UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC.  20549









FORM
10-K





FOR
ANNUAL AND TRANSITION REPORTS


PURSUANT
TO SECTIONS 13 OR 15(d) OF THE


SECURITIES
AND EXCHANGE ACT OF 1934


(Mark
One)


x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
the fiscal year ended December 31, 2008


or





 ̈
            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: 0-21121


______________________________________________________________________









______________________________________________________________________


(Exact
name of registrant as specified in its charter)





Delaware
              
              06-1456680(State
      or other jurisdiction of incorporation or organization)
              
              (I.R.S.
      Employer Identification No.)





One
      Hamden Center, 2319 Whitney Avenue, Suite 3B, Hamden,
    CT
              
              06518(Address
      of principal executive offices)
              
              (Zip
      Code)


Registrant's
telephone number, including area code 203-859-6800


______________________________________________________________________


Securities
registered pursuant to Section 12(b) of the Act:


Title
      of Each Class
              
              Name
      of Exchange on which RegisteredCommon
      Stock, par value $.01 per share
              
              NASDAQ
      Global Market


______________________________________________________________________


Securities
registered pursuant to Section 12(g) of the Act: None





Indicate
by check mark if the registrant is a well-known seasoned issuer (as defined in
Rule 405 of the Securities Act).


Yes   o No   ý





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Securities Act.


Yes o No   ý





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





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




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.





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





Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).


Yes   o No   ý





As of
June 30, 2008 the aggregate market value of the registrant's issued and
outstanding voting stock held by non-affiliates of the registrant was
$72,000,000.





As of
February 28, 2009, the registrant had outstanding 9,303,238shares of common stock,
$0.01 par value.





DOCUMENTS
INCORPORATED BY REFERENCE





Proxy
Statement for the Annual Meeting of Shareholders to be held on May 28,
2009 – Part III (Items 10-14).





Table of Contents





TRANSACT TECHNOLOGIES
INCORPORATED





INDEX





PART
      I.Item
      1.
                Business
                1Item
      1A.
                Risk
      Factors
                5Item
      1B.
                Unresolved Staff
      Comments
                10Item
      2.
                Properties
                10Item
      3.
                Legal
      Proceedings
                10Item
      4.
                Submission of Matters
      to a Vote of Security Holders
                10PART
      II.Item
      5.
                Market for
      Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                10Item
      6.
                Selected Financial
      Data
                12Item
      7.
                Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                12Item
      7A.
                Quantitative and
      Qualitative Disclosures About Market Risk
                26Item
      8.
                Financial Statements
      and Supplementary Data
                26Item
      9.
                Changes in and
      Disagreements with Accountants on Accounting and Financial
      Disclosure
                26Item
      9A.
                Controls and
      Procedures
                27Item
      9B.
                Other
      Information
                27PART
      III.Item
      10.
                Directors, Executive
      Officers and Corporate Governance
                27Item
      11.
                Executive
      Compensation
                28Item
      12.
                Security Ownership of
      Certain Beneficial Owners and Management and Related Stockholder
      Matters
                28Item
      13.
                Certain Relationships
      and Related Transactions, and Director
    Independence
                28Item
      14.
                Principal Accounting
      Fees and Services
                28PART
      IV.Item
      15.
                Exhibits and Financial
      Statement Schedules
                28SIGNATURESSignatures
                29CONSOLIDATED
      FINANCIAL STATEMENTS AND SCHEDULEIndex to Consolidated
      Financial Statements and Schedule
                F-1EXHIBITSIndex to
      Exhibits





Table of Contents





PART I




Item 1. Business.





The
Company


TransAct
Technologies Incorporated (“TransAct” or the “Company”) was incorporated in June
1996 and began operating as a stand-alone business in August 1996 as a spin-off
of the printer business that was formerly conducted by certain subsidiaries of
Tridex Corporation.  We completed an initial public offering on August
22, 1996.





TransAct
designs, develops, assembles, markets and services world-class transaction
printers under the Epic andIthaca® brand
names.  Known and respected worldwide for innovative designs and
real-world service reliability, our thermal, inkjet and impact printers generate
top-quality transaction records such as receipts, tickets, coupons, register
journals and other documents.  We focus on three core markets: (1)
banking and point-of-sale (“POS”), (2) casino and gaming and (3)
lottery.  We sell our products to original equipment manufacturers
("OEMs"), value-added resellers ("VARs"), selected distributors, as well as
directly to end-users.  Our product distribution spans across the
Americas, Europe, the Middle East, Africa, Asia, Australia, the Caribbean
Islands and the South Pacific.  In addition, we have a strong focus on
the after-market side of the business, through
our TransAct Services Group,with a growing commitment to printer
service, supplies and spare parts.  We have one primary operating
facility located in Ithaca, NY, our printer sales headquarters and western
region service center in Las Vegas, NV, an eastern region service center located
in New Britain, CT, a European sales and service center in the United Kingdom,
and a sales office located in Macau and two other sales offices located in the
United States.  Our executive offices are located at
One Hamden Center, 2319 Whitney Avenue, Suite 3B, Hamden, CT, 06518,
with a telephone number of (203) 859-6800.





Financial
Information about Segments


We have
determined that we operate in one reportable segment, the design, development,
assembly and marketing of transaction printers and printer-related service,
supplies and spare parts.





Products
and Services


Printers


TransAct
designs, develops, assembles and markets a broad array of transaction-based
printers utilizing inkjet, thermal and impact printing technology for
applications requiring up to 60 character columns, primarily in the banking,
POS, casino, gaming and lottery markets.  Our printers are
configurable and offer customers the ability to choose from a variety of
features and functions.  Options typically include interface
configuration, paper cutting devices, paper handling capacities and cabinetry
color.  In addition to our configurable printers, we design and
assemble custom printers for certain OEM customers.  In collaboration
with these customers, we provide engineering and manufacturing expertise for the
design and development of specialized printers.





Banking
and POS:  Our banking and POS printers include hundreds of optional
configurations that can be selected to meet particular customer
needs.  We believe that this is a significant competitive strength, as
it allows us to satisfy a wide variety of printing applications that our
customers request.  In the banking market, we sell printers that are
used by banks, credit unions and other financial institutions to print and/or
validate receipts at bank teller stations.  In the POS market, we sell
several models of printers utilizing inkjet, thermal and impact printing
technology.  Our printers are used primarily by retailers in the
restaurant (including fine dining, casual dining, and fast food), hospitality,
and specialty retail industries to print receipts for consumers, validate
checks, or print on other inserted media.





Lottery:  We
supply lottery printers to Lottomattica’s GTECH Corporation (“GTECH”),our largest customer and the world’s largest provider of lottery
terminals, with an approximate 70% market share.  These printers are
designed for high-volume, high-speed printing of lottery tickets for various
lottery applications.





Casino
and gaming:  We sell several models of printers used in slot machines
and video lottery terminals that print tickets or receipts instead of issuing
coins at casinos, racetracks and other gaming establishments
worldwide.  These printers utilize thermal printing technology and can
print tickets or receipts in monochrome or two-color (depending upon the model),
and offer various other features such as jam resistant bezels and a dual port
interface that will allow casinos to print coupons/promotions.  In
addition, we sell printers using thermal and impact printing technology for use
in non-casino establishments, including game types such as Amusements with
Prizes (“AWP”), Skills with Prizes (“SWP”), Video lottery terminals (“VLT”),
Fixed Odds Betting Terminals (“FOBT”) and other off-premise gaming type machines
around the world.





TransAct
Services Group


Through
our TransAct Services Group, we proactively market the sale of consumable
products (including inkjet cartridges, ribbons,
receipt paper and other transaction supplies), replacement parts and
maintenance services for all of our products and certain competitor’s
products.  Our maintenance services include the sale of extended
warranties, multi-year maintenance contracts, 24-hour guaranteed replacement
product service TransAct XpressSM,
and other repair services for our printers.  Within the United States,
we provide repair services through our eastern region service center in New
Britain, CT and our western region service center in Las Vegas,
NV.  Internationally, we provide repair services through our European
service center located in Doncaster, United Kingdom, and through partners
strategically located around the world.





1





Table of Contents





We also
provide customers with telephone sales and technical support, and a personal
account representative to handle orders, shipping and general
information.  Technical and sales support personnel receive training
on all of our manufactured products and our services.





In
addition to personalized telephone and technical support, we also market and
sell consumable products 24 hours a day, seven days a week, via our online
webstore www.transactsupplies.com.





Product
Warranty


Our
printers generally carry up to a two-year limited warranty against defects in
material and workmanship.  Defective equipment may be returned to any
of our service centers, or our assembly facility in Ithaca, NY for
newly-released printers only, for repair or replacement during the applicable
warranty period.





Production,
Manufacturing and Sources and Availability of Raw Materials


We design
our products to optimize product performance, quality, reliability and
durability.  These designs combine cost efficient materials, sourcing
and assembly methods with high standards of workmanship.  During 2008,
we began a program to transfer final assembly for approximately 70% of our total
printer production to a third-party contract manufacturer in China by the end of
2009.   As of December 31, 2008, we had transferred approximately
30% of our total production to this contract manufacturer, and we expect the
remaining 40% to be transferred during 2009.  Over the remainder of
2009, we will continue to finalize assembly for some of our products in our
Ithaca, NY facility largely on a configure-to-order basis using components and
subassemblies that have been sourced from vendors or contract manufacturers
around the world.  However, we plan to decrease in-house printer
production in Ithaca, NY by printer model as the assembly of that printer model
is transferred to our contract manufacturer.





We
procure component parts and subassemblies for use in the assembly of our
products in Ithaca, NY.  Critical component parts and subassemblies
include inkjet, thermal and impact printheads, printing/cutting mechanisms,
power supplies, motors, injection molded plastic parts, circuit boards and
electronic components, which are obtained from domestic and foreign suppliers at
competitive prices.  With the transition of 70% of our production to
our contract manufacturer, during 2009 we expect purchases of component parts
will decline, while purchases of fully-assembled printers will increase, as
in-house printer assembly in Ithaca, NY declines and assembly by our contract
manufacturer increases.  Furthermore, during this transition, we
expect inventories to temporarily rise, as we plan to increase our stocking
levels to ensure product availability to meet our customers’
demands.  We typically strive to maintain more than one source for our
component parts, subassemblies and fully assembled printers to reduce the risk
of parts shortages or unavailability.  However, we could experience
temporary disruption if certain suppliers ceased doing business with us, as
described below.





We
currently buy substantially all of our thermal print mechanisms, an important
component of our thermal printers, and fully assembled printers for several of
our printer models, from one foreign contract manufacturer.  Although
we believe that other contract manufacturers could provide similar thermal print
mechanisms or fully assembled printers, on comparable terms, a change in
contract manufacturers could cause a delay in manufacturing and possible loss of
sales, which may have a material adverse effect on our operating
results.





Hewlett-Packard
Company (“HP”) is the sole supplier of inkjet cartridges that are used in all of
our inkjet printers.  The loss of the supply of HP inkjet cartridges
would have a material adverse effect on the sale of our inkjet
printers.  Prior to February 2006, we had a supply agreement with HP
to purchase inkjet cartridges at fixed prices.  This agreement expired
on February 1, 2006 and was not renewed, as HP informed us that they no longer
maintain supply agreements for these inkjet cartridges; however, we continue to
purchase inkjet cartridges from HP.  Although we no longer have a
supply agreement with HP, our relationship with HP remains strong and we have no
reason to believe that HP will discontinue its supply of inkjet cartridges to
us.  The inkjet cartridges we purchase from HP are used not only in
our inkjet printers for the banking and POS market, but also in other
manufacturer’s printing devices across several other markets.





Okidata
Americas, Inc. (“Okidata”) is the sole supplier for an impact printer component
kit consisting of a printhead, control board and carriage (the “Oki Kit”) that
is used in all of our Ithacaâbrand impact
printers.  The loss of the supply of Oki Kits would have a material
adverse effect on TransAct.  However, sales of impact printers
continue to decline as sales of these printers are replaced by sales of thermal
and inkjet printers.  As such,
we believe that any possible loss of supply of Oki Kits will continue to have
less of an impact on TransAct in 2009 and beyond.  Although we do not
have a supply agreement with Okidata, our relationship with Okidata remains
strong and we have no reason to believe that Okidata will discontinue its supply
of Oki Kits to us during 2009 or that their terms to us will be any less
favorable than they have been historically.





2





Table of Contents





Patents
and Proprietary Information


We have
significantly expanded our patent portfolio since 2002, and expect to continue
to do so in the future.  We also believe our patent portfolio could
provide additional opportunities to license our intellectual property in the
future.  We hold 23 United States and 19 foreign patents and have 8
United States and 72 foreign patent applications pending pertaining to our
products.  The duration of these patents range from 10 to 18
years.  The expiration of any individual patent would not have a
significant negative impact on our business.  We regard certain
manufacturing processes and designs to be proprietary and attempt to protect
them through employee and third-party nondisclosure agreements and similar
means.  It may be possible for unauthorized third parties to copy
certain portions of our products or to reverse engineer or otherwise obtain and
use, to our detriment, information that we regard as
proprietary.  Moreover, the laws of some foreign countries do not
afford the same protection to our proprietary rights as do United States laws.
There can be no assurance that legal protections relied upon by the Company to
protect our proprietary position will be adequate or that our competitors will
not independently develop technologies that are substantially equivalent or
superior to our technologies.





Seasonality


Retailers
typically reduce purchases of new POS equipment in the fourth quarter, due to
the increased volume of consumer transactions in that holiday period, and our
sales of printers in the POS market historically have increased in the third
quarter and decreased in the fourth quarter.  Similarly, installations
of lottery terminals are typically reduced in the fourth quarter, resulting in
decreased sales of lottery printers.





Certain
Customers


We
currently have an ongoing OEM purchase agreement, as amended in February 2006
(the “GTECH Thermal Printer Agreement”) with GTECH that provides for the sale of
thermal on-line lottery printers and spare parts, at fixed prices, through June
28, 2012.  During 2008, sales to GTECH accounted for 28% of our net
sales, and no other customer individually accounted for more than 10% of total
net product sales.  Firm purchase orders for printers under the GTECH
Thermal Printer Agreement may be placed as required by GTECH.  Prior
to this agreement, we had a purchase agreement with GTECH that provided for the
sale of impact on-line lottery printers and spare parts through December 31,
2004.  Because our new thermal on-line lottery printer is a
replacement for our impact on-line printer, we do not expect any further
shipments of impact on-line lottery printers.  However, we do expect
to continue to sell spare parts to GTECH for the remaining installed base of
impact on-line lottery printers, although we expect such sales to decline as the
installed base of impact on-line lottery printers are replaced with our thermal
printer.





Backlog


Our
backlog of firm orders was approximately $9,994,000 as of February 28,
2009, compared to $9,123,000 as of February 29, 2008.  Based on
customers’ current delivery requirements, we expect to ship our entire current
backlog during 2009.





Competition


The
market for transaction-based printers is extremely competitive, and we expect
such competition to continue in the future. We compete with a number of
companies, many of which have greater financial, technical and marketing
resources than us. We believe our ability to compete successfully depends on a
number of factors both within and outside our control, including durability,
reliability, quality, design capability, product customization, price, customer
support, success in developing new products, manufacturing expertise and
capacity, supply of component parts and materials, strategic relationships with
suppliers, the timing of new product introductions by us and our competitors,
general market, economic and political conditions and, in some cases, the
uniqueness of our products.





In the
banking and POS market, our major competitor is Epson America, Inc., which holds
a dominant market position of the POS markets into which we sell.  We
also compete, to a much lesser extent, with Transaction Printer Group, Star
Micronics America, Inc., Citizen -- CBM America Corporation, Pertech Resources,
Inc., Addmaster, and Samsung/Bixolon.  Certain competitors of ours
have greater financial resources, lower costs attributable to higher volume
production and sometimes offer lower prices than us.





In the
lottery market (consisting principally of on-line lottery transaction printing),
we hold a leading position, based largely on our long-term purchase agreement
with GTECH, which holds approximately 70% market share of the worldwide on-line
lottery market.  We compete in this market based solely on our ability
to provide specialized, custom-engineered products to GTECH.





In the
casino and gaming market (consisting principally of slot machine and video
lottery terminal transaction printing), we compete with several companies
including FutureLogic, Inc., Nanoptix, Inc., Custom Engineering SPA and
others.  Certain of our products sold for casino and gaming
applications compete based upon our ability to provide highly specialized
products, custom engineering and ongoing technical support.





The
TransAct Services Group business is highly fragmented, and we compete with
numerous competitors of various sizes depending on the geographic
area.





