income available to common shares (1)	$	10,424	$	9,126	$	27,808	$	21,876

Basic
Weighted average shares		56,284		54,446		55,700		54,317

Diluted
Weighted average shares, basic		56,284		54,446		55,700		54,317
Dilutive effect of options		745		677		745		692
Weighted average shares, diluted		57,029		55,123		56,445		55,009

Basic earnings per share	$	0.19	$	0.17	$	0.50	$	0.40
Diluted earnings per share	$	0.18	$	0.17	$	0.49	$	0.40

Weighted average anti-dilutive shares excluded f rom diluted EPS		1,593		3,484		1,981		3,312

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

9. FAIR VALUE MEASUREMENT

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

Cash and cash equivalents, accounts receivable, the current portion of our investment in sales-type leases and notes receivable are not presented in the table below as their carrying value approximates fair value due to their short term nature. It is impracticable to estimate the fair value of the long-term portion of our investment in sales-type leases and notes receivable as it is comprised of many insignificant balances, customers with different credit profiles and various interest rates. As of July 31, 2012 our investment in sales-type leases and notes receivable had an approximate 5.5% effective interest rate and a 2 year average maturity.

The fair value of our Revolver as of July 31, 2012 and October 31, 2011 has been calculated based on market borrowing rates available as of July 31, 2012 and October 31, 2011, respectively, for debt with similar terms and maturities. The following table provides the fair value measurement information about the Company’s long-term debt.

	Carrying Value July 31, 2012		Fair Value July 31, 2012		Carrying Value October 31, 2011		Fair Value October 31, 2011		Fair Value Hierarchy

Revolver	$	14,446	$	14,495	$	37,446	$	37,679	Level 2

10. OPERATING SEGMENTS

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

	Three Months Ended July 31,						Nine Months Ended July 31,
	2012			2011			2012			2011
	(In thousands)
Revenue:
Utility	$	24,382		$	22,575		$	68,988		$	59,108
Proprietary Table Games		12,994			10,994			38,623			32,766
Electronic Table Systems		6,053			6,793			21,183			26,721
Electronic Gaming Machines		19,957			17,965			56,699			43,430
	$	63,386		$	58,327		$	185,493		$	162,025
Gross profit:
Utility	$	15,285		$	12,852		$	42,622		$	35,284
Proprietary Table Games		10,634			8,671			31,994			26,338
Electronic Table Systems		2,055			3,197			8,868			12,684
Electronic Gaming Machines		12,048			11,502			34,848			27,178
	$	40,022		$	36,222		$	118,332		$	101,484
Operating income:
Utility	$	13,334		$	11,208		$	36,986		$	30,294
Proprietary Table Games		8,481			7,445			25,122			23,205
Electronic Table Systems		(846	)		328			(967	)		3,860
Electronic Gaming Machines		8,701			8,336			24,948			18,493
Unallocated Corporate		(16,277	)		(14,606	)		(46,822	)		(43,939	)
	$	13,393		$	12,711		$	39,267		$	31,913
Depreciation and amortization:
Utility	$	1,874		$	2,252		$	5,549		$	5,451
Proprietary Table Games		1,359			1,414			3,962			4,183
Electronic Table Systems		1,630			1,397			4,940			5,300
Electronic Gaming Machines		336			38			879			166
Unallocated Corporate		1,061			974			3,327			2,851
	$	6,260		$	6,075		$	18,657		$	17,951
Capital expenditures:
Utility	$	1,557		$	2,171		$	3,767		$	6,537
Proprietary Table Games		1,109			668			3,313			6,843
Electronic Table Systems		2,634			1,299			4,860			4,376
Electronic Gaming Machines		211			354			5,341			421
Unallocated Corporate		852			659			4,131			2,383
	$	6,363		$	5,151		$	21,412		$	20,560

REVENUE BY GEOGRAPHIC AREA

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

	Three Months Ended July 31,								Nine Months Ended July 31,
	2012				2011				2012				2011
	(Dollars in thousands)
Revenue:
United States	$	28,372	44.8	%	$	26,578	45.6	%	$	83,327	44.9	%	$	76,928	47.5	%
Canada		2,422	3.8	%		2,696	4.6	%		6,166	3.3	%		5,970	3.7	%
Other North America		1,046	1.6	%		1,308	2.2	%		3,224	1.8	%		3,668	2.3	%
Europe		2,085	3.3	%		2,344	4.0	%		6,112	3.3	%		5,986	3.7	%
Australia		20,785	32.8	%		20,395	35.0	%		64,772	34.9	%		55,909	34.5	%
Asia		8,240	13.0	%		4,189	7.2	%		20,905	11.3	%		11,965	7.4	%
Other		436	0.7	%		817	1.4	%		987	0.5	%		1,599	0.9	%
	$	63,386	100.0	%	$	58,327	100.0	%	$	185,493	100.0	%	$	162,025	100.0	%

11. COMMITMENTS AND CONTINGENCIES

Employment agreements. We have entered into employment agreements with our corporate officers and certain other key employees with durations ranging from one to four years. Significant contract provisions include annual base salaries, healthcare benefits, bonus compensation if performance measures are achieved and non-compete provisions. These contracts are primarily “at will” employment agreements, under which the employee or we may terminate employment. If we terminate any of these employees without cause, we are obligated to pay the employee severance benefits as specified in their individual employment agreement. As of July 31, 2012 and October 31, 2011, minimum aggregate severance benefits totaled $6.8 million and $6.6 million, respectively.

Legal proceedings . In the ordinary course of business, we are involved in various legal proceedings and other matters that are complex in nature and have outcomes that are difficult to predict. We record accruals for such contingencies to the extent that we conclude that it is probable that a loss will be incurred and the amount of loss can be reasonably estimated. We have not recorded any loss accruals for these contingencies other than as we have considered reasonable for the matters noted below. Our assessment of each matter may change based on future unexpected events. An unexpected adverse judgment in any pending litigation could cause a material impact on our business operations, intellectual property, results of operations or financial position. Unless otherwise expressly stated, we believe costs associated with litigation will not have a material impact on our financial position or liquidity, but may be material to the results of operations in any given period. We assume no obligation to update the status of pending litigation after the date of this Form 10-Q, except as may be required by applicable law, statute or regulation.

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

The Court set the Markman hearing for December 2010. In November 2010, the Court granted our Motion to Stay. The stay was granted because of pending reexamination proceedings that were initiated at our request before the United States Patent and Trademark Office as to the four patents that are the subject of the lawsuit. Additionally, in June 2012 the USPTO granted our petitions to reexamine two of the patents that are the subject of the lawsuit, which patents were previously granted a Reexamination Certificate. We believe that the final results of the reexamination proceedings will be beneficial to us in future Court proceedings. It is possible that all of the reexamination proceedings will conclude in fiscal 2013 and thus the stay may be lifted in fiscal 2013. At present, the case remains stayed. We believe that the claim is entirely without merit and we intend to continue to vigorously defend this matter.

Macau Rapid Baccarat ® Patent Issue – On or about June 3, 2009, at the G2E Asia Gaming Show, customs officials from Macau SAR seized a Rapid Baccarat ® unit displayed by Shuffle Master Asia Limited (“SMAL”). This seizure related to a claim by a Macau patent holder (the “Patent Holder”) of an alleged patent infringement. On October 27, 2009, the Public Prosecutors Office in charge of the investigation elected to dismiss the investigation based on a finding that no patent infringement existed based upon the report of the Macau customs officials. In November 2009, the Patent Holder appealed this finding to the Macau Courts – what is called “ abertura de instrução ” according to Macau Law. On or about January 20, 2010, over our objection, the judge considering the Patent Holder’s appeal found that his appeal was timely filed.

On or about February 2010, we filed an appeal (the “First SMAL Appeal”) to this decision. On or about March 2010, the judge declined to forward the First SMAL Appeal to a higher Macau Court. We filed a further appeal (the “Second SMAL Appeal”) to have the higher Macau court hear the First SMAL Appeal. On June 2, 2010, the judge denied the Patent Holder’s request to open a criminal proceeding and decided that the investigation should remain dismissed against SMAL and its directors. The Patent Holder has subsequently appealed the June 2, 2010, decision to a higher Macau court, which appeal has not yet been heard. In the event the Patent Holder’s appeal is successful, it is possible that legal proceedings will be commenced against SMAL and its directors in Macau relating to this patent, although, at this time, no such proceedings have been commenced. Such proceedings, if initiated, would be for patent infringement, which we understand is a criminal matter in Macau. The Company does not carry insurance with respect to this matter. We believe that the claim is without merit and we intend to continue to defend this matter vigorously.