3





Table of Contents





Our
strategy for competing in our markets is to continue to develop new products and
product line extensions, to increase our geographic market penetration, to take
advantage of strategic relationships, and to lower product costs by sourcing
certain products overseas.  Although we believe that our products,
operations and relationships provide a competitive foundation, there can be no
assurance that we will compete successfully in the future.  In
addition, our products utilize certain inkjet, thermal and impact printing
technology.  If other technologies, or variations to existing
technologies were to evolve or become available to us, it is possible that we
would incorporate these technologies into our
products.  Alternatively, if such technologies were to evolve or
become available to our competitors, our products could become obsolete, which
would have a significant negative impact on our business.





Research
and Development Activities


We spent
approximately $2,942,000, $3,129,000 and $2,824,000 in 2008, 2007 and 2006,
respectively, on engineering, design and product development efforts in
connection with specialized engineering and design to introduce new products and
to customize existing products.





Environment


We are
not aware of any material noncompliance with federal, state and local provisions
that have been enacted or adopted regulating the discharge of materials into the
environment, or otherwise relating to the protection of the
environment.





Employees


As of
February 28, 2009, TransAct and our subsidiaries employed 151 persons, of whom
150 were full-time and 1 was a temporary employee.  None of our
employees are unionized, and we consider our relationships with our employees to
be good.





Financial
Information About Geographic Areas


We have
foreign operations primarily from TransAct Technologies Ltd., a wholly-owned
subsidiary located in the United Kingdom, which had sales to its customers of
$120,000, $2,121,000 and $2,722,000 in 2008, 2007 and 2006,
respectively.  We had export sales from our domestic operations of
approximately $10,006,000, $8,674,000 and $11,416,000 in 2008, 2007 and 2006,
respectively.  Total international sales, which include sales from our
foreign subsidiary and export sales from our domestic operations, were
approximately $10,126,000, $10,795,000 and $14,138,000 in 2008, 2007 and 2006,
respectively.





Additional
Information


We make
available free of charge through our internet website, www.transact-tech.com,
our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with or furnished to the
SEC.





We
maintain a Code of Business Conduct that includes our code of ethics that is
applicable to all employees, including our Chief Executive Officer, Chief
Financial Officer and Controller.  This Code, which requires continued
observance of high ethical standards such as honesty, integrity and compliance
with the law in the conduct of our business, is available for public access on
our internet website.  Any person may request a copy of our Code of
Business Conduct free of charge by calling (203) 859-6800.





Executive
Officers of the Registrant


The
following list is included as an unnumbered item in Part I of this Report in
lieu of being included in the Proxy Statement for the Annual Meeting of
Stockholders to be held on May 28, 2009.





The
following is a list of the names and ages of all executive officers of the
registrant, indicating all positions and offices with the registrant held by
each such person and each person’s principal occupations and employment during
at least the past five years.





Name
                    
                    Age
                    
                    PositionBart
      C. Shuldman
                    
                    51
                    
                    Chairman
      of the Board, President and Chief Executive OfficerSteven
      A. DeMartino
                    
                    39
                    
                    Executive
      Vice President, Chief Financial Officer, Treasurer and
      SecretaryMichael
      S. Kumpf
                    
                    59
                    
                    Executive
      Vice President-EngineeringJames
      B. Stetson
                    
                    52
                    
                    Senior
      Vice President and Business Manager of the TransAct Services
      GroupTracey
      S. Chernay
                    
                    49
                    
                    Senior
      Vice President-Sales and MarketingAndrew
      Hoffman
                    
                    51
                    
                    Senior
      Vice
President-Operations





Bart C.
Shuldman has been Chief Executive Officer, President and a Director of the
Company since its formation in June 1996.  In February 2001, Mr.
Shuldman was elected Chairman of the Board.





Steven A.
DeMartino was named as TransAct’s Executive Vice President, Chief Financial
Officer, Treasurer and Secretary on June 1, 2004.  Previously, Mr.
DeMartino served as Senior Vice President, Finance and Information Technology
from October 2001 to May 2004, Vice President and Corporate Controller from
January 1998 to October 2001, and Corporate Controller from August 1996 to
December 1997.  Mr. DeMartino is a certified public
accountant.





4





Table of Contents





Michael
S. Kumpf was appointed Executive Vice President of Engineering in March
2002.  He served as Senior Vice President, Engineering from June 1996
to March 2002.





James B.
Stetson was appointed Senior Vice President and Business Manager of TransAct
Services Group in January 2005.  Previously, Mr. Stetson held the
position of Executive Vice President of Sales and Marketing from February 2000
to December 2004, and Vice President of Latin American Sales from October 1997
to February 2000.





Tracey S.
Chernay was appointed Senior Vice President, Sales and Marketing in June 2007,
with responsibility for the sales and marketing of all TransAct printer products
worldwide.  Previously Ms. Chernay served as Sr. Vice President,
Marketing & Sales, POS & Banking with the Company from July 2006 to June
2007, and joined TransAct in May of 2005 as Senior Vice President,
Marketing.  Prior to joining TransAct, Ms. Chernay was employed with
Xerox Corporation where she held the role of Manager, Worldwide Marketing since
2003, and Manager, Sales Operations from 2000 to 2002.  She joined
Xerox Corporation in 1983.





Andrew
Hoffman was appointed Senior Vice President, Operations for TransAct worldwide
in November 2004.  He served as Vice President, Operations from
September 1994 to November 2004.




Item 1A. Risk Factors


Investors
should carefully consider the risks, uncertainties and other factors described
below, as well as other disclosures in Management’s Discussion and Analysis of
Financial Condition and Results of Operations, because they could have a
material adverse effect on our business, financial condition, operating results,
and growth prospects.  The risks described below and incorporated by
reference are not the only ones facing our Company.  Additional risks
not known to us now or that we currently deem immaterial may also impair our
business operations.





We assume
no obligation (and specifically disclaim any such obligation) to update these
Risk Factors or any other forward-looking statements contained in this Annual
Report to reflect actual results, changes in assumptions or other factors
affecting such forward-looking statements, except as required by
law.





Current
economic conditions and market disruptions may adversely affect our business and
results of operations.


As widely
reported, financial markets throughout the world have been experiencing extreme
disruption in recent months, including, among other things, extreme volatility
in security prices, severely diminished liquidity and credit availability,
rating downgrades of certain investments and declining valuations of others,
failure and potential failures of major financial institutions and unprecedented
government support of financial institutions.  The financial, casino
and gaming industries have been more severely impacted by the current economic
downturn than other industries and this may lead our customers in these
industries to reduce, or discontinue, spending on our products which could
adversely impact our business. These developments and the related general
economic downturn may adversely impact our business and financial condition in a
number of additional ways, including impacts beyond those typically associated
with other recent downturns in the U.S. and foreign economies.  The
slowdown could lead to reduced capital spending by end users, which could
adversely affect our product sales.  The current tightening of credit
in financial markets and the general economic downturn may adversely affect the
ability of our customers, suppliers, outsource manufacturer and channel partners
(e.g., distributors and resellers) to obtain financing for significant purchases
and operations and to perform their obligations with the Company.  The
tightening could result in a decrease in or cancellation of orders for our
products and services, could negatively impact our ability to collect our
accounts receivable on a timely basis, could result in additional reserves for
uncollectible accounts receivable being required, and in the event of the
contraction in our sales, could lead to excess inventory and require additional
reserves for obsolescence.  Significant volatility and fluctuations in
the rates of exchange for the U.S. dollar against foreign currencies could
negatively impact our customer pricing and adversely affect our
results.





We are
unable to predict the duration and severity of the current economic downturn and
disruption in financial markets or their effects on our business and results of
operations, but the consequences may be materially adverse and more severe than
other recent economic slowdowns.





Our
success will depend on our ability to sustain and manage growth.


As part
of our business strategy, we intend to pursue an aggressive growth
strategy.  Assuming this growth occurs, it will require the expansion
of distribution relationships in international markets, the successful
development and marketing of new products, expanded customer service and
support, and the continued implementation and improvement of our operational,
financial and management information systems.





To the
extent that we seek growth through acquisitions, our ability to manage our
growth will also depend on our ability to integrate businesses that have
previously operated independently.  We may not be able to achieve this
integration without encountering difficulties or experiencing the loss of key
employees, customers or suppliers.  It may be difficult to design and
implement effective financial controls for combined operations and differences
in existing controls for each business may result in weaknesses that require
remediation when the financial controls and reporting functions are
combined.




5





Table of Contents


There can
be no assurance that we will be able to successfully implement our growth
strategy, or that we can successfully manage expanded operations.  As
the Company expands, we may from time to time experience constraints that will
adversely affect our ability to satisfy customer demand in a timely
fashion.  Failure to manage growth effectively could adversely affect
our results of operations and financial condition.





In
the lottery market, we have been dependent on sales to one large customer; the
loss of this customer or reduction in orders from this customer could materially
affect our sales.


We expect
that sales to one large customer will continue to represent a significant
percentage of our net sales for the foreseeable future.  A reduction,
delay or cancellation in orders from this customer, including reductions or
delays due to market, economic, or competitive conditions in the industries in
which we serve, could have a material adverse effect upon our results of
operations.





We
rely on resellers to sell our products and services.


We use a
variety of distribution channels, including OEMs and distributors, to market our
products.  We may be adversely impacted by any conflicts that could
arise between and among our various sales channels.





Our
dependence upon resellers exposes us to numerous risks, including:





·
            loss
      of channel and the ability to bring new products to
  market;


·
            concentration
      of credit risk, including disruption in distribution should the resellers’
      financial condition deteriorate;


·
            reduced
      visibility to end user demand and pricing issues which makes forecasting
      more difficult;


·
            resellers
      leveraging their buying power to change the terms of pricing, payment and
      product delivery schedules; and


·
            direct
      competition should a reseller decide to manufacture printers internally or
      source printers from a competitor.





We cannot
guarantee that resellers will not reduce, delay or eliminate purchases from us,
which could have a material adverse effect upon the business, consolidated
results of operations and financial condition.





Our
operating results and financial condition may fluctuate.


Our
operating results and financial condition may fluctuate from quarter to quarter
and year to year and are likely to continue to vary due to a number of factors,
many of which are not within our control.  If our operating results do
not meet the expectations of securities analysts or investors, who may derive
their expectations by extrapolating data from recent historical operating
results, the market price of our common stock will likely
decline.  Fluctuations in our operating results and financial
condition may be due to a number of factors, including, but not limited to,
those identified throughout this “Risk Factors” section:


·
              market
      acceptance of our products, both domestically and
      internationally;
 ·
              development
      of new competitive printers by
others;
 ·
              our
      responses to price competition;
 ·
              our
      level of research and development
activities;
 ·
              changes
      in the amount that we spend to develop, acquire or license new products,
      consumables, technologies or
businesses;
 ·
              changes
      in the amount we spend to promote our products and
    services;
 ·
              changes
      in the cost of satisfying our warranty obligations and servicing our
      installed base of printers;
 ·
              delays
      between our expenditures to develop and market new or enhanced printers
      and consumables and the generation of sales from those
      products;
 ·
              the
      geographic distribution of our
sales;
 ·
              availability
      of third-party components at reasonable
prices;
 ·
              general
      economic and industry conditions, including changes in interest rates
      affecting returns on cash balances and investments, that affect customer
      demand;
 ·
              severe
      weather events (such as hurricanes) that can disrupt or interrupt the
      operation of our customers or suppliers facilities;
  and
 ·
              changes
      in accounting rules.













Due to
all of the foregoing factors, and the other risks discussed in this report,
quarter-to-quarter comparisons of our operating results may not be an indicator
of future performance.





We
depend on key personnel, the loss of which could materially impact our
business.


Our
future success will depend in significant part upon the continued service of
certain key management and other personnel and our continuing ability to attract
and retain highly qualified managerial, technical and sales and marketing
personnel.  There can be no assurance that we will be able to recruit
and retain such personnel.  The loss of either Bart C. Shuldman, the
Company's Chairman of the Board, President and Chief Executive Officer, or
Steven A. DeMartino, Executive Vice President, Chief Financial Officer,
Treasurer and Secretary, or the loss of certain groups of key employees, could
have a material adverse effect on our results of operations.





6





Table of Contents





Our
stock price may fluctuate significantly.


The
market price of our common stock could fluctuate significantly in response to
variations in quarterly operating results and other factors, such
as:





·
            changes
      in our business, operations or
prospects;


·
            developments
      in our relationships with our
customers;


·
            announcements
      of new products or services by us or by our
  competitors;


·
            announcement
      or completion of acquisitions by us or by our
  competitors;


·
            changes
      in existing or adoption of additional government
    regulations;


·
            unfavorable
      or reduced analyst coverage; and


·
            prevailing
      domestic and international market and economic
  conditions.





In
addition, the stock market has experienced significant price fluctuations in
recent years.  Broad market fluctuations, general economic conditions
and specific conditions in the industries in which we operate may adversely
affect the market price of our common stock.





Limited
trading volume of our capital stock may contribute to its price
volatility.


Our
common stock is traded on the NASDAQ Global Market.  During the twelve
months ended December 31, 2008, the average daily trading volume for our common
stock as reported by the NASDAQ Global Market was approximately 66,000
shares.  We are uncertain whether a more active trading market in our
common stock will develop.  In addition, many investment banks no
longer find it profitable to provide securities research on micro-cap and
small-cap companies.  If any analyst were to discontinue coverage of
our common stock, our trading volume may be further reduced.  As a
result, relatively small trades may have a significant impact on the market
price of our common stock, which could increase the volatility and depress the
price of our common stock.





Future
sales of our common stock may cause our stock price to decline.


In the
future, we may sell additional shares of our common stock in public or private
offerings, and we may also issue additional shares of our common stock to
finance future acquisitions.  Shares of our common stock are also
available for future sale pursuant to stock options that we have granted to our
employees, and in the future we may grant additional stock options and other
forms of equity compensation to our employees.  Sales of our common
stock or the perception that such sales could occur may adversely affect
prevailing market prices for shares of our common stock and could impair our
ability to raise capital through future offerings.





If
we are unable to enforce our patents or if it is determined that we infringe
patents held by others it could damage our business.


Prosecuting
and defending patent lawsuits is very expensive. We are committed to
aggressively asserting and defending our technology and related intellectual
property, which we have spent a significant amount of money to
develop.  These factors could cause us to become involved in new
patent litigation in the future. The expense of prosecuting or defending these
future lawsuits could also have a material adverse effect on our business,
financial condition and results of operations.





If we
were to lose a patent lawsuit in which another party is asserting that our
products infringe its patents, we would likely be prohibited from marketing
those products and could also be liable for significant damages. Either or both
of these results may have a material adverse effect on our business, financial
condition and results of operations. If we lose a patent lawsuit in which we are
claiming that another party’s products are infringing our patents and thus, are
unable to enforce our patents, it may have a material adverse effect on our
business, financial condition and results of operations.  In addition
to disputes relating to the validity or alleged infringement of other parties'
rights, we may become involved in disputes relating to our assertion of our own
intellectual property rights. Whether we are defending the assertion of
intellectual property rights against us or asserting our intellectual property
rights against others, intellectual property litigation can be complex, costly,
protracted, and highly disruptive to business operations by diverting the
attention and energies of management and key technical personnel. Plaintiffs in
intellectual property cases often seek injunctive relief, and the measures of
damages in intellectual property litigation are complex and often subjective or
uncertain. Thus, any adverse determinations in this type of litigation could
subject us to significant liabilities and costs. During the course of these
lawsuits there may be public announcements of the results of hearings, motions,
and other interim proceedings or developments in the litigation. If securities
analysts or investors perceive these results to be negative, it could harm the
market price of our stock.





The
inability to protect intellectual property could harm our reputation, and our
competitive position may be materially damaged.


Our
intellectual property is valuable and provides us with certain competitive
advantages. Copyrights, patents, trade secrets and contracts are used to protect
these proprietary rights. Despite these precautions, it may be possible for
third parties to copy aspects of our products or, without authorization, to
obtain and use information which we regard as trade secrets.




7





Table of Contents




Infringement
on the proprietary rights of others could put us at a competitive disadvantage,
and any related litigation could be time consuming and costly.
 Third
parties may claim that we violated their intellectual property rights. To the
extent of a violation of a third party’s patent or other intellectual property
right, we may be prevented from operating our business as planned and may be
required to pay damages, to obtain a license, if available, or to use a
non-infringing method, if possible, to accomplish our objectives. Any of these
claims, with or without merit, could result in costly litigation and divert the
attention of key personnel. If such claims are successful, they could result in
costly judgments or settlements.
 We
compete in a highly competitive market, which is likely to become more
competitive. Competitors may be able to respond more quickly to new or emerging
technology and changes in customer requirements.


We face
significant competition in developing and selling our printers and
services.  Principal competitors have substantial marketing,
financial, development and personnel resources.  To remain
competitive, we believe we must continue to provide:





·
            Technologically
      advanced printers that satisfy the user
demands,


·
            Superior
      customer service,


·
            High
      levels of quality and reliability,
and


·
            Dependable
      and efficient distribution
networks.





We cannot
ensure we will be able to compete successfully against current or future
competitors.  Increased competition in printers or supplies may result
in price reductions, lower gross profit margins and loss of market share, and
could require increased spending on research and development, sales and
marketing and customer support.  Some competitors may make strategic
acquisitions or establish cooperative relationships with suppliers or companies
that produce complementary products.  Any of these factors could
reduce our earnings.





We
have outsourced a large portion of the assembly of our printers to a contract
manufacturer and will be dependent on them for the manufacturing of such
printers.  A failure by this contract manufacturer , or any disruption
in such manufacturing, may adversely affect our business results.


In an
effort to achieve additional cost savings and operation benefits, we have
continued to outsource the manufacturing and assembly of our printers to a
contract manufacturer in China.





However,
to the extent we rely on a third party service provider for manufacturing
services, we may incur increased business continuity risks.  We will
no longer be able to exercise control over the assembly of certain of our
printers or any related operations or processes, including the internal controls
associated with operations and processes conducted and the quality of our
products assembled by the contract manufacturer.  If we are unable to
effectively develop and implement our outsourcing strategy, we may not realize
cost structure efficiencies and our operating and financial results could be
materially adversely affected.





In
addition, if the contract manufacturer experiences business difficulties or
fails to meet our manufacturing needs, then we may be unable to meet production
requirements, may lose revenue and may not be able to maintain relationships
with our customers.  Without the contract manufacturer continuing to
manufacture our products and the continuing operation of the contract
manufacturer’s facility, we will have limited means for the final
assembly of a majority of our printers until we are able to secure the
manufacturing capability at another facility or develop an alternative
manufacturing facility, which could be costly and time consuming and have a
material adverse effect on our operating and financial results.





The
increased elements of risk that arise from conducting certain operating
processes in foreign jurisdictions may lead to an increase in reputational
risk.





Although
we carry business interruption insurance to cover lost revenue and profits in an
amount we consider adequate, this insurance does not cover all possible
situations.  In addition, the business interruption insurance would not
compensate us for the loss of opportunity and potential adverse impact, both
short-term and long-term, on relations with our existing customers resulting
from our inability to produce products for them.





The
contract manufacturer has access to our intellectual property, which
increases the risk of infringement or misappropriation of this intellectual
property.





We
source some of our component parts and consumable products from sole source
suppliers; any disruptions may impact our ability to manufacture and sell our
products.


A
disruption in the supply of such component parts and consumable products could
have a material adverse effect on our operations and financial
results.




8





Table of Contents




We
sell a significant portion of our products internationally and purchase
important components from foreign suppliers.  These circumstances create a
number of risks.
 We sell a
significant amount of our products to customers outside the United States.
Shipments to international customers are expected to continue to account for a
material portion of net sales. Risks associated with sales and purchases outside
the United States include:
 
 ·
              Fluctuating
      foreign currency rates could restrict sales, or increase costs of
      purchasing, in foreign countries.
 ·
              Foreign
      governments may impose burdensome tariffs, quotas, taxes, trade barriers
      or capital flow restrictions.
 ·
              Political
      and economic instability may reduce demand for our products or put our
      foreign assets at risk.
 ·
              Restrictions
      on the export or import of technology may reduce or eliminate the ability
      to sell in or purchase from certain
markets.
 ·
              Potentially
      limited intellectual property protection in certain countries, such as
      China, may limit recourse against infringing products or cause us to
      refrain from selling in certain geographic
  territories.
 If
market conditions deteriorate or future results of operations are less than
expected, a valuation allowance may be required for all or a portion of our
deferred tax assets.


We
currently have significant deferred tax assets, which may be used to reduce
taxable income in the future. We assess the realization of these deferred tax
assets on a quarterly basis, and if we determine that it is more likely than not
that some portion of these assets will not be realized, an income tax valuation
allowance is recorded.  If market conditions deteriorate or future
results of operations are less than expected, or there is a change to applicable
tax rules, future assessments may result in a determination that it is more
likely than not that some or all of our net deferred tax assets are not
realizable. As a result, we may need to establish a valuation allowance for all
or a portion of our net deferred tax assets, which may have a material adverse
effect on our business, results of operations and financial
condition.





We
cannot provide any assurance that current laws, or any laws enacted in the
future, will not have a material adverse effect on our business.


Our
operations are subject to laws, rules, regulations, including environmental
regulations, government policies and other requirements in each of the
jurisdictions in which we conduct business.  Changes in laws, rules,
regulations, policies or requirements could result in the need to modify our
products and could affect the demand for our products, which may have an adverse
impact on our future operating results.  If we do not comply with
applicable laws, rules and regulations we could be subject to costs and
liabilities and our business may be adversely impacted.





Our
business could be adversely affected by actual or threatened terrorist attacks
or the related heightened security measures, military actions and other efforts
to combat terrorism.


Our
business could be adversely affected by actual or threatened terrorist attacks
or the related heightened security measures, military actions and other efforts
to combat terrorism.  It is possible that terrorist attacks could be
directed at important locations for the gaming industry. Heightened security
measures and other efforts to combat terrorism may also have an adverse effect
on the gaming industry by reducing tourism.  Any of these developments
could also negatively affect the general economy and consumer
confidence.  Any downturn in the economy or in the gaming industry in
particular could reduce demand for our products and adversely affect our
business and results of operations.  In addition, heightened security
measures may cause certain governments to restrict the import/export of goods,
which may have an adverse effect on our ability to buy/sell goods.





Additional
risks and uncertainties not presently known to us or that we currently believe
to be immaterial also may adversely impact our business. Should any risks or
uncertainties develop into actual events, these developments could have material
adverse effects on our business, financial condition, and results of
operations.





9





Table of Contents





Item 1B. Unresolved Staff Comments.


Not
applicable.





Item 2. Properties.


Our
corporate headquarters is currently located in Hamden, CT.  Our global
engineering and assembly facility is located in Ithaca,
NY.  We also maintain a facility in Las Vegas, NV that serves as our
global printer sales headquarters and western region service
center.  Our eastern region service center is currently located in New
Britain, CT.





Our
principal facilities as of December 31, 2008 are listed below:


Location
                Operations
      Conducted
                
                Size
                  (Approx. Sq.
      Ft.)
                
                Owned
      or
                  Leased
                Lease
      Expiration
                  DateHamden,
      Connecticut
                Executive
      offices and TransAct Services Group sales office
                
                
                11,100
                
                Leased
                April
      23, 2017Ithaca,
      New York
                Research,
      design and assembly facility
                
                
                73,900
                
                Leased
                June
      30, 2012Las
      Vegas, Nevada
                Service
      center and printer sales headquarters
                
                
                13,700
                
                Leased
                January
      31, 2010New
      Britain, Connecticut
                Service
      center
                
                
                11,500
                
                Leased
                April
      1, 2012Doncaster,
      United Kingdom
                Sales
      office and service center
                
                
                2,800
                
                Leased
                August
      1, 2009Georgia
      and New York
                Two
      regional sales offices
                
                
                300
                
                Leased
                Various113,300





We
believe that our facilities generally are in good condition, adequately
maintained and suitable for their present and currently contemplated
uses.





Item 3. Legal Proceedings.


None.





Item 4. Submission of Matters to a Vote of Security
Holders.


No
matters were submitted to a vote of security holders during the last quarter of
the year covered by this report.





PART II





Item 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities.


Our
common stock is traded on the NASDAQ Global Market under the symbol
TACT.  As of February 28, 2009, there were 575 holders of record of
the common stock.  The high and low sales prices of the common stock
reported during each quarter of the years ended December 31, 2008 and 2007 were
as follows:





Year
      Ended
              
              
              Year
      EndedDecember
      31, 2008
              
              
              December
      31, 2007High
              
              
              Low
              
              
              High
              
              
              LowFirst
      Quarter
              
              $
              5.67
              
              
              $
              3.58
              
              
              $
              10.10
              
              
              $
              6.75Second
      Quarter
              
              
              9.50
              
              
              
              4.80
              
              
              
              7.80
              
              
              
              5.95Third
      Quarter
              
              
              13.75
              
              
              
              6.84
              
              
              
              6.80
              
              
              
              5.70Fourth
      Quarter
              
              
              8.98
              
              
              
              3.25
              
              
              
              6.56
              
              
              
              4.70





No
dividends on common stock have been declared and we do not anticipate declaring
dividends in the foreseeable future.  Our credit agreement with TD
Banknorth, N.A. prohibits the payment of cash dividends on our common stock
for the term of the agreement.





Issuer
Purchases of Equity Securities


On March
25, 2005, the Board of Directors approved a stock repurchase program (“the Stock
Repurchase Program”).  Under the Stock Repurchase Program,
we were authorized to repurchase up to $10 million of our outstanding
shares of common stock from time to time in the open market over a three-year
period ending on March 25, 2008, depending on market conditions, share price and
other factors.





On
November 1, 2007, our Board of Directors approved an increase in our stock
repurchase authorization under the Stock Repurchase Program to $15 million from
$10 million.  In addition, the Board approved a two-year extension of
the Stock Repurchase Program to March 31, 2010.





10








Table of Contents





The
following table summarizes repurchases of our common stock in the quarter ended
December 31, 2008:





Period
                
                Total
      Number of Shares Purchased
                
                
                Average
      Price Paid per Share
                
                
                Total
      Number of Shares Purchased as Part of Publicly Announced Plans or
      Programs
                
                
                Approximate
      Dollar Value of Shares that May Yet Be Purchased under
      the Plans or ProgramsOctober
      1, 2008 – October 31, 2008
                
                
                -
                
                
                $
                -
                
                
                
                -
                
                
                $
                7,005,000November
      1, 2008 – November 30, 2008
                
                
                130,100
                
                
                $
                4.17
                
                
                
                130,100
                
                
                $
                6,462,000December
      1, 2008 – December 31, 2008
                
                
                -
                
                
                $
                -
                
                
                
                -
                
                
                $
                6,462,000Total
                
                
                130,100
                
                
                $
                4.17
                
                
                
                130,100





CORPORATE
PERFORMANCE GRAPH


The
following graph compares the cumulative total return on the Company’s Common
Stock from December 31, 2003 through December 31, 2008, with the CRSP Total
Return Index for the Nasdaq Stock Market (U.S.) and the Nasdaq Computer
Manufacturer Stocks Index. The graph assumes that $100 was invested on December
31, 2003 in each of the Company’s common stock, the CRSP Total Return Index for
the Nasdaq Stock Market (U.S.) and the Nasdaq Computer Manufacturer Stocks
Index, and that all dividends were reinvested.





COMPARISON
OF CUMULATIVE TOTAL RETURN AMONG


TRANSACT
TECHNOLOGIES INCORPORATED COMMON STOCK,


THE
CRSP TOTAL RETURN INDEX FOR THE NASDAQ STOCK MARKET (U.S.),


AND
THE NASDAQ COMPUTER MANUFACTURER STOCKS INDEX










12/31/03
                
                
                12/31/04
                
                
                12/31/05
                
                
                12/31/06
                
                
                12/31/07
                
                
                12/31/08TransAct
      Technologies Incorporated Common Stock
                
                $
                100.00
                
                
                $
                131.58
                
                
                $
                48.67
                
                
                $
                51.13
                
                
                $
                29.51
                
                
                $
                28.28CRSP
      Total Return Index for the Nasdaq Stock Market (U.S.)
                
                $
                100.00
                
                
                $
                108.83
                
                
                $
                111.14
                
                
                $
                122.12
                
                
                $
                132.43
                
                
                $
                63.87Nasdaq
      Computer Manufacturer Stocks Index
                
                $
                100.00
                
                
                $
                130.76
                
                
                $
                133.80
                
                
                $
                137.02
                
                
                $
                199.02
                
                
                $
                83.60





11





Table of Contents





Item 6. Selected Financial Data (in thousands, except per share
amounts).


The
following is summarized from our audited financial statements of the past five
years:





Year
      Ended December 31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Consolidated
      Statement of Operations Data:Net
      sales
                
                $
                62,207
                
                
                $
                48,766
                
                
                $
                64,328
                
                
                $
                51,091
                
                
                $
                59,847Gross
      profit
                
                
                20,950
                
                
                
                15,996
                
                
                
                22,365
                
                
                
                15,590
                
                
                
                22,042Operating
      expenses
                
                
                19,089
                
                
                
                19,751
                
                
                
                16,277
                
                
                
                15,366
                
                
                
                13,591Operating
      income (loss)
                
                
                1,861
                
                
                
                (3,755
                )
                
                
                6,088
                
                
                
                224
                
                
                
                8,451Net
      income (loss)
                
                
                1,444
                
                
                
                (2,274
                )
                
                
                3,916
                
                
                
                377
                
                
                
                5,458Net
      income (loss) per share:Basic
                
                
                0.16
                
                
                
                (0.24
                )
                
                
                0.41
                
                
                
                0.04
                
                
                
                0.55Diluted
                
                
                0.15
                
                
                
                (0.24
                )
                
                
                0.40
                
                
                
                0.04
                
                
                
                0.51





December
      31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Balance
      Sheet Data:Total
      assets
                
                $
                32,234
                
                
                $
                30,414
                
                
                $
                33,706
                
                
                $
                29,332
                
                
                $
                34,099Working
      capital
                
                
                15,051
                
                
                
                11,338
                
                
                
                16,643
                
                
                
                15,375
                
                
                
                20,511Shareholders’
      equity
                
                
                23,282
                
                
                
                21,608
                
                
                
                24,290
                
                
                
                21,257
                
                
                
                23,715





Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.


This
discussion should be read in conjunction with the Consolidated Financial
Statements and notes thereto.





Forward
Looking Statements


Certain
statements included in this report, including without limitation statements in
this Management’s Discussion and Analysis of Financial Condition and Results of
Operations, which are not historical facts are “forward-looking statements”
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements generally can be identified by the use of forward-looking
terminology, such as “may”, “will”, “expect”, “intend”, ”estimate”,
“anticipate”, “believe”, “project” or “continue” or the negative thereof or
other similar words.  All forward-looking statements involve risks and
uncertainties, including, but not limited to those listed in Item 1A of this
Annual Report.  Actual results may differ materially from those
discussed in, or implied by, the forward-looking statements.  The
forward-looking statements speak only as of the date of this report and we
assume no duty to update them.





Overview


2008 was
a year of positive achievements for TransAct as compared to
2007.  During 2008, we focused on and delivered sales growth and
delivered across the majority of our sales units, both domestically and
internationally.  During 2008, we shipped a record 196,000 printers,
led by record sales of our Epic 950® casino printer and significantly higher
sales of our online thermal lottery printer.  Our sales success was
also complemented by improved gross margin, operating margin and earnings per
share.





We
continue to focus on sales growth in our core markets (banking and POS, casino
and gaming, lottery, and in our TransAct Services Group) to drive increased
profitability.  During 2008, our total net sales increased by 28% to
approximately $62,207,000.  See the table below for a breakdown of our
sales by market.





Year
      ended
                    
                    
                    Year
      ended
                    
                    
                    Change(In
      thousands)
                    
                    December
      31, 2008
                    
                    
                    December
      31, 2007
                    
                    
                    $
                    
                    
                    
                    %Banking
      and POS
                    
                    $
                    11,866
                    
                    
                    
                    19.1
                    %
                    
                    $
                    11,046
                    
                    
                    
                    22.6
                    %
                    
                    $
                    820
                    
                    
                    
                    7.4
                    %Casino
      and gaming
                    
                    
                    22,299
                    
                    
                    
                    35.8
                    %
                    
                    
                    19,438
                    
                    
                    
                    39.9
                    %
                    
                    
                    2,861
                    
                    
                    
                    14.7
                    %Lottery
                    
                    
                    15,731
                    
                    
                    
                    25.3
                    %
                    
                    
                    5,900
                    
                    
                    
                    12.1
                    %
                    
                    
                    9,831
                    
                    
                    
                    166.6
                    %TransAct
      Services Group
                    
                    
                    12,311
                    
                    
                    
                    19.8
                    %
                    
                    
                    12,382
                    
                    
                    
                    25.4
                    %
                    
                    
                    (71
                    )
                    
                    
                    (0.6
                    )%Total
      net sales
                    
                    $
                    62,207
                    
                    
                    
                    100.0
                    %
                    
                    $
                    48,766
                    
                    
                    
                    100.0
                    %
                    
                    $
                    13,441
                    
                    
                    
                    27.6
                    %





12





Table of Contents





We
experienced an increase of approximately 7% in sales of Banking and POS printers
in 2008.  Sales of our Bankjet® line of inkjet bank teller printers
increased due to incremental sales of our first generation BANKjet® 1500 bank
teller printer as well as initial sales of our newly-launched, next generation
BANKjet® 2500 bank teller printer.  In addition to higher banking
printer sales, we also experienced a slight increase in sales from our line of
POS printers due primarily to sales of our two new printer products for
McDonalds – (1) the Ithaca® 8000 thermal receipt/label printer which will be
used to print either a receipt at the front counter or a label at the grill
station and (2) the Ithaca ® 8040 label printer which will be used to print
labels for McDonalds new combined beverage initiative.  Sales of our
legacy line of POS impact printers, as these printers continue to be replaced by
our newer thermal and inkjet printers.  We expect sales of our legacy
POS impact printers to continue to decline during 2009, as these printers
continue to be replaced by our newer thermal and inkjet
printers.