On May 4, 2012, the Patent Holder along with a company that we believe may be controlled by the Patent Holder (collectively, the "First Patent Litigants") requested that the Macau Court enjoin us and certain other exhibitors from infringing the First Patent Litigants' patents during the G2E Asia Gaming Show held May 22 through May 24. On May 15, 2012, the Macau Court signed a written decision enjoining us and certain other exhibitors from infringing these patents, even though the court decision did not specifically identify which of our products at the G2E Asia Gaming Show would allegedly infringe such patents. On May 22, 2012, we agreed with Macau Customs to cover our Rapid Table Games™ Multi Game product at the G2E Asia Gaming Show to avoid further legal proceedings. On May 23, 2012, we received Court approval to post a bond of approximately $0.1 million in substitution of the injunction and to permit us to display the Rapid Table Games TM Multi Game product. Notwithstanding that on May 23, 2012, we displayed the Rapid Table Games™ Multi Game product on the advice of our Macau counsel following the Macau Court allowing us to post a bond, we believe that Macau Public Prosecutors Office is investigating the timing of the lifting of the cover off of the Rapid Table Games TM Multi Game product and whether such action may give rise to any alleged criminal charges against SMAL, its directors, and the Company (including its subsidiaries) or its officers. On June 4, 2012, the First Patent Litigants and LT Game Limited (a company that we believe may be controlled by the Patent Holder) (collectively, the “Second Patent Litigants”) filed a writ of summons with the Court seeking monetary damages and other civil relief as a result of the alleged infringement of the First Patent Litigants’ patents by SMAL, and the Company at the G2E Asia Show. As of June 4, 2012, the other exhibitors referenced above are not defendants in this matter. As with the infringement claim discussed above, we believe that all of these claims are entirely without merit and we intend to continue to vigorously defend this matter.

On July 10, 2012, LT Game International Ltd. filed a complaint against us in the United States District Court for the District of Nevada. We believe that the plaintiff is controlled by the Patent Holder. In this complaint, LT Game International Ltd. makes various claims against the Company, including unfair competition and tortious interference with current and prospective business and contractual relations. The complaint seeks injunctive relief and an unspecified amount of damages, including claims for reasonable attorneys’ fees and disbursements, costs, statutory damages under the Lanham Act, treble damages and profits. On August 17, 2012, an amended complaint was filed with legal claims that are materially the same as the original complaint. On September 4, 2012, we filed a motion to dismiss the amended complaint. As with the Second Patent Litigants’ claims discussed above, we believe that this complaint is without merit and we intend to vigorously defend this matter.

Wright Matter – On November 7, 2009, Sam Wright was playing a Vegas Star ® craps machine at the Harrah’s Casino New Orleans. Mr. Wright played a game that ended in a losing result. After the game concluded, as a result of a malfunction, a false credit meter value of approximately $42.0 million appeared on the machine. On or about April 2010, we received notice that Mr. Wright had filed a patron dispute with the Louisiana State Police Gaming Division. The Louisiana State Police Gaming Division concluded that there was no violation of state law, rule or internal control and Mr. Wright was unsuccessful.

In November 2010, Mr. Wright filed a Petition for Damages (the “Wright Complaint”) with the Civil District Court for the Parish of Orleans, State of Louisiana, naming the Company, Jazz Casino Company, LLC d/b/a Harrah’s New Orleans Casino and Harrah’s New Orleans Management Company (collectively, “Harrah’s”) as defendants. The Petition claimed damages of approximately $43.0 million plus possible treble damages, attorneys’ fees and costs. The Company could have had possible indemnity obligations to Harrah’s if a judgment had been entered. In February 2011, all defendants answered the Petition and removed the case to the United States District Court for the Eastern District of Louisiana. On February 2012, the Company attended a Court ordered settlement conference, in which the Wright Complaint and the Declaratory Relief Complaint (discussed below) were settled between the parties without admission of liability by either the Company or Harrah’s. Effective May 8, 2012, the Wright Complaint and the Declaratory Relief Complaint were dismissed with prejudice.

Axis Surplus Insurance Company (“Axis”) was the Company’s insurance carrier with respect to the Wright Complaint. In November 2011, we filed a Complaint for Declaratory Judgment (the “Declaratory Relief Complaint”) in the United States District Court for the Eastern District of Louisiana against Axis seeking, pursuant to our policy, that (a) Axis provide full policy coverage and defense; (b) Axis pay all legal fees and expenses incurred by us in the defense of the Wright Complaint; and (c) Axis make all reasonable efforts to protect us from risk of excess judgment. The Declaratory Relief Complaint was dismissed with prejudice as discussed above.

TCS South Africa- On August 20, 2012, we sued TCS John Huxley (PTY) LTD. (“TCS South Africa”) in the Court of the Commissioner of Patents for the Republic of South Africa. The suit alleges that the “A Plus” card shuffler, which is being distributed by TCS South Africa, violates one of our patents. We seek an enquiry into damages, an interdict against infringement of our patent, and delivery up of any infringing products. We believe that we have a meritorious case and are vigorously pursuing this claim.

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

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

This Form 10-Q contains forward-looking statements. We consider such statements to be made under the safe harbor created by the federal securities laws to which we are subject. In some cases, you can identify forward-looking statements by the following words: “may,” “might,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “objective,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology intended to identify performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Examples of such forward looking statements include, without limitation, statements about or relating to the following:

Business strategies, including with respect to development of new or enhanced products, investment of capital to maximize returns and build our economic engine, and our focus on leasing structures for commercialization of certain products to increase returns and gross margins;

Increasing our PTG content through development or acquisitions of new proprietary titles;

Expectations of increases in gross margins and revenues from leasing of certain products;

The growth opportunities and revenue potential from our i-Table ® , i-Table Roulette ™ and MD3 ™ shuffler products;

The benefits of our products;

Continued volatility in sales revenue from our Utility segment;

Expected increases in leasing revenue in the Utility segment, driven by the MD3 ™ shuffler, with the majority of upgrade placements expected to be leases;

Expectations to begin revenue generation from Vegas Star ™ Live Roulette;

Expectations that EGM revenues will continue to come from sales of EGMs in Australia;

Expected growth of additional international markets, including Asia and Latin America;

Expectations of EGM placements and revenue in 2012 exceeding 2011 levels.

Cash and capital resources being sufficient to satisfy requirements for working capital, capital expenditures, debt service and other liquidity requirements of existing operations for at least the next 12 months;

Company expectations with respect to outstanding litigation;

Growing capital expenditures in proportion to revenue as a result of our leasing model extending into more capital-intensive products;

Expectations that there will be no further expenses recognized with respect to the terminated acquisition of Ongame; and

Expectations with respect to foreign currency exchange rate fluctuation risk.

Although we currently believe that we have a reasonable basis for each forward-looking statement contained in this Form 10-Q, we caution you that these statements are based on a combination of facts and factors currently known by us, as well as our projections of the future, about which we cannot be certain. Forward-looking statements reflect and are subject to inherent known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied. Risk factors that could cause actual results to differ materially from those expressed or implied by our forward-looking statements include, but are not limited to, the following:

Failure to maintain our regulatory licenses or obtain new licenses where necessary;

Legislative and regulatory changes that impact us or our customers;

Non-compliance with the covenants in our senior secured credit agreement, including as a result of factors that are beyond our control;

High volatility or extreme changes in foreign currency exchange rates;

Difficulties or delays in, or being prevented from, carrying out acquisitions and subsequent integration of acquired businesses;

Difficulties in maintaining and protecting our intellectual property rights;

Potential infringement of the intellectual property rights of third parties;

Adverse outcomes with respect to litigation regarding intellectual property, including our payment of damages, constraints on our business and operations and invalidation of our intellectual property;

Involvement in other legal proceedings, and adverse outcomes with respect to such proceedings which could have a materially adverse effect on our business or prospects;

Disruption or delays in our or our suppliers’ manufacturing processes that could prevent us from meeting demand for our products;

Revenue losses in any of our business segments due to technical difficulties or fraudulent activities experienced by end users;

Inability to obtain market acceptance of products currently in development;

Inability to maintain a competitive technological position with respect to our competitors and competitive products;

Lower than expected revenues from our transition in certain products to a lease-based commercialization model;

Decreased demand for our products, including as a result of developments with respect to competitive products;

Adverse economic conditions in the gaming industry, which is our sole industry of focus; and

Adverse developments with respect to economic, political, legal and other risks associated with our international sales and operations.

In addition, refer to the “Risk Factors” section in Part II, Item 1A of this Form 10-Q, as well as the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended October 31, 2011, as filed with the Securities and Exchange Commission on January 5, 2011, and as incorporated by reference in Part II, Item 1A of this 10-Q, for a discussion of other important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure that the forward-looking statements will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, these statements should not be regarded as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by each of these cautionary statements above.

The following discussion should be read in conjunction with “Item 8. Financial Statements and Supplementary Data” in the Form 10-K 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.