In our
casino and gaming market, our focus lies primarily in supplying printers for use
in slot machines at casinos and racetracks, as well as in other gaming devices
that print tickets or receipts, primarily in the United States, Europe and
Australia, as well as in the emerging Asian market, including
Macau.  During 2008, despite a weak domestic casino market, our
domestic casino and gaming printer sales increased by 12% from 2007 due largely
to International Game Technologies (“IGT”) awarding us default status as default
printer provider, which began in April of 2008.  Internationally,
casino and gaming printer sales increased by 20% to $7.9 million, largely due to
sales growth of our off-premise gaming printers to Europe.





On the
lottery side, we continue to hold a leading position based on our long-term
purchase agreement with Lottomatica’s GTECH Corporation (“GTECH”), our largest
customer and the world’s largest provider of lottery terminals, with
approximately a 70% market share.  GTECH has been our customer since
1995, and we continue to maintain a good relationship with them.  In
fact, our contract with GTECH continues through 2012.  Currently, we
fulfill substantially all of GTECH’s printer requirements for lottery terminal
installations and upgrades worldwide.  During 2008, we experienced a
record level of sales compared to historical sales levels from GTECH, with total
printer sales increasing by approximately $9,987,000, or 189%, compared to
2007.  However, our sales to GTECH each year are directly dependent on
the timing and number of new and upgraded lottery terminal installations GTECH
performs.  Our sales to GTECH are not indicative of GTECH’s overall
business or revenue.





Our
TransAct Services Group (“TSG”), which sells service, replacement parts and
consumable products, including receipt paper, ribbons and inkjet cartridges,
continues to offer a substantial growth opportunity and recurring revenue stream
for TransAct.  Even with declining sales of replacement parts for
legacy impact printers as the installed base of these printers in the market
declines, TSG domestic revenue continued to increase in 2008 by 17% from
2007.  During 2008, our domestic sales benefited from higher inkjet
cartridge sales resulting from the previously signed agreement with a leading
national office supply chain to supply inkjet cartridges in 2006 as well as
expanding sales of paper and other consumable products through our e-commerce
website, TransActSupplies.com.  Internationally, TSG sales declined
due to the decrease in maintenance and repair services revenue from a service
contract with a single customer in the United Kingdom.  The service
contract, which represented a substantial portion of our U.K. subsidiary’s
revenue in 2007, ended in November 2007 and was not renewed, as the customer
replaced our printers with newer technology that we were unable to
provide.





Operationally,
both our gross margin and operating margin showed marked improvement from
2007.  During 2008, our gross margin increased to 33.7% compared to
32.8% in 2007, due primarily to higher sales volume combined with lower product
costs and increased absorption of certain manufacturing overhead expenses as we
continue to transfer our domestic, in-house production of our products to a
lower cost contract manufacturer in China.  Our operating margin also
increased to 3.0% in 2008 compared to (7.7%) in 2007, as our operating expenses
decreased by 3% due to cost reduction programs we put in place at the end of
2007 and our sales increased by 28%.





Overall,
we reported net income of $1.4 million and net income per share (diluted) of
$0.15 per share for 2008.  We also utilized cash during 2008 to fund
$979,000 of capital expenditures and repurchase $543,000 of our common stock,
and we finished the year with $2.0 million of cash and no debt on our balance
sheet as of December 31, 2008.





Critical
Accounting Policies and Estimates


Our
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared by us
in accordance with accounting principles generally accepted in the United States
of America.  These principles require the use of estimates, judgments
and assumptions.  Such estimates and judgments are based upon
historical experience and certain assumptions that are believed to be reasonable
in the particular circumstances.  Those judgments affect both balance
sheet items and income statement categories.  Our estimates include
those related to revenue recognition, allowance for doubtful accounts, inventory
obsolescence, the valuation of deferred tax assets and liabilities, goodwill
impairment, warranty obligations, restructuring accruals, share-based
compensation and contingent liabilities.  We evaluate our assumptions
on an ongoing basis by comparing actual results with our
estimates.  Actual results may differ from the original
estimates.  The following accounting policies are those that we
believe to be most critical in the preparation of our financial
statements.





13





Table of Contents





Revenue
Recognition – Our typical contracts include the sale of printers, which
are sometimes accompanied by separately-priced extended warranty
contracts.  We also sell spare parts, consumables, and other repair
services (sometimes pursuant to multi-year product maintenance contracts), which
are not included in the original printer sale and are ordered by the customer as
needed.  We recognize revenue pursuant to the guidance within SAB 104,
“Revenue Recognition.”   Specifically, revenue is recognized when
evidence of an arrangement exists, delivery (based on shipping terms which are
generally FOB shipping point) has occurred, the selling price is fixed and
determinable, and collectablity is reasonably assured.  We provide for
an estimate of product returns and price protection based on historical
experience at the time of revenue recognition.





Revenue
related to extended warranty and product maintenance contracts is recognized
pursuant to FASB Technical Bulletin 90-1 (“FTB 90-1”), “Accounting for
Separately Priced Extended Warranty and Product Maintenance
Contracts.”  Pursuant to FTB 90-1, revenue related to separately
priced product maintenance contracts is deferred and recognized over the term of
the maintenance period.  We record deferred revenue for advance
payments received from customers for maintenance contracts.





Our
customers have the right to return products that do not function properly within
a limited time after delivery.  We monitor and track product returns
and record a provision for the estimated future returns based on historical
experience.  Returns have historically been within expectations and
the provisions established, but we cannot guarantee that we will continue to
experience return rates consistent with historical patterns.





We offer
some of our customer’s price protection as an incentive to carry inventory of
our product.  These price protection plans provide that if we lower
prices, we will credit them for the price decrease on inventory they
hold.  Our customers typically carry limited amounts of inventory, and
we infrequently lower prices on current products.  As a result, the
amounts paid under these plans have not been material.  However, we
cannot guarantee that this minimal level will continue.





We charge
our customers for shipping and handling services.  The amounts billed
to customers are recorded as revenue when the product ships.  Any
costs incurred related to these services are included in cost of
sales.





Accounts
Receivable–We
have standardized credit granting and review policies and procedures for all
customer accounts, including: credit reviews of all new customer accounts;
ongoing credit evaluations of current customers; credit limits and payment terms
based on available credit information; and adjustments to credit limits based
upon payment history and the customer’s current creditworthiness.  We
also provide an estimate of doubtful accounts based on historical experience and
specific customer collection issues.  Our allowance for doubtful
accounts as of December 31, 2008 was $55,000, or less than 1.0% of outstanding
accounts receivable, which we feel is appropriate considering the overall
quality of our accounts receivable.  While credit losses have
historically been within expectations and the reserves established, we cannot
guarantee that our credit loss experience will continue to be consistent with
historical experience.  As of December 31, 2008, we had accounts
receivable balances due from two customers of approximately 20% and 10%,
respectively, of the total balance due, and no other customer accounts
receivable balance exceeded 10%.  As of December 31, 2007, we had
accounts receivable balances due from three customers of 13%, 12% and 10% of the
total balance due, respectively, and no other customer accounts receivable
balance exceeded 10%.





Inventory– Our inventories are stated
at the lower of cost (principally standard cost, which approximates actual cost
on a first-in, first-out basis) or market.  We review market value
based on historical usage and estimates of future demand.  Assumptions
are reviewed at least quarterly and adjustments are made, as necessary, to
reflect changing market conditions.  Based on these reviews, inventory
write-downs are recorded, as necessary, to reflect estimated obsolescence,
excess quantities and market value.  Should circumstances change and
we determine that additional inventory is subject to obsolescence, additional
write-downs of inventory could result in a charge to income.  As of
December 31, 2008, our net inventory included a reserve of $3,050,000, or 23.5%
of gross inventory, to write inventory down to lower of cost or
market.





Goodwill– We test the impairment of
goodwill each year or more frequently if events or changes in circumstances
indicate that the carrying value may not be recoverable.  We completed
our last assessment as of December 31, 2008.  Factors considered that
may trigger an impairment review are: significant underperformance relative to
expected historical or projected future operating results; significant changes
in the manner of use of acquired assets or the strategy for the overall
business; significant negative industry or economic trends; and significant
decline in market capitalization relative to net book value.  Goodwill
amounted to $1,469,000 at December 31, 2008 and we have determined that no
goodwill impairment has occurred.





Income
Taxes–In
preparing our consolidated financial statements, we are required to estimate
income taxes in each of the jurisdictions in which we operate.  This
involves estimating the actual current tax exposure together with assessing
temporary differences between the tax basis of certain assets and liabilities
and their reported amounts in the financial statements, as well as net operating
losses, tax credits and other carryforwards.  These differences result
in deferred tax assets and liabilities, which are included within our
consolidated balance sheets.  We then assess the likelihood that the
deferred tax assets will be realized from future taxable income, and to the
extent that we believe that realization is not likely, we establish a valuation
allowance.





14





Table of Contents





Significant
judgment is required in determining the provision for income taxes and, in
particular, any valuation allowance or tax reserves with respect to our deferred
tax assets and uncertain tax positions.  On a quarterly basis, we
evaluate the recoverability of our deferred tax assets based upon historical
results and forecasted taxable income over future years, and match this forecast
against the basis differences, deductions available in future years and the
limitations allowed for net operating loss and tax credit carryforwards to
ensure that there is adequate support for the realization of the deferred tax
assets. While we have considered future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for a valuation allowance
or tax reserve, in the event we were to determine that we would not be able to
realize all or part of our deferred tax assets in the future, an adjustment to
the valuation allowance or tax reserves would be charged as a reduction to
income in the period such determination was made.  Likewise, should we
determine that we would be able to realize future deferred tax assets in excess
of its net recorded amount, an adjustment to the valuation allowance or tax
reserves would increase net income in the period such determination was
made.





In July
2006, the Financial Accounting Standards Board (the “FASB”) issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109, (“FIN 48”). Among other things, FIN 48
prescribes a minimum recognition threshold that an income tax position must meet
before it is recorded in the reporting entity’s financial statements. FIN 48
requires that the effects of such income tax positions be recognized only if, as
of the balance sheet reporting date, it is “more likely than not” (i.e., more
than a 50% likelihood) that the income tax position will be sustained based
solely on its technical merits.  When making this assessment,
management must assume that the responsible taxing authority will examine the
income tax position and have full knowledge of all relevant facts and other
pertinent information.  The new accounting guidance also clarifies the
method of accruing for interest and penalties when there is a difference between
the amount claimed, or expected to be claimed, on a company’s income tax returns
and the benefits recognized in the financial
statements.  Additionally, FIN 48 requires significant new and
expanded footnote disclosures in all annual periods.





We
adopted FIN 48 with an effective date of January 1,
2007.  Retrospective application of FIN 48 was
prohibited.  As a result of the implementation, we recognized a
decrease to reserves for uncertain tax positions.  This decrease was
accounted for as a $318,000 adjustment to the beginning balance of retained
earnings on the
Consolidated Balance Sheet as of December 31, 2007.





As of
December 31, 2008, we recorded a net deferred tax asset of approximately
$3,813,000 and a tax reserve of $44,000, primarily on portions of certain tax
credits.  We will need to recognize approximately $10.9 million in
future taxable income in order to realize all of our deferred tax assets at
December 31, 2008.  In one of the last three years, we have had U.S.
taxable losses and there is no assurance that we will generate future taxable
income sufficient to realize all of our deferred tax assets.  However,
based on our current projection of future taxable income as of December 31,
2008, no valuation allowance is considered necessary.  Should
circumstances change and we determine that some or all of the deferred taxes
would not be realized, a valuation allowance would be recorded, resulting in a
charge to income in the period such determination is made.





Restructuring
– In February 2001, we announced plans to establish a global engineering and
manufacturing center at our Ithaca, NY facility.  As part of this
strategic decision, we undertook a plan to consolidate all manufacturing and
engineering into our existing Ithaca, NY facility and close our Wallingford, CT
manufacturing facility (the “Consolidation”).  As of December 31,
2001, we successfully transferred substantially all our Wallingford operations
to Ithaca, NY, with the exception of our corporate headquarters and a service
center that remains in Connecticut.  The closing of the Wallingford
manufacturing facility resulted in the termination of employment of
approximately 70 production, administrative and management
employees.





In
connection with the Consolidation of manufacturing facilities in 2001, we
recorded significant accruals.Through December 31,
2007, we recognized approximately $5.5 million of expenses associated with the
Consolidation, including severance pay, stay bonuses, employee benefits, moving
expenses, non-cancelable lease payments, and other costs. Management has made
reasonable estimates of such costs and expenses.  During November
2006, we executed an agreement, effective May 1, 2007, to terminate the lease
agreement for our Wallingford, CT facility.  As a result, we changed
our estimate of the restructuring accrual and reversed approximately $479,000 of
restructuring expenses in 2006.  During the second quarter of 2007, we
recorded an additional $12,000 of expense to finalize the termination of the
lease agreement.  As of September 30, 2007, all non-cancelable lease
payments related to our Wallingford, CT facility have been made and we do not
expect to incur any additional restructuring expenses related to the
Consolidation.





Warranty–We generally warrant our
products for up to 24 months and record the estimated cost of such product
warranties at the time the sale is recorded.  Estimated warranty costs
are based upon actual past experience of product repairs and the related
estimated cost of labor and material to make the necessary
repairs.  If actual future product repair rates or the actual costs of
material and labor differ from the estimates, adjustments to the accrued
warranty liability and related warranty expense would be made.





Contingencies–We record an estimated
liability related to contingencies based on our estimates of the probable
outcomes pursuant to FAS 5.  On a quarterly basis, we assess the
potential liability related to pending litigation, audits and other
contingencies and confirm or revise estimates and reserves as
appropriate.  If the actual liabilities are settled in an amount
greater than those recorded on the balance sheet, a change to income would be
recorded.





15





Table of Contents





Share-Based
Compensation–We calculate share-based compensation expense in accordance with SFAS
123(R), “Share-Based Payment (as amended)” using the Black-Scholes
option-pricing model to calculate the fair value of share-based
awards.  The key assumptions for this valuation method include the
expected term of an option grant, and the stock price volatility, risk-free
interest rate, dividend yield, and forfeiture rate.  The determination
of these assumptions is based on past history and future expectations, and is
subject to a high level of judgment.  To the extent any of the
assumptions were to change from year to year, the fair value of new option
grants may vary significantly.





Results
of Operations: Year ended December 31, 2008 compared to year ended December 31,
2007





Net
Sales.  Net sales, which include printer sales and sales of
spare parts, consumables and repair services, by market for the years ended
December 31, 2008 and 2007 were as follows:





Year
      ended
                      
                      
                      Year
      ended
                      
                      
                      Change(In
      thousands)
                      
                      December
      31, 2008
                      
                      
                      December
      31, 2007
                      
                      
                      $
                      
                      
                      
                      %Banking
      and POS
                      
                      $
                      11,866
                      
                      
                      
                      19.1
                      %
                      
                      $
                      11,046
                      
                      
                      
                      22.6
                      %
                      
                      $
                      820
                      
                      
                      
                      7.4
                      %Casino
      and gaming
                      
                      
                      22,299
                      
                      
                      
                      35.8
                      %
                      
                      
                      19,438
                      
                      
                      
                      39.9
                      %
                      
                      
                      2,861
                      
                      
                      
                      14.7
                      %Lottery
                      
                      
                      15,731
                      
                      
                      
                      25.3
                      %
                      
                      
                      5,900
                      
                      
                      
                      12.1
                      %
                      
                      
                      9,831
                      
                      
                      
                      166.6
                      %TransAct
      Services Group
                      
                      
                      12,311
                      
                      
                      
                      19.8
                      %
                      
                      
                      12,382
                      
                      
                      
                      25.4
                      %
                      
                      
                      (71
                      )
                      
                      
                      (0.6
                      )%$
                      62,207
                      
                      
                      
                      100.0
                      %
                      
                      $
                      48,766
                      
                      
                      
                      100.0
                      %
                      
                      $
                      13,441
                      
                      
                      
                      27.6
                      %International*
                      
                      $
                      10,126
                      
                      
                      
                      16.3
                      %
                      
                      $
                      10,795
                      
                      
                      
                      22.1
                      %
                      
                      $
                      (669
                      )
                      
                      
                      (6.2
                      )%





*
            International
      sales do not include sales of printers made to domestic distributors or
      other domestic customers who may in turn ship those printers to
      international destinations.