Overview

We are a leading global gaming supplier committed to making gaming more fun for players and more profitable for operators through product innovation, and superior quality and service. We operate in legalized gaming markets across the globe and provide state-of-the-art, value-add products in four distinct segments: Utility products, which include automatic card shufflers and roulette chip sorters; Proprietary Table Games (“PTG”), which include live table games, side bets and progressives as well as our newly introduced online gaming products, which feature online versions of our table games, social gaming and mobile applications; Electronic Table Systems (“ETS”), which include various e-Table game platforms; and Electronic Gaming Machines (“EGM”), which include video slot machines. Each segment's activities include the design, development, acquisition, manufacturing, marketing, distribution, installation and servicing of a distinct product line. Our products are manufactured at our headquarters 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 Asia.

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

Strategy

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

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

Reinforce our relationships with our customers by providing enhanced efficiencies, security and profitability on the casino floor. We continue to work toward developing innovative products that anticipate and respond to their needs.

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

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

Foster the spirit of invention and the commitment to innovation that is at the heart of our success. With nearly 2,500 patents, trademarks and copyrights granted and pending, our pipeline for new intellectual property is robust. We believe our intellectual property collectively represents one of the strongest portfolios in the industry and our success depends upon our ability to preserve and protect these core assets.

Capitalize on emerging markets and the worldwide proliferation of gaming . A large part of our success in fiscal 2011 was turning opportunities into achievements. As new markets continue to emerge across the globe and as existing gaming markets continue to evolve, we strive to make the most of every opportunity that arises.

S ound balance sheet management to fuel growth through :

continued investment in our recurring revenue model, global intellectual property and research and development (“R&D”). We believe this will promote growth on the Company’s top and bottom line without relying on the introduction of significant new markets;

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

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

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

Drive margin improvement across all product categories. Our overall gross margin has shown continuous improvement over the past three fiscal years. We plan to continue our process improvement initiatives and uncover additional operational efficiencies.

Capitalize on opportunities created from existing online gaming markets and prepare ourselves for the potential legalization of Internet gambling in the United States. The gaming landscape is quickly evolving and we will strive to be a leading content-provider in this arena. We believe online gaming represents a significant opportunity for our future growth.

We are focused on our customers and on value-creation for our shareholders. We seek to maintain continuous improvement while keeping innovation at the core of our success. We believe that continued execution of our strategic plan is the best method to foster the growth of our business in fiscal 2012.

Sources of Revenue

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

Currently, Utility segment revenue is derived substantially from our automatic card shufflers. In addition to leasing shufflers, we also sell and service them. In the PTG segment, the majority of games placed are licensed to our customers on month-to-month license arrangements, which provides us with monthly 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, as well as game conversion kits.

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

Utility

We expect to continue increasing lease revenues in our Utility segment within the United States. One of the current growth drivers for this segment has been the Ace® shuffler upgrade initiative. We expect the next revenue driver to be our new MD3™ shuffler. The MD3™ shuffler is our next generation upgrade for the legacy MD series shufflers. As the MD1 shuffler reaches its end of life where replacement parts will no longer be available, our strategy is to encourage our customers to upgrade the MD1 shufflers, both leased and previously sold, with the MD3™ shuffler. The majority of these placements are expected to be leases.

We expect to continue seeing volatility in sales revenue in our Utility segment outside the United States. While we encourage leasing outside the United States, a large majority of our international Utility product placements historically have been sales. We are starting to see increased lease activity in international markets such as Australia, Asia and Latin America. Growth drivers for the Utility segment outside the United States are new jurisdictional openings, such as the new openings in Singapore and the Philippines during fiscal 2010, as well as the expansion of existing markets such as Macau. In the current year, we have seen an increase in the demand for our shufflers in Macau, particularly the MD3™ shuffler.

Proprietary Table Games

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

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

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

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

We intend to seek enforcement against parties that infringe our intellectual property on the Internet in legalized markets where legal systems and availability of cost-effective remedies are available to us.

Electronic Table Systems

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

Through development of new products and enhancements of our existing products we expect to generate revenue and growth for the ETS segment. New products include the following:

The new i-Table® and i-Table Roulette™ combine an electronic betting interface with a live table game and graphically-enhanced central display screens. We expect these products to provide us with growth opportunities in domestic and international markets if they achieve customer acceptance; and

In Australia and Asia, we have begun generating revenue from placements of our new multi-game feature on Rapid Table Games®, which offers enhanced live statistics at the touch of a button and betting can be conducted across multiple games.

Electronic Gaming Machines

Our EGM segment is primarily a sales model and we expect to continue to realize the majority of our EGM revenues from sales of EGMs in Australia and Asia.

We expect that EGM revenue and placements in fiscal 2012 will continue above 2011 levels primarily driven by updated game content as well as our new Super Topbox for the Equinox™ cabinet.

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

We also expect growth in additional international markets such as Asia and Latin America. Initial installations into Asia began during the third quarter 2011, of which a majority was Equinox™. In the current year we have placed units in Mexico and Latin America

Expenses

Our direct expenses primarily include cost of products sold, depreciation of leased assets, amortization of product-related intangible assets, service, manufacturing overhead, shipping and installation. Indirect expenses include other costs directly identified with each segment, such as R&D, product approval costs, product-related litigation expenses, amortization of patents and other product-related intellectual property, sales commissions and other directly-allocable sales expenses. We continue to expend significant R&D efforts on the development of our newer generation shuffler products, such as the DeckMate®2, MD3™ and one2six® Plus, our i-Shoe® Auto card recognition products, as well as other table accessories, such as the i-Shoe® and the i-Score™ display. Our online gaming division is expending R&D dollars on developing online versions of our table games, social gaming and mobile applications. With our expansion into the e-Table markets, we continue to spend significant R&D dollars on developing and implementing new gaming mediums, such as the i-Table®, our newest e-Table that combines a variety of our products to create an exciting new table game experience. We are also spending increased R&D dollars on the new Equinox™ EGM cabinets and related game content.

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

Gross Margin

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

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

We occasionally record inventory adjustments related to obsolescence or declines in the net realizable value of some products. While those adjustments occur in the normal course of business, it can cause negative pressure on our margins. We also occasionally dispose of leased assets that are no longer in service and are no longer usable.

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

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

CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended July 31,										Nine Months Ended July 31,
	2012					2011					2012					2011
	(Dollars in thousands)
Revenue:
Utility	$	24,382		38.5	%	$	22,575		38.7	%	$	68,988		37.2	%	$	59,108		36.5	%
Proprietary Table Games		12,994		20.5	%		10,994		18.9	%		38,623		20.8	%		32,766		20.2	%
Electronic Table Systems		6,053		9.5	%		6,793		11.6	%		21,183		11.4	%		26,721		16.5	%
Electronic Gaming Machines		19,957		31.5	%		17,965		30.8	%		56,699		30.6	%		43,430		26.8	%

Total revenue		63,386		100.0	%		58,327		100.0	%		185,493		100.0	%		162,025		100.0	%
Cost of revenue		23,364		36.9	%		22,105		37.9	%		67,161		36.2	%		60,541		37.4	%

Gross profit		40,022		63.1	%		36,222		62.1	%		118,332		63.8	%		101,484		62.6	%
Selling, general and administrative		19,007		30.0	%		16,816		28.8	%		55,991		30.2	%		50,077		30.9	%
Research and development		7,622		12.0	%		6,695		11.5	%		23,074		12.4	%		19,494		12.0	%

Income from operations		13,393		21.1	%		12,711		21.8	%		39,267		21.2	%		31,913		19.7	%
Other income (expense):
Interest income		116		0.2	%		177		0.3	%		429		0.2	%		429		0.3	%
Interest expense		(367	)	(0.6	%)		(659	)	(1.1	%)		(1,222	)	(0.6	%)		(2,031	)	(1.3	%)
Other, net		180		0.3	%		457		0.8	%		209		0.1	%		(504	)	(0.3	%)
Total other income (expense)		(71	)	(0.1	%)		(25	)	(0.0	%)		(584	)	(0.3	%)		(2,106	)	(1.3	%)

Income from operations before tax		13,322		21.0	%		12,686		21.8	%		38,683		20.9	%		29,807		18.4	%
Income tax provision		2,898		4.6	%		3,560		6.2	%		10,875		5.9	%		7,931		4.9	%
Net income	$	10,424		16.4	%	$	9,126		15.6	%	$	27,808		15.0	%	$	21,876		13.5	%

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

REVENUE AND GROSS MARGIN

	Three Months Ended July 31,						Percentage			Nine Months Ended July 31,						Percentage
	2012			2011			Change			2012			2011			Change
	(Dollars in thousands)
Revenue:
Leases and royalties	$	27,830		$	24,785			12.3	%	$	80,730		$	72,625			11.2	%
Sales and service		35,556			33,542			6.0	%		104,763			89,400			17.2	%
Total	$	63,386		$	58,327			8.7	%	$	185,493		$	162,025			14.5	%

Cost of revenue:
Leases and royalties	$	9,475		$	8,970			5.6	%	$	27,853		$	24,506			13.7	%
Sales and service		13,889			13,135			5.7	%		39,308			36,035			9.1	%
Total	$	23,364		$	22,105			5.7	%	$	67,161		$	60,541			10.9	%

Gross profit:
Leases and royalties	$	18,355		$	15,815			16.1	%	$	52,877		$	48,119			9.9	%
Sales and service		21,667			20,407			6.2	%		65,455			53,365			22.7	%
Total	$	40,022		$	36,222			10.5	%	$	118,332		$	101,484			16.6	%

Gross margin:
Leases and royalties		66.0	%		63.8	%					65.5	%		66.3	%
Sales and service		60.9	%		60.8	%					62.5	%		59.7	%
Total		63.1	%		62.1	%					63.8	%		62.6	%

Three months ended July 31, 2012 compared to three months ended July 31, 2011

Revenue

Our revenue for the three months ended July 31, 2012 increased $5.1 million over the same prior year period, primarily due to the following:

Increase of $3.0 million in our lease and royalty revenue was primarily due to our continued strategic focus on leasing:

Increased PTG lease and royalty revenue due to a 25.6% increase in units on lease; and

Increased Utility lease revenue due to a 7.3% increase in shuffler units on lease, driven primarily by the MD3 ™ shuffler , primarily in the United States and Asia.