Net sales
for 2008 increased $13,441,000, or 28%, from 2007 due to sales increases in
three out of four of our markets:  banking and point of sale (“POS”)
(an increase of approximately $820,000, or 7%), casino and gaming (an increase
of approximately $2,861,000, or 15%) and lottery (an increase of approximately
$9,831,000 or 167%).  Sales from our TransAct Services Group (“TSG”)
decreased by approximately $71,000, or less than 1%.
  Overall, international
sales decreased by $669,000, or 6%.  The decrease in international
sales was due largely to the expiration in November 2007 of a service contract
with a single customer in the United Kingdom.





Banking and point of
sale:  Revenue
from the banking and POS market includes sales of printers used by banks, credit
unions and other financial institutions to print and/or validate receipts at
bank teller stations.  Revenue from this market also includes sales of
inkjet, thermal and impact printers used primarily by retailers in restaurant
(including fine dining, casual dining and fast food), hospitality, and specialty
retail stores to print receipts for consumers, validate checks, or print on
other inserted media.  Sales of our banking and POS printers worldwide
increased approximately $820,000, or 7%, from 2007.





Year
      ended
                    
                    
                    Year
      ended
                    
                    
                    Change(In
      thousands)
                    
                    December
      31, 2008
                    
                    
                    December
      31, 2007
                    
                    
                    $
                    
                    
                    
                    %Domestic
                    
                    $
                    10,664
                    
                    
                    
                    89.9
                    %
                    
                    $
                    9,775
                    
                    
                    
                    88.5
                    %
                    
                    $
                    889
                    
                    
                    
                    9.1
                    %International
                    
                    
                    1,202
                    
                    
                    
                    10.1
                    %
                    
                    
                    1,271
                    
                    
                    
                    11.5
                    %
                    
                    
                    (69
                    )
                    
                    
                    (5.4
                    )%$
                    11,866
                    
                    
                    
                    100.0
                    %
                    
                    $
                    11,046
                    
                    
                    
                    100.0
                    %
                    
                    $
                    820
                    
                    
                    
                    7.4
                    %





Domestic
banking and POS printer sales increased to $10,664,000, representing an
$889,000, or 9%, increase from 2007.  Banking printer sales increased
by approximately $610,000 due largely to incremental sales of our first
generation BANKjet® 1500 bank teller printer as well as new product sales of our
BANKjet® 2500 bank teller printer in 2008 compared to 2007.  Although
we are currently pursuing several banking opportunities, due to the
project-oriented nature of these sales, and the current credit crisis that we
believe is negatively impacting the banking industry’s level of capital
expenditures, we cannot predict the level of future sales.  Our
increased banking printer sales were also complemented by new product sales of
our new Ithaca® 8000 and Ithaca® 8040 thermal receipt/label printers for
McDonalds.  We also experienced lower sales of our legacy impact
printers, as expected, during 2008 compared to 2007, as these printers continue
to be replaced by our thermal and inkjet printers.





16





Table of Contents





International
banking and POS printer shipments decreased by approximately $69,000, or 5%, to
$1,202,000, due primarily to lower sales to our international POS
distributors in Europe and Asia, largely offset by an increase in printer sales
to our international POS distributors in Latin America.





Casino and gaming:  Revenue
from the casino and gaming market includes sales of printers used in slot
machines, video lottery terminals (“VLTs”) and other gaming machines that print
tickets or receipts instead of issuing coins (“ticket-in, ticket-out” or “TITO”)
at casinos, racetracks (“racinos”) and other gaming venues
worldwide.  Sales of our casino and gaming printers increased by
$2,861,000, or 15%, from 2007, due to increased sales of our thermal casino
and gaming printers both domestically and internationally.





Year
      ended
                    
                    
                    Year
      ended
                    
                    
                    Change(In
      thousands)
                    
                    December
      31, 2008
                    
                    
                    December
      31, 2007
                    
                    
                    $
                    
                    
                    
                    %Domestic
                    
                    $
                    14,355
                    
                    
                    
                    64.4
                    %
                    
                    $
                    12,798
                    
                    
                    
                    65.8
                    %
                    
                    $
                    1,557
                    
                    
                    
                    12.2
                    %International
                    
                    
                    7,944
                    
                    
                    
                    35.6
                    %
                    
                    
                    6,640
                    
                    
                    
                    34.2
                    %
                    
                    
                    1,304
                    
                    
                    
                    19.6
                    %$
                    22,299
                    
                    
                    
                    100.0
                    %
                    
                    $
                    19,438
                    
                    
                    
                    100.0
                    %
                    
                    $
                    2,861
                    
                    
                    
                    14.7
                    %





Domestic
sales of our casino and gaming printers increased by $1,557,000, or 12%, despite
a weak domestic casino market, due largely to an increase in domestic sales
of our thermal casino printers, including incremental sales beginning in
the second quarter of 2008 resulting from our new status as default printer
provider to International Game Technology (“IGT”).  We expect the
domestic casino and gaming market to continue to be weak into 2009 as we believe
the current uncertain economic environment is negatively impacting the casino
industry’s level of capital expenditures.  In light of these negative
market conditions, our future sales to the domestic casino and gaming market may
be unpredictable and adversely affected.





International
casino and gaming printer sales increased $1,304,000, or 20%, to $7,944,000 in
2008 compared to 2007.  International sales represented 36% and 34% of
total sales into our casino and gaming market during 2008 and 2007,
respectively.  This increase was due primarily to increased sales
of our casino and gaming printers in Europe, including growing sales of our new
off-premise gaming printers, as well as increased international casino printer
sales to Australia.





Lottery:  Revenue
from the lottery market includes sales of lottery printers to Lottomatica’s
GTECH Corporation (“GTECH”), the world’s largest provider of lottery terminals,
for various lottery applications.





Year
      ended
                    
                    
                    Year
      ended
                    
                    
                    Change(In
      thousands)
                    
                    December
      31, 2008
                    
                    
                    December
      31, 2007
                    
                    
                    $
                    
                    
                    
                    %Domestic
                    
                    $
                    15,283
                    
                    
                    
                    97.2
                    %
                    
                    $
                    5,297
                    
                    
                    
                    89.8
                    %
                    
                    $
                    9,986
                    
                    
                    
                    188.5
                    %International
                    
                    
                    448
                    
                    
                    
                    2.8
                    %
                    
                    
                    603
                    
                    
                    
                    10.2
                    %
                    
                    
                    (155
                    )
                    
                    
                    (25.7
                    )%$
                    15,731
                    
                    
                    
                    100.0
                    %
                    
                    $
                    5,900
                    
                    
                    
                    100.0
                    %
                    
                    $
                    9,831
                    
                    
                    
                    166.6
                    %





Domestic
and international lottery printer sales to GTECH, which include thermal on-line
and other lottery printers, increased by approximately $9,831,000, or 167%, in
2008 compared to 2007, with domestic sales increasing by approximately
$9,986,000 and international sales declining by approximately
$155,000.  Our sales to GTECH are directly dependent on the timing and
number of new and upgraded lottery terminal installations GTECH performs, and as
a result, may fluctuate significantly quarter-to-quarter and
year-to-year.  Our sales to GTECH are not indicative of GTECH’s
overall business or revenue.  We expect total sales to GTECH for 2009
to be lower than those reported during 2008.





TransAct Services
Group:  Revenue from the
TransAct Services Group (“TSG”) includes sales of consumable products (inkjet
cartridges, ribbons, receipt paper and other transaction-related supplies),
replacement parts, maintenance and repair services, refurbished printers, and
shipping and handling charges.  Sales from TSG decreased by
approximately $71,000, or less than 1% from 2007.





Year
      ended
                
                
                Year
      ended
                
                
                Change(In
      thousands)
                
                December
      31, 2008
                
                
                December
      31, 2007
                
                
                $
                
                
                
                %Domestic
                
                $
                11,779
                
                
                
                95.7
                %
                
                $
                10,101
                
                
                
                81.6
                %
                
                $
                1,678
                
                
                
                16.6
                %International
                
                
                532
                
                
                
                4.3
                %
                
                
                2,281
                
                
                
                18.4
                %
                
                
                (1,749
                )
                
                
                (76.7
                )%$
                12,311
                
                
                
                100.0
                %
                
                $
                12,382
                
                
                
                100.0
                %
                
                $
                (71
                )
                
                
                (0.6
                )%





17





Table of Contents





Domestic
revenue from TSG increased by approximately $1,678,000, or 17%, to $11,779,000,
largely due to increased sales of consumable products, including higher sales
of inkjet cartridges as well as growing sales of paper and other
consumable products through our new e-commerce website, www.TransActSupplies.com. 
The increase in domestic TSG revenue was also due, to a lesser extent, to
higher maintenance and repair services revenue for 2008 as we renewed and
expanded existing contracts for our service products including extended
warranty contracts and our 24-hour guaranteed replacement product service
called TransAct XpressTM.  These increases were partially offset by a
decline in the sales of replacement parts for certain legacy printers,
as the installed base of these legacy printers in the market continues to
decline.





Internationally,
TSG sales decreased by approximately $1,749,000, or 77%, to $532,000, due
largely to a decrease in maintenance and repair services revenue from a
service contract with a single customer in the United Kingdom.  The service
contract, which represented a substantial portion of our U.K. subsidiary’s
revenue in 2007, ended in November 2007 and was not renewed, as the customer
replaced our printers with newer technology that we were unable to
provide.





Gross
Profit. Gross profit information is summarized below (in thousands,
except percentages):





December
      31,
                
                
                Percent
                
                
                Percent
      of
                
                
                Percent
      of2008
                
                
                2007
                
                
                Change
                
                
                Total
      Sales - 2008
                
                
                Total
      Sales - 2007Year
      ended
                
                $
                20,950
                
                
                $
                15,996
                
                
                
                31.0
                %
                
                
                33.7
                %
                
                
                32.8
                %





Gross
profit is measured as revenue less cost of goods sold.  Cost of goods
sold includes primarily the cost of all raw materials and component parts,
direct labor, and the associated manufacturing overhead
expenses.  Gross profit and gross margin increased due primarily to a
higher volume of sales and lower component part and labor costs resulting
from our initiatives to increasingly move production of our products to Asia,
somewhat offset by a less favorable sales mix.  Gross
profit for 2008 was also favorably impacted by approximately
$195,000 ofincreased absorption of certain manufacturing overhead
expenses due to
the transition of more of our production to Chinacompared to 2007.Gross profit for 2007 was negatively impacted by an incremental inventory
reserve charge of approximately $528,000, or 1.1% of net sales in 2007,
specifically related to certain obsolete electronic components and certain
discontinued printer products.





Engineering and
Product Development. Engineering and product development information
is summarized below (in thousands, except percentages):





December
      31,
                
                
                Percent
                
                
                Percent
      of
                
                
                Percent
      of2008
                
                
                2007
                
                
                Change
                
                
                Total
      Sales - 2008
                
                
                Total
      Sales – 2007Year
      ended
                
                $
                2,942
                
                
                $
                3,129
                
                
                
                (6.0
                )%
                
                
                4.7
                %
                
                
                6.4
                %





Engineering,
design and product development expenses primarily include salary and payroll
related expenses for our engineering staff, depreciation and design expenses
(including prototype printer expenses, outside design and testing services and
supplies).  Such expenses for 2008 decreased by $187,000 or 6.0%, due
to lower outside design, prototype, development and professional consulting
related expenses partially offset by higher employee compensation related
expenses.  Engineering and product development expenses decreased as a
percentage of net sales due primarily to higher sales volume coupled with a
lower level of expenses in 2008 compared to 2007.





Selling and
Marketing. Selling and marketing information is summarized below (in
thousands, except percentages):





December
      31,
                
                
                Percent
                
                
                Percent
      of
                
                
                Percent
      of2008
                
                
                2007
                
                
                Change
                
                
                Total
      Sales - 2008
                
                
                Total
      Sales - 2007Year
      ended
                
                $
                6,078
                
                
                $
                6,708
                
                
                
                (9.4
                )%
                
                
                9.8
                %
                
                
                13.8
                %





Selling
and marketing expenses primarily include salaries and payroll related expenses
for our sales and marketing staff, sales commissions, travel expenses, expenses
associated with the lease of sales offices, advertising, trade show expenses and
other promotional marketing expenses.  Selling and marketing expenses
decreased primarily due to a reduced level of sales staff related expenses
resulting from the cost reduction actions we took in late 2007 as well as lower
promotional marketing expenses.  Selling and marketing expenses
decreased as a percentage of net sales due primarily to higher sales volume
coupled with a lower level of expenses in 2008 compared to 2007.





18





Table of Contents





General and
Administrative. General and administrative information is summarized
below (in thousands, except percentages):





December 31,
                
                
                Percent
                
                
                Percent
      of
                
                
                Percent
      of2008
                
                
                2007
                
                
                Change
                
                
                Total
      Sales - 2008
                
                
                Total
      Sales - 2007Year
      ended
                
                $
                7,040
                
                
                $
                6,995
                
                
                
                0.6
                %
                
                
                11.3
                %
                
                
                14.3
                %





General
and administrative expenses primarily include: salaries and payroll related
expenses for our executive, accounting, human resource, business development and
information technology staff, expenses for our corporate headquarters,
professional and legal expenses, telecommunication expenses, and other expenses
related to being a publicly-traded company.  General and
administrative expenses increased by $45,000, or less than 1%, due primarily to
(1) higher incentive compensation expenses, (2) compensation and travel expenses
related to the hiring of our new Vice President of Business Development in May
2008 and (3) the full year effect of increased rent and facility-related
expenses, including depreciation expense on purchases of office furniture
and leasehold improvements for our new corporate headquarters in Hamden, CT that
we moved into during the second quarter of 2007.  These increases were
partially offset by lower legal expenses related to general
corporate matters, recruitment related expenses, and professional
fees.  General and administrative expenses decreased as a percentage of net
sales due primarily to higher sales volume in 2008 compared to
2007.





Legal Fees
associated with lawsuit.  During
2008, we incurred approximately $3,029,000 of legal fees related to the settled
lawsuit with FutureLogic, Inc. compared to $2,907,000 in 2007.  The
substantial increase was due to the settlement of our litigation with
FutureLogic, Inc. in May 2008.  As a result of the settlement, we do
not expect to incur any additional legal fees related to the
lawsuit.





Operating Income
(Loss). Operating income (loss) information is summarized below (in
thousands, except percentages):





December 31,
                
                
                Percent
                
                
                Percent
      of
                
                
                Percent
      of2008
                
                
                2007
                
                
                Change
                
                
                Total
      Sales - 2008
                
                
                Total
      Sales - 2007Year
      ended
                
                $
                1,861
                
                
                $
                (3,755
                )
                
                
                NM
                
                
                
                3.0
                %
                
                
                (7.7
                )%





During
2008, the substantial increase in our operating income and operating margin was
due largely to higher sales and the resulting higher gross profit and lower
operating expenses in 2008 compared to that of 2007.





Interest.  We
recorded net interest expense of $11,000 in 2008 compared to net interest income
of $76,000 in 2007.  The decrease in our net interest income was
largely due to a lower average cash balance in 2008 as compared to 2007, coupled
with a lower overall rate of return on our invested cash balance due to the
decreasing interest rate environment.  See “Liquidity and Capital
Resources” below for more information.





Other
Income.  We recorded other income of $368,000 in 2008 compared
to other income of $21,000 in 2007.  The increase was due primarily to
transaction exchange gains recorded by our UK subsidiary resulting from the
significant strengthening of the U.S. dollar against the British pound primarily
in the third and fourth quarters of 2008.





Income
Taxes.  We recorded an income tax provision of $774,000, at an
effective rate of 34.9% during 2008 compared to an income tax benefit of
$1,384,000, at an effective rate of 37.8% in 2007.  The effective tax
rate for 2008 decreased compared to 2007 due largely to a decrease in the
recognition of certain deferred tax credits.  We expect our annual
effective tax rate for 2009 to be approximately 35%.