Increase of $2.0 million in our sales and service revenue:

Increase in our EGM segment driven by a significant sale to a customer in the Philippines;

Increase in shuffler sales in Asia and an increase in shuffler average sales price; and

Offset by decreased revenue in our ETS segment primarily driven by the sale of refurbished units at a lower average sales price.

Impact of foreign currency fluctuations:

Total revenue was negatively impacted by approximately $1.8 million due to the exchange effect of a strengthening U.S. dollar.

Gross margin

Our gross margin for the three months ended July 31, 2012 increased 100 basis points (“bps”) to 63.1% as compared to the same prior year period, reflecting the following:

Increased segment margin performance:

Utility was favorably impacted by increases in the number of shufflers sold and an increase in average sales price; and

Increased margins in the PTG segment were driven primarily by an increase in the number of units on lease.

Offset by ETS and EGM which were unfavorably impacted by reductions in the average sales price.

Impact of foreign currency fluctuations:

Total gross profit was negatively impacted by approximately $1.0 million due to the exchange effect of a strengthening U.S. dollar.

Nine months ended July 31, 2012 compared to nine months ended July 31, 2011

Revenue

Our revenue for the nine months ended July 31, 2012 increased $23.5 million over the same prior year period, primarily due to the following:

Increase of $15.4 million in our sales and service revenue:

Increase in our EGM segment driven by a substantial increase in sold units due to the continued popularity of our Equinox ™ cabinet as well as our expansion into Victoria, Australia;

EGM also increased due to a significant sale to a customer in the Philippines;

Increase in shuffler sales in Asia and to new casino openings in the United States;

$2.3 million in settlement and license fees from online operators driven by our strategy to protect and license our intellectual property; and

Offset by decreased revenue in our ETS segment primarily driven by decreases in the number of seats sold.

Increase of $8.1 million in our lease and royalty revenue was primarily due to our strategic focus on leasing:

Increased PTG lease and royalty revenue due to a 25.6% increase in units on lease; and

Increased Utility lease revenue due to a 7.3% increase in shuffler units on lease, primarily in the United States and Asia.

Gross margin

Our gross margin for the nine months ended July 31, 2012 increased 120 bps to 63.8% as compared to the same prior year period, reflecting the following:

Increased segment margin performance:

Increased margins in the PTG segment were driven primarily by settlement and license fees of $2.3 million from online operators with little associated direct costs and an increase in the number of units on lease; and

Increased lease and royalty revenue in Utility and PTG.

Partially offset by ETS which was unfavorably impacted by reductions in the number of units sold and decrease in average sales prices.

The following table provides additional information regarding our operating expenses:

OPERATING EXPENSES

	Three Months Ended July 31,						Percentage			Nine Months Ended July 31,						Percentage
	2012			2011			Change			2012			2011			Change
	(Dollars in thousands)

Selling, general and administrative	$	19,007		$	16,816			13.0	%	$	55,991		$	50,077			11.8	%
Percentage of revenue		30.0	%		28.8	%					30.2	%		30.9	%

Research and development	$	7,622		$	6,695			13.8	%	$	23,074		$	19,494			18.4	%
Percentage of revenue		12.0	%		11.5	%					12.4	%		12.0	%

Total operating expenses	$	26,629		$	23,511			13.3	%	$	79,065		$	69,571			13.6	%
Percentage of revenue		42.0	%		40.3	%					42.6	%		42.9	%

Three months ended July 31, 2012 compared to three months ended July 31, 2011

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

SG&A expenses increased $2.2 million for the three months ended July 31, 2012, as compared to the same prior year period. This increase primarily reflects the following:

Compensation and related expenses:

Increase of approximately $1.2 million in payroll and related expenses driven by the hiring of two executive level positions; our General Counsel and our newly created Chief Strategy Officer role, as well as, expansion into new jurisdictions, and an increase in sales and profit driven compensation expenses related to the increase in revenue.

Ongame acquisition related expenses:

Due diligence expenses and professional fees related to the terminated Ongame acquisition were approximately $0.5 million. We do not anticipate any further expenses related to the terminated Ongame acquisition.

Legal expenses:

Increase of approximately $0.3 million in legal and consulting expenses primarily related to the Macau Rapid Baccarat® Patent Issue and TCS South Africa litigation described in Note 11 of this Form 10-Q.

Offset by impact of foreign currency fluctuations:

Total SG&A was positively impacted by approximately $0.5 million due to the exchange effect of a strengthening U.S. dollar.

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

R&D expenses increased $0.9 million for the three months ended July 31, 2012, as compared to the same prior year period. R&D was positively impacted by approximately $0.3 million due to the effect of foreign currency exchange. The following projects have been the focus of our R&D efforts during the three months ended July 31, 2012:

PTG

Ongoing enhancements to the successful progressive offering to our table game titles including the development of our Operator Wide Area Progressive (“O-WAP”); and

Development of online platforms and versions of our table games for online, social gaming and mobile applications.

Utility:

Expenses primarily related to development of next generation shufflers such as the DeckMate®2, as well as ongoing development of our existing Utility products.

ETS:

Expenses primarily related to the development of updated ETS products including the next generation of the Table Master ® , and the multigame and concurrent gaming enhancements to the Rapid Table Games ® and Vegas Star ® products as well as ongoing development of i-Table ® and i-Table Roulette™.

EGM:

R&D efforts were spent on developing additional new EGM titles for the Equinox ™ cabinet and to support ongoing business growth and geographic expansion into Asia.

Nine months ended July 31, 2012 compared to nine months ended July 31, 2011

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

SG&A expenses increased $5.9 million for the nine months ended July 31, 2012, as compared to the same prior year period. This increase primarily reflects the following:

Compensation and related expenses:

Increase of approximately $3.5 million in payroll and related expenses, partially driven by the hiring of several executive level positions during 2011, including our Chief Executive Officer, our General Counsel and our newly created Chief Strategy Officer role, as well as, sales and profit driven compensation expenses due to increased revenue during the nine months ended July 31, 2012, as compared to the prior year period.

Ongame acquisition related expenses:

Due diligence expenses and professional fees related to the terminated Ongame acquisition were approximately $2.0 million. We do not anticipate any further expenses related to the terminated Ongame acquisition.

Development of online platforms and versions of our table games for online, social gaming and mobile applications.

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

R&D expenses increased $3.6 million for the nine months ended July 31, 2012, as compared to the same prior year period. The following projects have been the focus of our R&D efforts during the nine months ended July 31, 2012:

PTG

Ongoing enhancements to the successful progressive offering to our table game titles including the development of our O-WAP; and

Development of online platforms and versions of our table games for online, social gaming and mobile applications.

EGM:

R&D efforts were spent on developing additional new EGM titles for the Equinox ™ cabinet and to support ongoing business growth and geographic expansion into Asia.

ETS:

Utility:

Expenses primarily related to development of next generation shufflers such as the DeckMate®2, as well as ongoing development of our existing Utility products.

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

DEPRECIATION AND AMORTIZATION EXPENSES

	Three Months Ended July 31,				Percentage			Nine Months Ended July 31,				Percentage
	2012		2011		Change			2012		2011		Change
	(Dollars in thousands)
Gross margin:
Depreciation	$	3,164	$	2,521		25.5	%	$	9,126	$	7,528		21.2	%
Amortization		1,400		1,729		(19.0	%)		4,271		5,078		(15.9	%)
Total		4,564		4,250		7.4	%		13,397		12,606		6.3	%

Operating expenses:
Depreciation		862		1,021		(15.6	%)		2,745		3,011		(8.8	%)
Amortization		834		804		3.7	%		2,515		2,334		7.8	%
Total		1,696		1,825		(7.1	%)		5,260		5,345		(1.6	%)

Total:
Depreciation		4,026		3,542		13.7	%		11,871		10,539		12.6	%
Amortization		2,234		2,533		(11.8	%)		6,786		7,412		(8.4	%)
Total	$	6,260	$	6,075		3.0	%	$	18,657	$	17,951		3.9	%

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

Three months ended July 31, 2012 compared to three months ended July 31, 2011

Total depreciation and amortization included in gross margin increased 7.4% in the three months ended July 31, 2012 as compared to the same prior year period. Increased depreciation in gross margin is attributable to increases in the number and cost of assets on lease. Decreased amortization in gross margin is primarily due to reduced amortization of intangible assets in our Utility segment as the underlying intangible assets are reaching the end of their estimated useful lives.

Total depreciation and amortization included in operating expenses decreased 7.1% in the three months ended July 31, 2012 as compared to the same prior year period. Depreciation expenses decreased as various assets reached the end of their estimated useful lives. The increase in amortization expenses relates primarily to amortization of the customer relationships acquired in connection with the purchase of Fire Bet ® in the first quarter of the current fiscal year.

Nine months ended July 31, 2012 compared to nine months ended July 31, 2011

Total depreciation and amortization included in gross margin increased 6.3% in the nine months ended July 31, 2012 as compared to the same prior year period. Increased depreciation in gross margin is attributable to increases in the number and cost of assets on lease. Decreased amortization in gross margin is primarily due to reduced amortization of intangible assets in our Utility segment as the underlying intangible assets are reaching the end of their estimated useful lives.

Total depreciation and amortization included in operating expenses decreased 1.6% in the nine months ended July 31, 2012 as compared to the same prior year period. Depreciation expenses decreased as various assets reached the end of their estimated useful lives. The increase in amortization expenses relates primarily to amortization of the customer relationships acquired in connection with the purchase of Fire Bet ® in the first quarter of the current fiscal year.

INCOME TAXES

Three months ended July 31, 2012 compared to three months ended July 31, 2011

The effective income tax rate from continuing operations for the three months ended July 31, 2012 decreased to 21.8% as compared to 28.1% in the prior year period. This decrease primarily reflects the following:

Expenses recorded in the prior quarter for transaction costs related to the Ongame acquisition, which became deductible in the current quarter due to our decision not to proceed with the acquisition; and

Expiration of the statute of limitations with regard to several of our uncertain tax positions.

Nine months ended July 31, 2012 compared to nine months ended July 31, 2011

The effective income tax rate from continuing operations for the nine months ended July 31, 2012 increased to 28.1% as compared to 26.6% in the prior year period. This increase primarily reflects the following:

Changes in geographic income before taxes.

SEGMENT OPERATING RESULTS

Utility Segment Operating Results

Three months ended July 31, 2012 compared to three months ended July 31, 2011

	Three Months Ended July 31,						Increase			Percentage
	2012			2011			(Decrease)			Change
	(In thousands, except for units/seats and per unit/seat amounts)
Utility Segment Revenue:
Lease	$	11,915		$	10,796		$	1,119			10.4	%
Sales - Shuffler		9,027			8,315			712			8.6
Sales - Chipper		608			537			71			13.2
Service		1,814			1,639			175			10.7
Other		1,018			1,288			(270	)		(21.0	)
Total sales and service		12,467			11,779			688			5.8
Total Utility segment revenue	$	24,382		$	22,575		$	1,807			8.0	%

Utility segment gross profit	$	15,285		$	12,852		$	2,433			18.9	%
Utility segment gross margin		62.7	%		56.9	%

Utility segment operating income	$	13,334		$	11,208		$	2,126			19.0	%
Utility segment operating margin		54.7	%		49.6	%


Shuffler unit information:
Lease units, end of period (1)		8,245			7,682			563			7.3	%
Average monthly lease price	$	461		$	451			10			2.2	%

Sold units during the period		563			540			23			4.3	%
Average sales price	$	16,034		$	15,398		$	636			4.1	%

Chipper unit information:
Lease units, end of period		228			211			17			8.1	%

Sold during period		35			28			7			25.0	%
Average sales price	$	17,371		$	19,179		$	(1,808	)		(9.4	%)

(1) Certain unit information as of July 31, 2011 has been amended to reflect an immaterial adjustment to the beginning units as of October 31, 2008. No changes were made to revenue.

Our Utility segment revenue for the three months ended July 31, 2012 increased $1.8 million as compared to the same prior year period, primarily due to the following:

A 10.4% increase in lease revenue:

The number of shufflers on lease has increased 7.3% over the prior year led primarily by placements of MD2 ™ shuffler in Asia and MD3 ™ shufflers in the United States; and

Placements of the newly introduced MD3 ™ shuffler, which accounted for the majority of our new lease placements during the quarter. The MD3 ™ shuffler lease base has grown to over 700 units as of the end of the quarter.

A 8.6% increase in shuffler sales revenue:

An increase of 4.3% in the number of units sold, driven primarily by a sale of MD3 ™ shuffler units to a large casino customer in Macau and sales to new casinos opening in the United States; and

An increase of 4.1% in shuffler average sales price driven by changes in the mix of shuffler models sold.

Utility gross profit increased 18.9% year over year and utility gross margin increased 580 bps to 62.7% as compared to the same prior year period primarily related to the following:

The overall increase in total revenues as noted above; and

A decrease in amortization expense associated with the underlying intangible assets related to the one2six® shuffler and Easy Chipper® that are approaching the end of their original estimated useful lives.

Utility operating income increased 19.0% year over year and operating margin increased 510 bps to 54.7% as compared to the same prior year period. These changes primarily related to the changes described in gross profit and gross margin described above.

Nine months ended July 31, 2012 compared to nine months ended July 31, 2011

	Nine Months Ended July 31,						Increase			Percentage
	2012			2011			(Decrease)			Change
	(In thousands, except for units/seats and per unit/seat amounts)
Utility Segment Revenue:
Lease	$	34,787		$	31,077		$	3,710			11.9	%
Sales - Shuffler		24,477			18,007			6,470			35.9
Sales - Chipper		1,068			1,010			58			5.7
Service		5,280			4,951			329			6.6
Other		3,376			4,063			(687	)		(16.9	)
Total sales and service		34,201			28,031			6,170			22.0
Total Utility segment revenue	$	68,988		$	59,108		$	9,880			16.7	%

Utility segment gross profit	$	42,622		$	35,284		$	7,338			20.8	%
Utility segment gross margin		61.8	%		59.7	%

Utility segment operating income	$	36,986		$	30,294		$	6,692			22.1	%
Utility segment operating margin		53.6	%		51.3	%


Shuffler unit information:
Lease units, end of period (1)		8,245			7,682			563			7.3	%
Average monthly lease price	$	450		$	432			18			4.2	%

Sold units during the period		1,565			1,159			406			35.0	%
Average sales price	$	15,640		$	15,537		$	103			0.7	%

Chipper unit information:
Lease units, end of period		228			211			17			8.1	%

Sold during period		59			51			8			15.7	%
Average sales price	$	18,102		$	19,804		$	(1,702	)		(8.6	%)

(1) Certain unit information as of July 31, 2011 has been amended to reflect an immaterial adjustment to the beginning units as of October 31, 2008. No changes were made to revenue.

Our Utility segment revenue for the nine months ended July 31, 2012 increased $9.9 million as compared to the same prior year period, primarily due to the following:

A 35.9% increase in shuffler sales revenue:

An increase of 35.0% in the number of units sold, driven by increased MD3 ™ shuffler sales in Asia and in the United States primarily to new casinos opening and replacement of previously sold shufflers.

A 11.9% increase in lease revenue:

An increase in the number of MD2 ™ shuffler units on lease in Asia and MD3 ™ shuffler units on lease in the United States; and

Placements of the newly introduced MD3 ™ shuffler, which accounted for the majority of our new lease placements during the year to date period. The MD3 ™ shuffler lease base has grown to over 700 units as of the end of the quarter.

Utility gross profit increased 20.8% year over year and utility gross margin increased 210 bps to 61.8% as compared to the same prior year period primarily related to the following:

The overall increase in total revenues as noted above;

Utility operating income increased 22.1% year over year and operating margin increased 230 bps to 53.6% as compared to the same prior year period. These changes primarily related to the changes described in gross profit and gross margin above.

Proprietary Table Games Segment Operating Result s

Three months ended July 31, 2012 compared to three months ended July 31, 2011

	Three Months Ended July 31,						Increase			Percentage
	2012			2011			(Decrease)			Change
	(In thousands, except for units/seats and per unit/seat amounts)

PTG segment revenue:
Royalties and leases	$	12,324		$	10,543		$	1,781			16.9	%
Sales		552			331			221			66.8
Service		27			29			(2	)		(6.9	)
Other		91			91			-			-
Total sales and service revenue		670			451			219			48.6
Total PTG segment revenue	$	12,994		$	10,994		$	2,000			18.2	%

PTG segment gross profit	$	10,634		$	8,671		$	1,963			22.6	%
PTG segment gross margin		81.8	%		78.9	%

PTG segment operating income	$	8,481		$	7,445		$	1,036			13.9	%
PTG segment operating margin		65.3	%		67.7	%


PTG unit information (1):
Premium units, end of quarter		2,699			2,417			282			11.7	%
Side bet units, end of quarter		2,542			1,969			573			29.1	%
Progressive units, end of quarter		1,139			783			356			45.5	%
Add-on units, end of quarter		341			180			161			89.4	%
Total revenue generating lease base		6,721			5,349			1,372			25.6	%

Average monthly lease/license price	$	611		$	657			(46	)		(7.0	%)

Sold during quarter		10			29			(19	)		(65.5	%)
Average sales price	$	54,750		$	11,414			43,336			379.7	%

(1) Certain unit information as of July 31, 2011 has been amended to reflect an immaterial adjustment to the beginning units as of October 31, 2008. No changes were made to revenue.