Net Income
(Loss).  We reported net
income in 2008 of $1,444,000, or $0.15 per diluted share compared to a net loss
of $(2,274,000), or $(0.24) per diluted share in 2007.





19





Table of Contents





Results
of Operations: Year ended December 31, 2007 compared to year ended December 31,
2006





Net
Sales.Net
sales, which include printer sales and sales of spare parts, consumables and
repair services, by market for the years ended December 31, 2007 and 2006 were
as follows:





Year
      ended
                      
                      
                      Year
      ended
                      
                      
                      Change(In
      thousands)
                      
                      December
      31, 2007
                      
                      
                      December
      31, 2006
                      
                      
                      $
                      
                      
                      
                      %Banking
      and POS
                      
                      $
                      11,046
                      
                      
                      
                      22.6
                      %
                      
                      $
                      16,858
                      
                      
                      
                      26.2
                      %
                      
                      $
                      (5,812
                      )
                      
                      
                      (34.5
                      )%Casino
      and gaming
                      
                      
                      19,438
                      
                      
                      
                      39.9
                      %
                      
                      
                      23,246
                      
                      
                      
                      36.1
                      %
                      
                      
                      (3,808
                      )
                      
                      
                      (16.4
                      )%Lottery
                      
                      
                      5,900
                      
                      
                      
                      12.1
                      %
                      
                      
                      11,431
                      
                      
                      
                      17.8
                      %
                      
                      
                      (5,531
                      )
                      
                      
                      (48.4
                      )%TransAct
      Services Group
                      
                      
                      12,382
                      
                      
                      
                      25.4
                      %
                      
                      
                      12,793
                      
                      
                      
                      19.9
                      %
                      
                      
                      (411
                      )
                      
                      
                      (3.2
                      )%$
                      48,766
                      
                      
                      
                      100.0
                      %
                      
                      $
                      64,328
                      
                      
                      
                      100.0
                      %
                      
                      $
                      (15,562
                      )
                      
                      
                      (24.2
                      )%International*
                      
                      $
                      10,795
                      
                      
                      
                      22.1
                      %
                      
                      $
                      14,138
                      
                      
                      
                      22.0
                      %
                      
                      $
                      (3,343
                      )
                      
                      
                      (23.6
                      )%





*
            International
      sales do not include sales of printers made to domestic distributors or
      other domestic customers who may in turn ship those printers to
      international destinations.





Net sales
for 2007 decreased $15,562,000, or 24%, from 2006 due to sales decreases in each
of our four markets: banking and point of sale (“POS”) (a decrease of
approximately $5,812,000, or 35%), casino and gaming (a decrease of
approximately $3,808,000, or 16%), lottery (a decrease of approximately
$5,531,000, or 48%), and TSG (a decrease of approximately $411,000, or 3%).
Overall, international sales decreased by $3,343,000, or 24%, due largely to
lower international shipments of our banking and POS, casino and gaming,
and lottery printers, and to a lesser extent, decreased TSG
sales internationally.





Banking and point of
sale:  Sales of our banking and POS printers worldwide
decreased approximately $5,812,000, or 35%, from 2006.





Year
      ended
                    
                    
                    Year
      ended
                    
                    
                    Change(In
      thousands)
                    
                    December
      31, 2007
                    
                    
                    December
      31, 2006
                    
                    
                    $
                    
                    
                    
                    %Domestic
                    
                    $
                    9,775
                    
                    
                    
                    88.5
                    %
                    
                    $
                    15,410
                    
                    
                    
                    91.4
                    %
                    
                    $
                    (5,635
                    )
                    
                    
                    (36.6
                    )%International
                    
                    
                    1,271
                    
                    
                    
                    11.5
                    %
                    
                    
                    1,448
                    
                    
                    
                    8.6
                    %
                    
                    
                    (177
                    )
                    
                    
                    (12.2
                    )%$
                    11,046
                    
                    
                    
                    100.0
                    %
                    
                    $
                    16,858
                    
                    
                    
                    100.0
                    %
                    
                    $
                    (5,812
                    )
                    
                    
                    (34.5
                    )%





Domestic
banking and POS printer sales decreased to $9,775,000, representing a
$5,635,000, or 37%, decrease from 2006, due largely to the non-recurrence
of significant sales (approximately $2.6 million) of our BANKjet® line of inkjet
bank teller printers to two large banking customers that were made in 2006.
 In addition to lower banking printer sales, we also experienced a decline
in sales from our line of POS thermal printers due primarily to a large
hospitality customer that slowed and deferred equipment purchases while it
implemented a new point-of-sale software system.  We also experienced a
decline in sales of our legacy line of POS impact printers as these
printers are replaced by our newer thermal and inkjet printers.  Our
sales into the banking and POS market over the last several years have been
impacted by a shift in technology in the market from impact
printing technology to thermal and inkjet printing technology.  This
change in technology has resulted in declining sales of our impact printers that
were at higher average selling prices and increasing sales of our thermal
and inkjet printers that are at lower average selling prices.





International
banking and POS printer shipments decreased by approximately $177,000, or 12%,
to $1,271,000, due primarily to lower sales to our international POS
distributors in Latin America and Europe.




Casino and
gaming:  Sales of our casino and gaming printers decreased by
$3,808,000, or 16%, from 2006, primarily due to lower casino and other gaming
printer sales, both domestically and internationally.
 
 Year
      ended
                      
                      
                      Year
      ended
                      
                      
                      Change(In
      thousands)
                      
                      December
      31, 2007
                      
                      
                      December
      31, 2006
                      
                      
                      $
                      
                      
                      
                      %Domestic
                      
                      $
                      12,798
                      
                      
                      
                      65.8
                      %
                      
                      $
                      14,848
                      
                      
                      
                      63.9
                      %
                      
                      $
                      (2,050
                      )
                      
                      
                      (13.8
                      )%International
                      
                      
                      6,640
                      
                      
                      
                      34.2
                      %
                      
                      
                      8,398
                      
                      
                      
                      36.1
                      %
                      
                      
                      (1,758
                      )
                      
                      
                      (20.9
                      )%$
                      19,438
                      
                      
                      
                      100.0
                      %
                      
                      $
                      23,246
                      
                      
                      
                      100.0
                      %
                      
                      $
                      (3,808
                      )
                      
                      
                      (16.4
                      )%


20





Table of Contents





Domestic
sales of our casino and gaming printers decreased by $2,050,000, or 14%, due
primarily to a decrease in sales of our thermal casino printers due to continued
softness in the domestic casino market during 2007 as compared to
2006.





International
casino and gaming printer sales decreased $1,758,000, or 21%, to $6,640,000 in
2007 compared to 2006.  Such sales represented 34% and 36% of total
sales into our casino and gaming market during 2007 and 2006, respectively.
 This decrease was primarily due to lower international gaming printer
sales, primarily in Australia due to a slower than anticipated conversion to
ticket-in, ticket-out slot machines in that region, partially offset by
higher sales in Europe and Asia.





Lottery: Sales of our
lottery printers decreased by $5,531,000, or 48%, from 2006, primarily due
to lower sales of lottery printers to GTECH, both domestically and
internationally.





Year
      ended
                    
                    
                    Year
      ended
                    
                    
                    Change(In
      thousands)
                    
                    December
      31, 2007
                    
                    
                    December
      31, 2006
                    
                    
                    $
                    
                    
                    
                    %Domestic
                    
                    $
                    5,297
                    
                    
                    
                    89.8
                    %
                    
                    $
                    10,350
                    
                    
                    
                    90.5
                    %
                    
                    $
                    (5,053
                    )
                    
                    
                    (48.8
                    )%International
                    
                    
                    603
                    
                    
                    
                    10.2
                    %
                    
                    
                    1,081
                    
                    
                    
                    9.5
                    %
                    
                    
                    (478
                    )
                    
                    
                    (44.2
                    )%$
                    5,900
                    
                    
                    
                    100.0
                    %
                    
                    $
                    11,431
                    
                    
                    
                    100.0
                    %
                    
                    $
                    (5,531
                    )
                    
                    
                    (48.4
                    )%





Domestic
and international printer sales to GTECH, which include thermal on-line and
other lottery printers, decreased by approximately $5,531,000, or 48%, in
2007 compared to 2006, with domestic sales declining approximately $5,053,000
and international sales declining approximately $478,000.  Our sales
to GTECH are directly dependent on the timing and number of new and upgraded
lottery terminal installations GTECH performs, and as a result, may
fluctuate significantly quarter-to-quarter.  Our sales to GTECH are not
indicative of GTECH’s overall business or revenue.





TransAct Services
Group:  Sales by TSG decreased by approximately $411,000, or
3%.





Year
      ended
                    
                    
                    Year
      ended
                    
                    
                    Change(In
      thousands)
                    
                    December
      31, 2007
                    
                    
                    December
      31, 2006
                    
                    
                    $
                    
                    
                    
                    %Domestic
                    
                    $
                    10,101
                    
                    
                    
                    81.6
                    %
                    
                    $
                    9,582
                    
                    
                    
                    74.9
                    %
                    
                    $
                    519
                    
                    
                    
                    5.4
                    %International
                    
                    
                    2,281
                    
                    
                    
                    18.4
                    %
                    
                    
                    3,211
                    
                    
                    
                    25.1
                    %
                    
                    
                    (930
                    )
                    
                    
                    (29.0
                    )%$
                    12,382
                    
                    
                    
                    100.0
                    %
                    
                    $
                    12,793
                    
                    
                    
                    100.0
                    %
                    
                    $
                    (411
                    )
                    
                    
                    (3.2
                    )%





Domestic
TSG revenue increased by approximately $519,000, or 5%, to $10,101,000, largely
due to increased sales of consumable products, including higher sales of
inkjet cartridges as we benefited from the agreement we signed in August 2006 to
supply inkjet cartridges to a leading national office supply chain. 
The increase in domestic revenue was also due, to a lesser extent, to
maintenance and repair services performed as we continue to win new service
contracts and expand existing contracts for our service products including
extended warranty contracts and our 24-hour guaranteed replacement product
service called TransAct XpressTM.  These increases were largely offset by
a decline in the sale of refurbished printers and replacement parts for
certain legacy printers, as the installed base of these legacy printers in
the market continues to decline.





Internationally,
TSG sales decreased by approximately $930,000, or 29%, to $2,281,000, due
largely to a decrease in maintenance and repair services revenue from a
service contract with a single customer in the United Kingdom, as well as a
decline in sales of consumable products and replacement parts.  The
primary operations of our United Kingdom subsidiary, a European sales and
service center, relate to revenue generated from a service contract with a
single customer in the United Kingdom.  The service contract, which
represented a substantial portion of our U.K. subsidiary’s revenue, was
renewed in April 2007 through November 2007 at a lower minimum sales value
compared to the minimum sales value of the prior year’s contract.  The
contract ended in November 2007 and was not renewed, as the
customer replaced our printers with newer technology that we were unable to
provide.




Gross
Profit. Gross profit information is summarized below (in thousands,
except percentages):
 
 December
      31,
                  
                  
                  Percent
                  
                  
                  Percent
      of
                  
                  
                  Percent
      of2007
                  
                  
                  2006
                  
                  
                  Change
                  
                  
                  Total
      Sales - 2007
                  
                  
                  Total
      Sales – 2006Year
      ended
                  
                  $
                  15,996
                  
                  
                  $
                  22,365
                  
                  
                  
                  28.4
                  %
                  
                  
                  32.8
                  %
                  
                  
                  34.8
                  %
 
 Gross
profit and gross margin decreased due primarily to a lower volume of sales
and a less favorable sales mix in 2007 compared to 2006, somewhat offset by
lower component part and labor costs resulting from our initiatives to
increasingly move production to Asia.  In addition, gross profit for 2007
was negatively impacted by an incremental inventory reserve charge of
approximately $528,000, or 1.1% of net sales, specifically related to certain
obsolete electronic components and certain discontinued printer
products.


21





Table of Contents




Engineering and
Product Development.  Engineering and product development
information is summarized below (in thousands, except percentages):





December
      31,
                
                
                Percent
                
                
                Percent
      of
                
                
                Percent
      of2007
                
                
                2006
                
                
                Change
                
                
                Total
      Sales - 2007
                
                
                Total
      Sales – 2006Year
      ended
                
                $
                3,129
                
                
                $
                2,824
                
                
                
                10.8
                %
                
                
                6.4
                %
                
                
                4.4
                %





Engineering,
design and product development expenses increased as we incurred increased
outside design, prototype and development expenses associated largely with new
product development for the banking market, as well as increased
professional consulting related expenses.  These increases were somewhat
offset by lower expenses related to engineering staffing and other employee
compensation expenses.  Engineering and product development expenses
increased as a percentage of net sales due primarily to lower sales volume
in proportion to a higher level of expenses in the 2007 compared to
2006.





Selling and
Marketing. Selling and marketing information is summarized below (in
thousands, except percentages):





December
      31,
                
                
                Percent
                
                
                Percent
      of
                
                
                Percent
      of2007
                
                
                2006
                
                
                Change
                
                
                Total
      Sales - 2007
                
                
                Total
      Sales - 2006Year
      ended
                
                $
                6,708
                
                
                $
                6,892
                
                
                
                (2.7
                )%
                
                
                13.8
                %
                
                
                10.7
                %





Selling
and marketing expenses decreased as we incurred lower employee sales commission
expenses based on lower sales volume, lower demonstration printer expenses,
and the non-recurrence of expenses incurred in 2006 related to the redesign of
our website. These decreases were partly offset by increased trade show,
advertising and other promotional marketing expenses compared with
2006. Selling and marketing expenses increased as a percentage of net sales
due primarily to lower sales volume in proportion to a lower level
of expenses in 2007 compared to 2006.





General and
Administrative. General and administrative information is summarized
below (in thousands, except percentages):





December 31,
                
                
                Percent
                
                
                Percent
      of
                
                
                Percent
      of2007
                
                
                2006
                
                
                Change
                
                
                Total
      Sales - 2007
                
                
                Total
      Sales - 2006Year
      ended
                
                $
                6,995
                
                
                $
                6,925
                
                
                
                1.0
                %
                
                
                14.3
                %
                
                
                10.8
                %





General
and administrative expenses increased due primarily to (1) higher legal
expense related to the expansion of our international patent portfolio, (2)
higher depreciation and amortization expense associated with the completion
of the implementation of new Oracle software at the beginning of 2007 and the
purchase of office furniture and leasehold improvements for our new
corporate headquarters in Hamden, CT, and (3) increased rent and
facility-related expenses associated with our new corporate headquarters.
 These increases were somewhat offset by a decrease in incentive
compensation expense and acquisition-related expenses, as we incurred
approximately $220,000 of legal and consulting services related to a potential
acquisition in the second quarter of 2006 that was not consummated.
 These expenses did not recur during 2007.  General and administrative
expenses for 2007 also included a charge of approximately $187,000 for
severance resulting from the termination of certain employees as part of
cost reduction actions.  General and administrative expenses increased
as a percentage of net sales due primarily to lower sales volume in proportion
to a higher level of expenses in 2007 compared to 2006.





Legal
Fees associated with lawsuit.During 2007,
we incurred approximately $2,907,000 of legal fees related to our lawsuit
with FutureLogic, Inc. compared to approximately $115,000 in 2006.
 The substantial increase was due primarily to our patent
infringement counterclaim against FutureLogic, Inc.We
settled out litigation with FutureLogic, Inc. in May 2008.




Business
Consolidation and Restructuring.  During the fourth quarter of
2006, we executed an agreement, effective May 1, 2007, to terminate the lease
agreement for our existing corporate headquarters and eastern region service
center facility located in Wallingford, CT (the “Release
Agreement”).  Prior to the execution of the Release Agreement, we
accrued for the remaining non-cancelable lease payments and other related costs
for this facility through the expiration date of the lease (March 31,
2008).  As a result of the Release Agreement and the early termination
of the old lease, we were released from the legal obligation for lease payments
after May 1, 2007 and, accordingly, we reversed $479,000 of previously accrued
expenses related to the Consolidation in the fourth quarter of
2006.  During the second quarter of 2007, we recorded an additional
$12,000 in expense to finalize the termination of the lease agreement for our
prior corporate headquarters and eastern region service center facility located
in Wallingford, CT.