Total PTG segment revenue for the three months ended July 31, 2012 increased $2.0 million as compared to the same prior year period, primarily due to the following:

A 16.9% increase in royalty and lease revenue:

Increased placements of premium table games in the United States, primarily Ultimate Texas Hold ‘Em ® and Mississippi Stud ® ;

Increased placements of progressive table games in the United States, primarily Fortune Pai Gow Poker ® Progressive, Three Card Poker Progressive and Ultimate Texas Hold ‘Em ® Progressive;

Increased placements of side bets in the United States, primarily Fortune Pai Gow Poker ® , Dragon Bonus, and the acquisition of the Fire Bet ® side bet in the first quarter; and

Offset by a 7.0% decrease in average monthly lease/license price due to the change in mix of table games on lease.

A 66.8% increase in PTG sales revenue:

Driven primarily by a 379.7% increase in average sales price in the current quarter. The prior year quarter sales consisted primarily of side bets and current quarter sales consisted primarily of premium table games in the United States; and

Offset by a 65.5% decrease in the number of table games sold.

PTG gross profit increased 22.6% year over year and gross margin increased by 290 bps to 81.8% as compared to the same prior year period. The increase in gross profit and gross margin primarily related to the following:

The overall increase in total revenues.

PTG operating income increased 13.9% year over year, although the operating margin decreased 240 bps to 65.3% as compared to the same prior year. The increase in operating income primarily related to the following:

The increase in gross margin and gross profit referred to above.

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

An increase in R&D costs associated with our online gaming development of games and platforms for online, social gaming, and mobile devices; and

Offset by the increase in gross margin and gross profit referred to above.

Nine months ended July 31, 2012 compared to nine months ended July 31, 2011

	Nine Months Ended July 31,						Increase			Percentage
	2012			2011			(Decrease)			Change
	(In thousands, except for units/seats and per unit/seat amounts)

PTG segment revenue:
Royalties and leases	$	35,379		$	31,204		$	4,175			13.4	%
Sales		2,941			1,225			1,716			140.1
Service		92			86			6			7.0
Other		211			251			(40	)		(15.9	)
Total sales and service revenue		3,244			1,562			1,682			107.7
Total PTG segment revenue	$	38,623		$	32,766		$	5,857			17.9	%

PTG segment gross profit	$	31,994		$	26,338		$	5,656			21.5	%
PTG segment gross margin		82.8	%		80.4	%

PTG segment operating income	$	25,122		$	23,205		$	1,917			8.3	%
PTG segment operating margin		65.0	%		70.8	%


PTG unit information (1):
Premium units, end of period		2,699			2,417			282			11.7	%
Side bet units, end of period		2,542			1,969			573			29.1	%
Progressive units, end of period		1,139			783			356			45.5	%
Add-on units, end of period		341			180			161			89.4	%
Total revenue generating lease base		6,721			5,349			1,372			25.6	%

Average monthly lease/license price	$	585		$	648		$	(63	)		(9.7	%)

Sold during period		12			48			(36	)		(75.0	%)
Average sales price	$	51,598		$	25,521		$	26,077			102.2	%

(1) Certain unit information as of July 31, 2011 has been amended to reflect an immaterial adjustment to the beginning units as of October 31, 2008. No changes were made to revenue.

Total PTG segment revenue for the nine months ended July 31, 2012 increased $5.9 million as compared to the same prior year period, primarily due to the following:

A 13.4% increase in royalty and lease revenue:

Increased placements of premium table games in the United States, primarily Ultimate Texas Hold ‘Em ® and Mississippi Stud ® ;

Increased placements of progressive table games in the United States, primarily Three Card Poker Progressive, Fortune Pai Gow Poker ® Progressive and Ultimate Texas Hold ‘Em ® Progressive;

Increased placements of side bets in the United States, primarily Fortune Pai Gow Poker ® , Dragon Bonus and the acquisition of the Fire Bet ® side bet during the period; and

Offset by a 9.7% decrease in average monthly lease/license price due to the change in mix of table games on lease.

A 140.1% increase in PTG sales revenue:

Driven by $2.3 million settlement and license fees from online operators in line with our strategy to protect and license our intellectual property; and

Offset by a 75.0% decrease in table games sold, driven primarily by our strategic focus on leasing versus sales. Current and prior year sales included primarily sales related to new casino openings and conversions of leased to sold table games at premium prices. Average sales price increased due to the change in mix of table games sold.

PTG gross profit increased 21.5% year over year and gross margin increased by 240 bps to 82.8% as compared to the same prior year period. The increase in gross profit and gross margin primarily related to the following:

The overall increase in total revenues; and

The settlement and license fees from online operators described above partially offset by the decrease in sales of table games.

PTG operating income increased 8.3% year over year, although the operating margin decreased 580 bps to 65.0% as compared to the same prior year period. The increase in operating income primarily related to the following:

The increase in gross margin and gross profit referred to above.

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

An increase in R&D costs associated with our online gaming development of games and platforms for online, social gaming, and mobile devices; and

Offset by the increase in gross margin and gross profit referred to above.

Electronic Table Systems Segment Operating Results

Three months ended July 31, 2012 compared to three months ended July 31, 2011

	Three Months Ended July 31,						Increase			Percentage
	2012			2011			(Decrease)			Change
	(In thousands, except for units and per unit/seat amounts)
ETS segment revenue:
Royalties and leases:
Royalties and leases	$	3,437		$	3,354		$	83			2.5	%
Sales		1,828			2,577			(749	)		(29.1	%)
Service		149			153			(4	)		(2.6	%)
Other		639			709			(70	)		(9.9	%)
Total sales and service revenue		2,616			3,439			(823	)		(23.9	%)
Total ETS segment revenue	$	6,053		$	6,793		$	(740	)		(10.9	%)

ETS segment gross profit	$	2,055		$	3,197		$	(1,142	)		(35.7	%)
ETS segment gross margin		34.0	%		47.1	%

ETS segment operating income	$	(846	)	$	328		$	(1,174	)		(357.9	%)
ETS segment operating margin		(14.0	%)		4.8	%

ETS unit information:

Rapid Table Games®, Table Master® and Vegas Star®:
Lease seats, end of period (1)		2,421			2,414			7			0.3	%
Average monthly lease price	$	459		$	450		$	9			2.0	%

Sold during the period		115			78			37			47.4	%
Average sales price	$	15,896		$	33,038		$	(17,142	)		(51.9	%)

i-Table®:
Lease units, end of period (1)		63			49			14			28.6	%

(1) Certain unit information as of July 31, 2011 has been amended to reflect an immaterial adjustment to the beginning units as of October 31, 2008. i-Table® seats are reported separately as units rather than seats to conform to the current presentation. No changes were made to revenue.

Total ETS segment revenue for the three months ended July 31, 2012 decreased $0.7 million as compared to the same prior year period, primarily due to the following:

An 29.1% decrease in sales revenue:

A 51.9% reduction in average sales price primarily driven by the sale of refurbished units in Australia and Latin America; and

Offset by an increase of Rapid Table Games ® seats sold totaling approximately $1.1 million to two large casino customers in Australia.

Impact of foreign currency fluctuations:

Total revenue was negatively impacted by approximately $0.1 million due to the exchange effect of a strengthening U.S. dollar.

ETS gross profit decreased 35.7% year over year and gross margin decreased 1,310 bps to 34.0% as compared to the same prior year period. These decreases are due to the following:

The decrease in the sales revenue described above; and

An increase over the prior year in depreciation expense of leased units without a corresponding increase in lease revenue.

ETS operating income decreased 357.9% year over year and resulted in a loss for the three months ended July 31, 2012 as compared to the same prior year period. ETS operating margin decreased 1,880 bps as compared to the same prior year period. These decreases in both operating income and operating margin primarily related to the following:

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

An increase in R&D costs associated with the development of new ETS products as described in the research and development expense section above. We have been investing in the next generation products for our ETS segment, such as an updated version of our Table Master ® , a wide-screen version of our Rapid Table Games ® and Vegas Star ® product, as well as a software enhancement that allows for multigame and concurrent gaming on our Rapid Table Games ® and Vegas Star ® in certain jurisdictions.

Nine months ended July 31, 2012 compared to nine months ended July 31, 2011

	Nine Months Ended July 31,						Increase			Percentage
	2012			2011			(Decrease)			Change
	(In thousands, except for units and per unit/seat amounts)
ETS segment revenue:
Royalties and leases	$	10,205		$	10,062		$	143			1.4	%
Sales		7,579			13,348			(5,769	)		(43.2	%)
Service		450			433			17			3.9	%
Other		2,949			2,878			71			2.5	%
Total sales and service revenue		10,978			16,659			(5,681	)		(34.1	%)
Total ETS segment revenue	$	21,183		$	26,721		$	(5,538	)		(20.7	%)

ETS segment gross profit	$	8,868		$	12,684		$	(3,816	)		(30.1	%)
ETS segment gross margin		41.9	%		47.5	%

ETS segment operating income	$	(967	)	$	3,860		$	(4,827	)		(125.1	%)
ETS segment operating margin		(4.6	%)		14.4	%

ETS unit information:

Rapid Table Games®, Table Master® and Vegas Star®:
Lease seats, end of period (1)		2,421			2,414			7			0.3	%
Average monthly lease price	$	454		$	453		$	1			0.2	%

Sold during the period		409			558			(149	)		(26.7	%)
Average sales price	$	18,531		$	23,921		$	(5,390	)		(22.5	%)

i-Table®:
Lease units, end of period (1)		63			49			14			28.6	%

Total ETS segment revenue for the nine months ended July 31, 2012 decreased $5.5 million as compared to the same prior year period, primarily due to the following:

A 43.2% decrease in sales revenue:

A 57.1% decrease in the number of Vegas Star ® seats sold. The prior year included sales to large casino customers primarily in Australia;

Decrease of 60.7% in the number of Table Master ® seats sold as the prior year included significant sales to individual regional casinos in the United States;

A 22.5% reduction in average sales price driven by discounts on refurbished units sold in Asia and Australia and discounts on units sold in Latin America; and

Offset by an increase of 69.6% in Rapid Table Games ® seats sold primarily in Australia, totaling approximately $4.2 million.

Impact of foreign currency fluctuations:

Total revenue was positively impacted by approximately $0.3 million due to the exchange effect of a weakening U.S. dollar.

ETS gross profit decreased 30.1% year over year and gross margin decreased 560 bps to 41.9% as compared to the same prior year period. These decreases are due to the following:

The decrease in sales revenue as a result of fewer seats sold; and

The decrease in average sales price noted above.

ETS operating income decreased 125.1% and resulted in a loss for the nine months ended July 31, 2012 as compared to the same prior year period. ETS operating margin decreased 1,900 bps for the nine months ended July 31, 2012 as compared to the same prior year period. These decreases in both operating income and operating margin primarily related to the following:

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

Electronic Gaming Machines Segment Operating Results

Three months ended July 31, 2012 compared to three months ended July 31, 2011

	Three Months Ended July 31,						Increase			Percentage
	2012			2011			(Decrease)			Change
	(In thousands, except for units/seats and per unit/seat amounts)

EGM segment revenue:
Lease revenue	$	154		$	92		$	62			67.4	%
Sales		18,153			16,348			1,805			11.0
Service		35			33			2			6.1
Other		1,615			1,492			123			8.2
Total sales and service revenue		19,803			17,873			1,930			10.8
Total EGM segment revenue	$	19,957		$	17,965		$	1,992			11.1	%

EGM segment gross profit	$	12,048		$	11,502		$	546			4.7	%
EGM segment gross margin		60.4	%		64.0	%

EGM segment operating income	$	8,701		$	8,336		$	365			4.4	%
EGM segment operating margin		43.6	%		46.4	%

EGM unit information:
Lease units, end of period		380			27			353			1,307.4	%

Sold during period		1,021			863			158			18.3	%
Average sales price	$	17,780		$	18,943		$	(1,163	)		(6.1	%)

Total EGM segment revenue for the three months ended July 31, 2012 increased $2.0 million as compared to the same prior year period, primarily due to the following:

A 11.0% increase in sales revenue:

Driven by the 18.3% increase in units sold primarily related to a sale to a customer in the Philippines; and

A 6.1% decrease in average sales price primarily related to the sale in the Philippines. The decrease also relates to foreign exchange effects on the Australian Dollar. The average sales price in Australian dollars increased 3.1% reflecting a higher average sales price for the Equinox TM cabinet with Super Topbox.

Impact of foreign exchange fluctuations:

Total revenue was negatively impacted by approximately $1.2 million due to the exchange effect of a strengthening U.S. dollar.

We are starting to generate lease revenue from machines on participation arrangements in Mexico and Asia. We have placed a significant number of machines in these jurisdictions and our installed base has grown to approximately 380 units.

EGM gross profit increased 4.7% year over year and EGM gross margin decreased 360 bps to 60.4% as compared to the same prior year period. The increase in gross profit primarily related to the following:

The increase in EGM sales revenues as noted above, driven primarily by the increase in units sold.

The decrease in gross margin primarily related to the following:

The decrease in average sales price primarily driven by the large sale to a customer in the Philippines; and

Import duties and freight expenses to place machines on lease in Mexico and Latin America.

EGM operating income increased 4.4% year over year and operating margin decreased 280 bps as compared to the same prior year period. The changes in operating income and operating margin primarily related to the following:

The changes in total EGM gross profit and gross margin described above.

Nine months ended July 31, 2012 compared to nine months ended July 31, 2011

	Nine Months Ended July 31,						Increase		Percentage
	2012			2011			(Decrease)		Change
	(In thousands, except for units/seats and per unit/seat amounts)

EGM segment revenue:
Lease revenue	$	359		$	281		$	78		27.8	%
Sales		52,063			39,642			12,421		31.3
Service		67			65			2		3.1
Other		4,210			3,442			768		22.3
Total sales and service revenue		56,340			43,149			13,191		30.6
Total EGM segment revenue	$	56,699		$	43,430		$	13,269		30.6	%

EGM segment gross profit	$	34,848		$	27,178		$	7,670		28.2	%
EGM segment gross margin		61.5	%		62.6	%

EGM segment operating income	$	24,948		$	18,493		$	6,455		34.9	%
EGM segment operating margin		44.0	%		42.6	%

EGM unit information:
Lease units, end of period		380			27			353		1,307.4	%

Sold during period		2,726			2,155			571		26.5	%
Average sales price	$	19,099		$	18,395		$	704		3.8	%

Total EGM segment revenue for the nine months ended July 31, 2012 increased $13.3 million as compared to the same prior year period, primarily due to the following:

A 31.3% increase in sales revenue:

Driven by the 26.5% increase in units sold as a result of a sale to a customer in the Philippines;

Our expansion in the Victoria, Australia market in the current year and to a lesser extent increased placements in Asia; and

A 3.8% increase in average sales price reflecting higher sales prices in Australia driven by higher average sales price for the Equinox TM cabinet with Super Topbox and partially offset by lower pricing for a sale to a single customer in the Philippines.

An increase of 22.3% in other revenue, driven by an increase in sales of conversion kits and other parts and peripherals.

We are starting to generate revenue from machines on lease and from participation arrangements in Mexico, Asia and Latin America. We have placed a significant number of machines in these jurisdictions and our installed base has grown to approximately 380 units.

EGM gross profit increased 28.2% year over year and EGM gross margin decreased 110 basis points to 61.5%. The increase in gross profit primarily related to the following:

The increase in EGM sales revenues as noted above, driven primarily by the increase in units sold and the increase in average sales price;

Increased sales of conversion kits and other parts and peripherals at higher margins; and

Offset by import duties and freight expenses to place several machines on lease in Mexico and Latin America.

EGM gross margin decreased primarily due to import duties and freight expenses to place several machines on lease in Mexico and Latin America.

EGM operating income increased 34.9% year over year and operating margin also increased 140 bps to 44.0% compared to the same prior year period. The increases in operating income and operating margin primarily related to the following:

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

LIQUIDITY AND CAPITAL RESOURCES

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 and products leased and held for lease and to fund new products through both research and development and strategic acquisitions of businesses and intellectual property. Based on past performance and current expectations, we believe these resources will satisfy our needs for working capital, capital expenditures, debt service and other liquidity requirements associated with our existing operations for the next 12 months.

Our Senior Secured Revolving Credit Facility contains three financial maintenance covenants: a Total Leverage Ratio, Senior Leverage Ratio and an Interest Expense Coverage Ratio. Under the facility, we are required to maintain a Total Leverage Ratio, as defined therein, of not more than 3.75 to 1.0. Our Total Leverage Ratio as of July 31, 2012 was 0.19 to 1.0. Furthermore, we are required to maintain a Senior Leverage Ratio, as defined therein, of not more than 3.00 to 1.0 until October 31, 2013 and not more than 2.75 to 1.00 after October 31, 2013. Our Senior Leverage Ratio as of July 31, 2012 was 0.17 to 1.0. We are also required to maintain an Interest Coverage Ratio, as defined therein, in excess of 3.0 to 1.0 at the end of any fiscal quarter. Our Interest Coverage Ratio as of July 31, 2012 was 63.36 to 1.0.