22





Table of Contents




Operating
Income.  Operating income (loss) information is summarized
below (in thousands, except percentages):





December 31,
                
                
                Percent
                
                
                Percent
      of
                
                
                Percent
      of2007
                
                
                2006
                
                
                Change
                
                
                Total
      Sales - 2007
                
                
                Total
      Sales - 2006Year
      ended
                
                $
                (3,755
                )
                
                $
                6,088
                
                
                
                (161.7
                )%
                
                
                (7.7
                )%
                
                
                9.5
                %





During
2007, the substantial decrease in our operating income and operating margin was
due largely to lower sales and the resulting lower gross profit and higher
operating expenses (largely legal expenses of approximately $2.9 million related
to the FutureLogic lawsuit) in 2007 compared to that of 2006.





Interest.  We
recorded net interest income of $76,000 in 2007 compared to net interest income
of $104,000 in 2006.  The decrease in our net interest income was
largely due to a lower average cash balance being lower in 2007 as compared to
2006.





Other Income
(Expense).  We recorded other income of $21,000 in 2007 due
primarily to gains recorded from the sale of certain assets from our prior
corporate headquarters and Eastern Regional Service Center in Wallingford, CT,
partially offset by transaction exchange losses recorded by our UK subsidiary
resulting from the weakening of the U.S. dollar against the British
pound.  We recorded other expense of $159,000 in 2006 due primarily to
transaction exchange losses recorded by our UK subsidiary resulting from the
weakening of the U.S. dollar against the British pound during that
period.





Income
Taxes.  We recorded an income tax benefit of $1,384,000, at an
effective rate of 37.8% during 2007 compared to an income tax provision of
$2,117,000, at an effective rate of 35.1% in 2006.  The effective tax
rate for 2007 increased compared to 2006, due largely to an increase in the
recognition of certain deferred tax credits.





Net Income
(Loss).  We reported a net loss in 2007 of $2,274,000, or
($0.24) per diluted share compared to net income of $3,916,000, or $0.40 per
diluted share in 2006.





Liquidity
and Capital Resources


During
2008, our cash flows reflected the results of higher sales volume offset by
legal fees related to the settled lawsuit with FutureLogic, Inc. and increases
in working capital.  After funding $979,000 of capital expenditures
and incurring $3,029,000 of legal fees related to the settled lawsuit with
FutureLogic, our cash balance decreased by $561,000 from December 31,
2007.  We ended 2008 with approximately $2,000,000 in cash and cash
equivalents and no debt outstanding.





Operating activities:  The
following significant factors primarily affected our cash provided by operations
of $701,000 in 2008 as compared to $2,610,000 in 2007.





During
2008:
 ·
                  We
      reported net income of $1,444,000.
 ·
                  We
      recorded depreciation, amortization and non-cash compensation expense of
      $2,650,000.
 ·
                  We
      recorded a non-cash foreign currency exchange transaction gain of $368,000
      from our UK subsidiary due to the strengthening of the U.S. dollar against
      the British pound.
   ·
                Deferred
      taxes decreased by $592,000 primarily due to the utilization of our net
      operating loss generated in
2007.
 ·
                Accounts
      receivable increased by $2,611,000 due primarily to higher sales volume in
      the fourth quarter of 2008 compared to the fourth quarter of
      2007.
 ·
                Gross
      inventories increased by $1,457,000 due primarily to higher stocking
      levels resulting from our initiatives to move increased production to Asia
      and increased sales volume.
 ·
                Accounts
      payable increased by $178,000 due to higher inventory purchases related to
      higher sales volumes during 2008.
 ·
                Accrued
      liabilities and other liabilities increased by $19,000 due primarily to
      higher incentive compensation accruals largely offset by lower accrued
      legal fees related to our settled lawsuit with FutureLogic,
      Inc.
  During
2007:
 ·
                We
      reported a net loss of $2,274,000.
 ·
                We
      recorded depreciation, amortization and non-cash compensation expense of
      $2,559,000.
  23




Table of Contents








·
            Deferred
      taxes increased by $1,839,000 due to our net operating loss during
      2007.


·
            Accounts
      receivable decreased by $5,294,000 due to lower sales during 2007 and
      improved collection efforts.


·
            Inventory
      increased by $2,053,000 due primarily to an increase in consignment
      inventory programs with certain of our customers, higher stocking levels
      resulting from our initiatives to move increased production to Asia, and
      expected increased sales demand in the first quarter of
    2008.


·
            Accounts
      payable increased by $691,000 due to higher inventory purchases and the
      timing of payments during the year.


·
            Accrued
      liabilities and other liabilities decreased by $575,000 due to the
      following: (1) lower compensation related accruals and (2) a lower income
      tax accrual based on the decreased level of income before taxes. These
      decreases were somewhat offset by increases in accrued legal fees,
      primarily related to our lawsuit with FutureLogic, Inc. and deferred rent
      related to the lease of our new corporate headquarters in Hamden,
      CT.


·
            As
      of December 31, 2007 and December 31, 2006, our restructuring accrual
      amounted to $0 and $315,000, respectively. The decrease of $315,000
      is related largely to final payments made on our Wallingford lease
      obligation.





Investingactivities:  Our
capital expenditures were approximately $979,000 and $2,166,000 in 2008 and
2007, respectively.  Expenditures in 2008 included approximately
$514,000 for the purchase of new product tooling, $329,000 for the purchase of
computer, networking equipment, and software, $88,000 for the purchase of
manufacturing equipment, and the remaining amount primarily for the purchase of
engineering equipment and leasehold improvements.  Expenditures in
2007 included approximately $1,248,000 for the purchase of leasehold
improvements and office furniture for our new corporate headquarters in Hamden,
CT, approximately $135,000 for the purchase of leasehold improvements and office
furniture for our new Eastern Region service center in New Britain, CT,
approximately $338,000 for the purchase of new computer hardware and software
including outside consulting costs related to our Oracle software
implementation, and the remaining amount primarily for the purchase of new
product tooling.We
expect our capital expenditures for 2009 to be approximately $1.2
million.





Financing
activities:  We used approximately $229,000 for financing
activities during 2008, largely due to the repurchase of Company stock of
approximately $543,000.  The repurchases were offset by proceeds from
stock option exercises of approximately $314,000 during 2008.  During
2007, we used approximately $1,360,000 for financing activities largely due to
the repurchase of Company stock of approximately $1,503,000.  The
repurchases were offset by proceeds from stock option exercises of approximately
$149,000 during 2007.





Working
Capital


Our
working capital increased to $15,051,000 at December 31, 2008 from $11,338,000
at December 31, 2007.  Our current ratio also increased to 2.9 to 1 at
December 31, 2008, compared to 2.4 to 1 at December 31, 2007.  The
increase in both our working capital and current ratio was largely due to higher
receivables and inventory balances resulting from higher sales.





Deferred
Taxes


As of
December 31, 2008, we had net deferred tax assets of approximately
$3,813,000.  In order to utilize these deferred tax assets, we will
need to generate approximately $10.9 million of taxable income in future
years.  In one of the last three years, we have had U.S. taxable
losses and there is no assurance that we will generate future taxable income
sufficient to realize all of our deferred tax assets.  However, based
on our current projection of future taxable income as of December 31, 2008, we
believe that it is more likely than not that the existing net deferred tax
assets will be realized.  However, if our future projections of
taxable income are less than expected, we may need to establish a valuation
allowance for all or a portion of our net deferred tax assets, which may have a
material adverse effect on our results of operations and financial
condition.





Credit
Facility and Borrowings


On
November 28, 2006, we signed a, five-year $20 million credit facility (the “TD
Banknorth Credit Facility”) with TD Banknorth, N.A. (“TD
Banknorth”).  The credit facility provides for a $20 million revolving
credit line expiring on November 28, 2011.  Borrowings under the
revolving credit line bear a floating rate of interest at the prime rate minus
one percent and are secured by a lien on all of our assets.  We also
pay a fee of 0.25% on unused borrowings under the revolving credit
line.  The total deferred financing costs relating to expenses
incurred to complete the TD Banknorth Credit Facility was
$94,000.  The TD Banknorth Credit Facility imposes certain quarterly
financial covenants on us and prohibits the payment of dividends on our common
stock and the creation of other liens.  On November 7, 2007, we
amended the TD Banknorth Credit Facility to revise a financial covenant
effective September 30, 2007 through September 30, 2008.  We were in
compliance with all financial covenants of the TD Banknorth Credit Facility at
December 31, 2008.  The following table lists the financial covenants
and the performance measurements at December 31, 2008.
  Financial
      Covenant
                        Requirement/Restriction
                        Calculation
      at December 31, 2008Operating
      cash flow / Total debt service
                        Minimum
      of 1.25 times
                        58.8
      timesFunded
      debt / EBITDA
                        Maximum
      of 3.25
                        0
      times





As of
December 31, 2008, we had no balances outstanding on the revolving credit
line.  Undrawn commitments under the TD Banknorth Credit facility were
approximately $20,000,000 at December 31, 2008.





24





Table of Contents





Stock
Repurchase Program


On March
25, 2005, our Board of Directors approved a stock repurchase program (the “Stock
Repurchase Program”).  Under the Stock Repurchase Program, we were
authorized to repurchase up to $10 million of our outstanding shares of common
stock from time to time in the open market over a three-year period ending on
March 25, 2008, depending on market conditions, share price and other
factors.





On
November 1, 2007, our Board of Directors approved an increase in our stock
repurchase authorization under the Stock Repurchase Program to $15 million from
$10 million.  In addition, the Board approved a two-year extension of
the Stock Repurchase Program to March 31, 2010.  During 2008, we
repurchased a total of 130,100 shares of common stock for approximately $543,000
at an average price of $4.17 per share.  As of December 31, 2008, we
have repurchased a total of 1,164,100 shares of common stock for approximately
$8,538,000, at an average price of $7.33 per share, since the inception of the
Stock Repurchase Program.





Shareholders’
Equity


Shareholders’
equity increased by $1,674,000 to $23,282,000 at December 31, 2008 from
$21,608,000 at December 31, 2007.  The increase was primarily due to
net income of $1,444,000, proceeds of approximately $314,000 from the issuance
of approximately 67,000 shares of common stock from stock option exercises, and
compensation expense related to stock options and restricted stock of
$803,000.  These increases were offset by treasury stock purchases of
130,100 shares of common stock for approximately $543,000, a decrease in
additional paid-in capital of approximately $98,000 due to a tax charge
resulting from employee stock transactions and foreign currency translation of
approximately $246,000.





Consolidation
Expenses


During
2001 through 2007, we recognized approximately $5.5 million of business
consolidation, restructuring and related expenses as a result of the
Consolidation.  These expenses primarily included employee severance
and termination related expenses, facility closure and consolidation expenses
(including moving expenses, estimated non-cancelable lease payments and other
costs) and accelerated depreciation and asset disposal losses on certain
leasehold improvements and other fixed assets.





In
November 2006, we executed an agreement effective May 1, 2007 to terminate the
lease agreement for our Wallingford, CT facility (the “Release
Agreement”).  Prior to the execution of the Release Agreement, we
accrued the remaining non-cancelable lease payments and other related costs for
the unused portion of this facility through the expiration date of the lease
(March 31, 2008). As a result of the Release Agreement and the early termination
of the lease, we were released from the legal obligation to make lease payments
after May 1, 2007 and, accordingly, we reversed approximately $479,000 of
previously accrued restructuring reserve in the fourth quarter of
2006.  During the second quarter of 2007, we recorded an additional
$12,000 of expense to finalize the termination of the lease
agreement.  As of September 30, 2007, all remaining non-cancelable
lease payments related to our Wallingford, CT facility were made.  We
paid approximately $327,000 and $399,000 of expenses related to the
Consolidation in 2007 and 2006, respectively.





Contractual
Obligations


TransAct’s
contractual obligations as of December 31, 2008 were as follows:
 
 (In
      thousands)
                  
                  Total
                  
                  
                  <
      1 year
                  
                  
                  1-3
      years
                  
                  
                  3-5
      years
                  
                  
                  >
      5 yearsOperating
      lease obligations
                  
                  $
                  4,051
                  
                  
                  $
                  970
                  
                  
                  $
                  1,626
                  
                  
                  $
                  682
                  
                  
                  $
                  773Purchase
      obligations
                  
                  
                  22,056
                  
                  
                  
                  21,488
                  
                  
                  
                  568
                  
                  
                  
                  -
                  
                  
                  
                  -Total
                  
                  $
                  26,107
                  
                  
                  $
                  22,458
                  
                  
                  $
                  2,194
                  
                  
                  $
                  682
                  
                  
                  $
                  773
 
 Purchase
obligations are for purchases made in the normal course of business to meet
operational requirements, primarily of fully assembled printers and component
part inventory.


Recently
Issued Accounting Pronouncements





Fair Value
Measurements:  In September 2006, the Financial Accounting
Standards Board (“FASB”) issued Statement of Financial Accounting Standards
No. 157, “Fair Value Measurements” (“FAS 157”).  This statement defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value
measurements.  This Statement applies under other accounting
pronouncements that require or permit fair value measurements.  FAS 157
defines fair value based upon an exit price model.  A fair value
measurement assumes that the transaction to sell an asset or transfer a
liability occurs in the principal market for the asset or liability, or,
in the absence of a principal market, the most advantageous market for the
asset or liability.  This Statement was effective for the
Company beginning on January 1, 2008, except that FSP 157-2 delayed the
effective date of FAS 157 for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis, until fiscal years
beginning after November 15, 2008.  The Company adopted FAS 157 on
January 1, 2008, with the exception of the application of the Statement to
nonrecurring nonfinancial assets and liabilities measured at fair value
which include: (i) goodwill impairment testing, (ii) initial measurement of
the fair value of asset retirement obligations and (iii) measurement of
impairment of long-lived assets.  The implementation of FAS 157 did not
have an effect on the Company’s consolidated financial position, results of
operations or cash flows during 2008, and is not expected to have a material
effect on the Company upon full adoption in future periods.





25





Table of Contents





Fair Value Option
for Financial Assets and Financial Liabilities:  In February
2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The
Fair Value Option for Financial Assets and Financial Liabilities, including an
amendment of FASB Statement No. 115” (“FAS 159”).  This Statement permits
entities to choose to measure many financial instruments and certain other items
at fair value that are not currently required to be measured at fair value.
 The Company adopted FAS 159 on January 1, 2008 and elected not to measure
any additional financial instruments and other items at fair value.  The
adoption did not have a material effect on the Company’s consolidated financial
position, results of operations or cash flows during 2008.





Business
Combinations:  In December 2007, the FASB issued Statement of
Financial Accounting Standards No. 141 (revised 2007), “Business Combinations”
(“FAS 141(R)”).  FAS 141(R) amends Statement of Financial Accounting
Standards No. 141, “Business Combinations” and provides revised guidance
requiring the acquirer to recognize and measure, at fair value on the
acquisition date, identifiable assets and goodwill acquired, liabilities
assumed, and any non-controlling interest in the
acquiree.  Transaction and restructuring costs generally will be
expensed as incurred.  The Statement also provides disclosure
requirements to enable users of the financial statements to evaluate the nature
and financial effects of the business combination.  FAS 141(R) is
effective for fiscal years beginning on or after December 15, 2008 and will be
applied prospectively.  This
statement is not expected to have any effect on our financial statements until
such time as we acquire a business and its effect on future periods will depend
on the nature and significance of any acquisition.





Derivative
Instruments and Hedging Activities:  In March 2008, the FASB
issued FAS No. 161, “Disclosures about Derivative Instruments and Hedging
Activities—an amendment of FASB No. 133” (“FAS 161”).  This statement
amends FAS No. 133 by requiring enhanced qualitative, quantitative and
credit-risk disclosures about an entity’s derivative instruments and hedging
activities, but does not change FAS No. 133’s scope or
accounting.  FAS 161 is effective for fiscal years, and interim
periods within those fiscal years, beginning after November 15, 2008, with
earlier adoption permitted.  As we do not currently engage in
activities accounted for under the provision of FAS No. 133, the adoption of FAS
No. 161 is not expected to have any impact on our financial
statements.





Resource
Sufficiency


We
believe that our cash on hand, cash flows generated from operations and
borrowings available under the TD Banknorth Credit Facility will provide
sufficient resources to meet our working capital needs, finance our capital
expenditures and meet our liquidity requirements through at least the next
twelve months.





Impact
of Inflation


We
believe that our business has not been affected to a significant degree by
inflationary trends during the past three years.  However,
inflation is still a factor in the worldwide economy and may increase the cost
of certain raw materials, component parts and labor used in the manufacture of
our products.  It also may increase our operating expenses,
manufacturing overhead expenses and the cost to acquire or replace fixed
assets.  Despite growing costs of oil, gas and freight over the recent
year, we have generally been able to maintain or improve our profit margins
through productivity and efficiency improvements, cost reduction programs and to
a lesser extent, price increases, and we expect to be able to do the same during
2009.  As such, we do not believe that inflation will have a
significant impact on our business during 2009.