Cash and cash equivalents at our foreign subsidiaries were $22.5 million as of July 31, 2012 and $17.5 million as of October 31, 2011. We constantly evaluate our cash position in each territory and look for ways to efficiently deploy capital to markets where it is most needed.

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

	July 31, 2012		October 31, 2011		Increase (Decrease)		Percentage Change
	(In thousands, except ratios)

Cash and cash equivalents	$	28,030	$	22,189	$	5,841		26.3	%
Working capital	$	79,366	$	67,120	$	12,246		18.2	%
Current ratio	3.0 : 1		2.8 : 1

CASH FLOWS SUMMARY

	Nine Months Ended July 31,						Increase			Percentage
	2012			2011			(Decrease)			Change
	(In thousands)

Net cash provided by operating activities	$	35,868		$	36,692		$	(824	)		(2.2	%)
Net cash used in investing activities		(25,962	)		(21,434	)		4,528			21.1	%
Net cash provided by (used in) financing activities		(5,435	)		4,423			(9,858	)		222.9	%
Effects of exchange rates		1,370			522			848			(162.5	%)
Net change in cash and cash equivalents	$	5,841		$	20,203

Capital Expenditures. Significant items included in cash flows related to capital expenditures are as follows:

	Nine Months Ended July 31,						Increase			Percentage
	2012			2011			(Decrease)			Change
	(In thousands)

Payments for products leased and held for lease	$	(11,227	)	$	(11,608	)	$	(381	)		(3.3	%)
Purchases of property and equipment		(5,852	)		(2,683	)		3,169			118.1	%
Purchases of intangible assets		(4,333	)		(6,269	)		(1,936	)		(30.9	%)
Total capital expenditures	$	(21,412	)	$	(20,560	)

Operating

Cash flows provided by operating activities decreased $0.8 million for the nine months ended July 31, 2012 compared to the same prior year period, primarily due to following:

An increased use of cash for working capital and operating accounts:

Cash paid for income tax liabilities was approximately $11.1 million more than the prior year period;

Days sales outstanding increased from 70.7 in the prior year to 76.3 as of July 31, 2012 due to an increase in sales-type leases with payment terms ranging generally from 24 to 36 months; and

Offset by strong operating performance, which led to an increase in net income of $5.9 million and the difference in non-cash items year over year provided an increase of additional $4.4 million.

Investing

Cash used in investing activities increased $4.5 million for the nine months ended July 31, 2012 compared to the same prior year period, primarily due to following:

A decrease of $4.6 million in proceeds from sale of leased assets; and

An increase of $3.2 million in cash used to purchase property and equipment, which is primarily related to the purchase of land for a consolidated corporate and operating facility in Las Vegas, Nevada.

Offset by the following:

Purchase of intangible assets during the nine months ended July 31, 2012 decreased by $1.9 million. Current year purchases related primarily to the acquisition of licenses to be used in our EGM segment; and

Acquisition of intellectual property which was recorded as a business acquisition for accounting purposes was $5.5 million during the nine months ended July 31, 2012 compared with the acquisition of Newton Shuffler, LLC for $6.5 million in the prior year period.

Financing

Cash flows were used in financing activities for the nine months ended July 31, 2012 at an increase of $9.9 million over the same prior year period, primarily due to following:

Cash used for debt payments on our Revolver, net of draws, was $23.0 million as compared to a net draw of $1.5 million during the nine months ended July 31, 2011; and

Offset by increased proceeds from issuance of common stock of $14.1 million, due to an increased weighted average exercise price of options exercised and an increase in the number of options exercised in the current period compared to the prior year period.

Indebtedness (See Note 4 of our Notes to Condensed Consolidated Financial Statements)

the Federal Funds Rate plus .50%;

the prime commercial lending rate of the Administrative Agent, as defined; and

the one month LIBOR rate for such day plus 2.00%.

On May 31, 2012, the Senior Secured Revolving Credit Facility was amended to clarify and define certain restrictive covenants.

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 12 months. Projected cash flows from operations are based on our estimates of revenue and expenses and the related timing of cash receipts and disbursements. If actual performance differs from estimated performance, projected cash flows could be positively or negatively impacted.

DEBT, OTHER LONG-TERM LIABILITIES AND CONTRACTUAL OBLIGATIONS

Our contractual obligations have not changed materially from the amounts disclosed in our Form 10-K as of October 31, 2011.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have material off-balance sheet arrangements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We prepare our Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States. Our critical accounting policies are discussed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations; Critical Accounting Policies and Estimates” in our Form 10-K for the year ended October 31, 2011.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest rate risk . As of July 31, 2012, we had approximately $14.4 million of variable rate debt. Assuming a 1% change in the average interest rate as of July 31, 2012, our annual interest cost would change by approximately $0.1 million.

Foreign currency risk. We are exposed to foreign currency exchange rate risk inherent in our leases and sales commitments, anticipated leases and sales, anticipated purchases and assets, liabilities and debt denominated in currencies other than the U.S. dollar. We transact business in numerous countries around the world using numerous currencies, of which the most significant to our operations for the three and nine months ended July 31, 2012 and 2011, were the Australian dollar and the Euro. We settle inter-company trade balances, which results in the recognition of foreign currency fluctuations. We expect that a significant portion of the volume of our business will continue to be denominated in foreign currencies. As such, we expect our cash flows and earnings to continue to be exposed to the risks that may arise from fluctuations in foreign currency exchange rates.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

As required by Rule 13a-15(b) promulgated under the Exchange Act, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the design and operating effectiveness as of July 31, 2012, of our disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Exchange Act. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of July 31, 2012.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the three and nine months ended July 31, 2012, that has materially affected, or is 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, 2011, see Note 11 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, 2011.

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 under Part I, Item 1A. The text of such risk factors is incorporated herein by reference. For the three and nine months ended July 31, 2012, there were no material changes to our risk factors.

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

	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program		Maximum Value of Shares That May Yet Be Purchased Under the Stock Buyback Program (1)
May1 through May 31, 2012		-	$	-		-	$	21,077
June 1 through June 30, 2012		-		-		-		21,077
July 1 through July 31, 2012		-		-		-		21,077
Total		-	$	-		-

(1) In September 2006, our board of directors authorized a stock buyback program for up to $30.0 million of the Company’s shares; as of July 31, 2012, $21.1 million remained outstanding under our board authorization. We cancel shares that we repurchase. Although we generally prioritize bank debt reduction over share repurchases we may consider share repurchases when there are anomalies in the share value created by, but not limited to, market conditions.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

3.1		Articles of Incorporation of Shuffle Master, Inc. as amended July 15, 1992 (Incorporated by reference to exhibit 3.2 in our Annual Report on Form 10-K for the year ended October 31, 1995).
3.2		Articles of Amendment to Articles of Incorporation of Shuffle Master, Inc., effective January 14, 2005 (Incorporated by reference to exhibit 3.2 to our Annual Report on Form 10-K, filed January 13, 2005).
3.3		Articles of Correction of Articles of Amendment of Articles of Incorporation of Shuffle Master, Inc., effective March 15, 2005 (Incorporated by reference to exhibit 3.1 to our Current Report on Form 8-K, filed March 18, 2005).
3.4		Amended and Restated Bylaws of Shuffle Master, Inc., effective April 4, 2011 (Incorporated by reference to exhibit 3.4 to our Current Report on Form 8-K, filed April 8, 2011)
4.1		Registration Rights Agreement dated May 13, 2004, by and between Casinos Austria AG on the one hand and Shuffle Master, Inc. on the other hand (Incorporated by reference to exhibit 10.2 in our Quarterly Report on Form 10-Q for the quarter ended April 30, 2004).
10.1		Amendment No. 1 to Credit Agreement dated May 31, 2012 by and among Shuffle Master, Inc., Wells Fargo Bank, National Association and the lenders on the signature page thereto (Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed May 31, 2012).
10.2	[Deed of Mutual Termination dated June 25, 2012 by and among SHFL Holdings (Gibraltar) Limited, Shuffle Master International, Inc., Shuffle Master, Inc., bwin.party services (Austria) GMBH and bwin.party digital entertainment plc.

31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
101.INS	XBRL Instance**
101.SCH	XBRL Taxonomy Extension Schema**
101.CAL	XBRL Taxonomy Extension Calculation**
101.DEF	XBRL Taxonomy Extension Definition**
101.LAB	XBRL Taxonomy Extension Labels**
101.PRE	XBRL Taxonomy Extension Presentation**

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

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

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: September 10, 2012

	/s/ MICHAEL GAVIN ISAACS
	Michael Gavin Isaacs
	Chief Executive Officer
	(Principal Executive Officer)

	/s/ LINSTER W. FOX
	Linster W. Fox
	Chief Financial Officer
	(Principal Financial Officer)