Item 7A. Quantitative and Qualitative Disclosures about Market
Risk.


Interest
Rate Risk


Our
exposure to market risk for changes in interest rates relates primarily to the
investment of our available cash and cash equivalents.  In accordance
with our investment policy, we strive to achieve above market rates of return in
exchange for accepting a prudent amount of incremental risk, which includes the
risk of interest rate movements.  Risk tolerance is constrained by an
overriding objective to preserve capital.  An effective increase or
decrease of 10% in interest rates would not have a material effect on our
results of operations or cash flows.





Foreign
Currency Exchange Risk


A
substantial portion of our sales are denominated in U.S. dollars and, as a
result, we have relatively little exposure to foreign currency exchange risk
with respect to sales made.  This exposure may change over time as
business practices evolve and could have a material adverse impact on our
financial results in the future.  We do not use forward exchange
contracts to hedge exposures denominated in foreign currencies or any other
derivative financial instruments for trading or speculative
purposes.  We
estimate that the combined translational and transactional impact of a 10%
overall movement in exchange rates from December 31, 2008 (principally the UK
Pound Sterling) is approximately $100,000 on a pre-tax
basis.




Item 8. Financial Statements and Supplementary
Data.


The
financial statements and schedule of the Company are annexed to this report as
pages F-2 through F-24. An index to such materials appears on page
F-1.





Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.


None.





26





Table of Contents





Item 9A. Controls and Procedures.


Attached
as exhibits to this Form 10-K are certifications of our Chief Executive Officer
(“CEO”) and Chief Financial Officer (“CFO”), which are required in accordance
with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the
Exchange Act).  This “Controls and Procedures” section includes
information concerning the controls and controls evaluation referred to in the
certifications.  Part II, Item 8 of this Form 10-K sets forth the
report of PricewaterhouseCoopers LLP, our independent registered public
accounting firm, regarding its audit of TransAct’s internal control over
financial reporting as of December 31, 2008.  This section should be read
in conjunction with the CEO and CFO certifications and the
PricewaterhouseCoopers LLP report for a more complete understanding of the
topics presented.





Evaluation
of Disclosure Controls and Procedures


As of
December 31, 2008, the Company, with the participation of its CEO and CFO
conducted an evaluation of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures pursuant to Rule 13a-15 under the
Securities Exchange Act of 1934 (the “Exchange Act”).  Based on that
evaluation, our CEO and CFO concluded that the Company’s disclosure controls and
procedures (as defined in Rule 13a-15 of the Exchange Act) are
effective.




Management’s
Report on Internal Control Over Financial Reporting


Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting to provide reasonable assurance regarding the
reliability of our financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles.  Internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of
records that in reasonable detail accurately and fairly reflect the transactions
and dispositions of the assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company’s assets that could have a
material effect on the financial statements.





Management
assessed our internal control over financial reporting as of December 31, 2008.
 Management based its assessment on criteria established in Internal
Control–Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (“COSO”).





Based on
our assessment, management has concluded that our internal control over
financial reporting was effective as of December 31, 2008.





The
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2008, has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report which
appears herein.





Inherent
Limitations on Effectiveness of Controls


A control
system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that the control system’s objectives will be
met.  The design of a control system must reflect the fact that there
are resource constraints, and the benefits of controls must be considered
relative to their costs.  Further, because of the inherent limitations
in all control systems, no evaluation of controls can provide absolute assurance
that misstatements due to error or fraud will not occur or that all control
issues and instances of fraud, if any, within the company have been
detected.







Item 9B. Other Information.
 Not
applicable.
  PART III
  Item 10. Directors, Executive Officers and
Corporate Governance.
 The
information in response to this item is incorporated by reference from the Proxy
Statement sections entitled “Election of Directors” and “Executive
Officers.”


27





Table of Contents





Item 11. Executive Compensation.


The
information in response to this item is incorporated by reference from the Proxy
Statement sections entitled “Executive Compensation and Certain Transactions”
and “Compensation Discussion and Analysis.”





Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.


The
information in response to this item is incorporated by reference from the Proxy
Statement section entitled “Security Ownership of Certain Beneficial Owners and
Management.”





Information
regarding our equity compensation plans as of December 31, 2008 is as
follows:





Plan
      category
                
                (a)
                  Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
                
                
                (b)
                  Weighted
      average exercise price of outstanding options, warrants and
      rights
                
                
                (c)
                  Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))Equity
      compensation plans approved by security holders:1996
      Stock Plan
                
                
                333,838
                
                
                $
                3.28
                
                
                
                -1996
      Non-Employee Director Plan
                
                
                153,750
                
                
                
                11.50
                
                
                
                -2005
      Equity Incentive Plan
                
                
                392,250
                
                
                
                7.18
                
                
                
                187,250Total
                
                
                879,838
                
                
                $
                6.46
                
                
                
                187,250Equity
      compensation plans not approved by security holders:2001
      Employee Stock Plan
                
                
                32,661
                
                
                $
                5.18
                
                
                
                -912,499
                
                
                $
                6.41
                
                
                
                187,250





The
TransAct Technologies Incorporated 2001 Employee Stock Plan (the “2001 Employee
Plan”) was adopted by our Board of Directors, without approval of our security
holders, effective February 26, 2001.  Under the 2001 Employee Plan,
we may issue non-qualified stock options, shares of restricted stock, restricted
units to acquire shares of common stock, stock appreciation rights and limited
stock appreciation rights to key employees of TransAct or any of our
subsidiaries and to non-employees who provide services to TransAct or any of our
subsidiaries.  The 2001 Employee Plan is administered by our
Compensation Committee, which has the authority to determine the vesting period
and other similar restrictions and terms of awards, provided that the exercise
price of options granted under the plan may not be less than the fair market
value of the underlying shares on the date of grant.





In May
2005, our shareholders approved the adoption of the 2005 Equity Incentive
Plan.  No new awards will be available for future issuance under any
existing TransAct equity plan other than the 2005 Equity Incentive
Plan.




Item 13. Certain Relationships and Related Transactions, and
Director Independence.
 The
information in response to this item is incorporated by reference from the Proxy
Statement section entitled “Certain Relationships and Related
Transactions.”
 
 Item 14. Principal Accounting Fees and Services.
 The
information in response to this item is incorporated by reference from the Proxy
Statement section entitled “Independent Registered Public Accounting Firm’s
Services and Fees.”
 
 PART IV
  Item 15. Exhibits and Financial Statement
Schedules.
 The
financial statements and schedule filed as part of this report are listed in the
accompanying Index to Financial Statements and Schedule. The exhibits filed as a
part of this report are listed in the accompanying Index to
Exhibits.


28





Table of Contents




SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.








TRANSACT
      TECHNOLOGIES INCORPORATEDBy:
            /s/
      Bart C. ShuldmanName:
            Bart
      C. ShuldmanTitle:
            Chairman
      of the Board, President and Chief Executive
  Officer





Date:
March 16,
2009





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.





Signature
            
            Title
            
            Date/s/ Bart C.
      Shuldman
            
            Chairman
      of the Board,
            
            March
      16,
      2009Bart
      C. Shuldman
            
            President
      and Chief Executive Officer,(Principal
      Executive Officer)/s/ Steven A.
      DeMartino
            
            Executive
      Vice President,
            
            March
      16,
      2009Steven
      A. DeMartino
            
            Chief
      Financial Officer,Treasurer
      and Secretary(Principal
      Financial and Accounting Officer)/s/ Charles A.
      Dill
            
            Director
            
            March
      16,
      2009Charles
      A. Dill/s/
      Thomas R. Schwarz
            
            Director
            
            March
      16,
      2009Thomas
      R. Schwarz/s/
      Graham Y. Tanaka
            
            Director
            
            March
      16,
      2009Graham
      Y. Tanaka





29





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TRANSACT TECHNOLOGIES INCORPORATED


INDEX
TO FINANCIAL STATEMENTS AND SCHEDULE





Financial
      StatementsReport of Independent
      Registered Public Accounting Firm
              F-2Consolidated balance
      sheets as of December 31, 2008 and 2007
              F-3Consolidated
      statements of operations for the years ended December 31, 2008, 2007 and
      2006
              F-4Consolidated
      statements of changes in shareholders' equity and comprehensive income
      (loss) for the years ended December 31, 2008, 2007 and
      2006
              F-5Consolidated
      statements of cash flows for the years ended December 31, 2008, 2007 and
      2006
              F-6Notes to consolidated
      financial statements
              F-7Financial
      Statement ScheduleThe
      following financial statement schedule is included herein:Schedule II -
      Valuation and Qualifying Accounts
              F-22All
      other financial statement schedules are omitted because they are not
      applicable or the required information is shown in the consolidated
      financial statements or notes thereto





F-1





Table of Contents





Report of Independent Registered Public Accounting
Firm





To the
Board of Directors and Stockholders of TransAct Technologies
Incorporated:







In our
opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in shareholders' equity and
comprehensive income (loss) and of cash flows, present fairly, in all material
respects, the financial position of TransAct Technologies Incorporated and its
subsidiaries at December 31, 2008 and December 31, 2007, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2008 in conformity with accounting principles generally
accepted in the United States of America.  In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).  The Company's
management is responsible for these financial statements, for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in
Management's Report on Internal Control over Financial
Reporting.  Our responsibility is to express opinions on these
financial statements, on the
financial statement schedule,and on the Company's internal control over
financial reporting based on our integrated audits.  We conducted our
audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States).  Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects.  Our audits of the financial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation.  Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk.  Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.




As
discussed in Note 2 to the consolidated financial statements, the Company
changed the manner in which it accounts for uncertain tax positions in
2007.




A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.  A company’s internal
control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial
statements.






Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate./s/
PricewaterhouseCoopers LLP




/s/
PricewaterhouseCoopers LLP
  Hartford,
Connecticut


March 16,
2009





F-2





Table of Contents





TRANSACT TECHNOLOGIES INCORPORATED


CONSOLIDATED
BALANCE SHEETS


(In
thousands, except share data)





December
      31,
                      
                      
                      December
      31,2008
                      
                      
                      2007Assets:Current
      assets:Cash
      and cash equivalents
                      
                      $
                      2,000
                      
                      
                      $
                      2,561Receivables,
      net
                      
                      
                      8,734
                      
                      
                      
                      6,128Inventories,
      net
                      
                      
                      9,919
                      
                      
                      
                      8,665Refundable
      income taxes
                      
                      
                      35
                      
                      
                      
                      51Deferred
      tax assets
                      
                      
                      2,054
                      
                      
                      
                      1,528Other
      current assets
                      
                      
                      352
                      
                      
                      
                      362Total
      current assets
                      
                      
                      23,094
                      
                      
                      
                      19,295Fixed
      assets, net
                      
                      
                      5,563
                      
                      
                      
                      6,338Goodwill
                      
                      
                      1,469
                      
                      
                      
                      1,469Deferred
      tax assets
                      
                      
                      1,759
                      
                      
                      
                      2,830Intangible
      and other assets, net of accumulated amortization of $306 and $221,
      respectively
                      
                      
                      349
                      
                      
                      
                      4829,140
                      
                      
                      
                      11,119Total
      assets
                      
                      $
                      32,234
                      
                      
                      $
                      30,414Liabilities
      and Shareholders’ Equity:Current
      liabilities:Accounts
      payable
                      
                      $
                      4,863
                      
                      
                      $
                      4,688Accrued
      liabilities
                      
                      
                      2,847
                      
                      
                      
                      2,747Deferred
      revenue
                      
                      
                      333
                      
                      
                      
                      522Total
      current liabilities
                      
                      
                      8,043
                      
                      
                      
                      7,957Deferred
      revenue, net of current portion
                      
                      
                      259
                      
                      
                      
                      211Accrued
      warranty, net of current portion
                      
                      
                      133
                      
                      
                      
                      91Deferred
      rent
                      
                      
                      473
                      
                      
                      
                      507Other
      liabilities
                      
                      
                      44
                      
                      
                      
                      40909
                      
                      
                      
                      849Total
      liabilities
                      
                      
                      8,952
                      
                      
                      
                      8,806Commitments
      and contingencies (Note 11)Shareholders’
      equity:Preferred
      stock, $0.01 par value, 4,800,000 authorized, none issued and
      outstanding
                      
                      
                      -
                      
                      
                      
                      -Preferred
      stock, Series A, $0.01 par value, 200,000 authorized, none issued and
      outstanding
                      
                      
                      -
                      
                      
                      
                      -Common
      stock, $0.01 par value, 20,000,000 authorized at December 31, 2008 and
      2007; 10,465,588 and 10,399,866 shares issued; 9,301,488 and 9,365,866
      shares outstanding, at December 31, 2008 and 2007,
      respectively
                      
                      
                      105
                      
                      
                      
                      104Additional
      paid-in capital
                      
                      
                      20,890
                      
                      
                      
                      19,872Retained
      earnings
                      
                      
                      10,893
                      
                      
                      
                      9,449Accumulated
      other comprehensive income (loss), net of tax
                      
                      
                      (68
                      )
                      
                      
                      178Treasury
      stock, 1,164,100 and 1,034,000 shares, at cost
                      
                      
                      (8,538
                      )
                      
                      
                      (7,995
                      )Total
      shareholders’ equity
                      
                      
                      23,282
                      
                      
                      
                      21,608Total
      liabilities and shareholders’ equity
                      
                      $
                      32,234
                      
                      
                      $
                      30,414





See
accompanying notes to consolidated financial statements.





F-3





Table of Contents





TRANSACT TECHNOLOGIES INCORPORATED


CONSOLIDATED
STATEMENTS OF OPERATIONS


(In
thousands, except per share data)





Year
      Ended December 31,2008
                
                
                2007
                
                
                2006Net
      sales
                
                $
                62,207
                
                
                $
                48,766
                
                
                $
                64,328Cost
      of sales
                
                
                41,257
                
                
                
                32,770
                
                
                
                41,963Gross
      profit
                
                
                20,950
                
                
                
                15,996
                
                
                
                22,365Operating
      expenses:Engineering,
      design and product development
                
                
                2,942
                
                
                
                3,129
                
                
                
                2,824Selling
      and marketing
                
                
                6,078
                
                
                
                6,708
                
                
                
                6,892General
      and administrative
                
                
                7,040
                
                
                
                6,995
                
                
                
                6,925Legal
      fees associated with lawsuit (See Note 11)
                
                
                3,029
                
                
                
                2,907
                
                
                
                115Business
      consolidation and restructuring
                
                
                -
                
                
                
                12
                
                
                
                (479
                )19,089
                
                
                
                19,751
                
                
                
                16,277Operating
      income (loss)
                
                
                1,861
                
                
                
                (3,755
                )
                
                
                6,088Interest
      and other income (expense):Interest
      expense
                
                
                (70
                )
                
                
                (69
                )
                
                
                (44
                )Interest
      income
                
                
                59
                
                
                
                145
                
                
                
                148Other,
      net
                
                
                368
                
                
                
                21
                
                
                
                (159
                )357
                
                
                
                97
                
                
                
                (55
                )Income
      (loss) before income taxes
                
                
                2,218
                
                
                
                (3,658
                )
                
                
                6,033Income
      tax provision (benefit)
                
                
                774
                
                
                
                (1,384
                )
                
                
                2,117Net
      income (loss)
                
                $
                1,444
                
                
                $
                (2,274
                )
                
                $
                3,916Net
      income (loss) per common share:Basic
                
                $
                0.16
                
                
                $
                (0.24
                )
                
                $
                0.41Diluted
                
                $
                0.15
                
                
                $
                (0.24
                )
                
                $
                0.40Shares
      used in per-share calculation:Basic
                
                
                9,308
                
                
                
                9,364
                
                
                
                9,577Diluted
                
                
                9,489
                
                
                
                9,364
                
                
                
                9,870





See
accompanying notes to consolidated financial statements.





F-4





Table of Contents





TRANSACT TECHNOLOGIES INCORPORATED


CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(LOSS)


(In
thousands, except share data)





Common
      Stock
                
                
                Additional
      Paid-in
                
                
                Retained
                
                
                Unamortized
      Restricted Stock
                
                
                Treasury
                
                
                Accumulated
      Other Comprehensive
                
                
                
                
                
                Total
      ComprehensiveShares
                
                
                Amount
                
                
                Capital
                
                
                Earnings
                
                
                Compensation
                
                
                Stock
                
                
                Income
      (Loss)
                
                
                Total
                
                
                Income
      (Loss)Balance,
      December 31, 2005
                
                
                9,732,010
                
                
                $
                102
                
                
                $
                19,334
                
                
                $
                7,489
                
                
                $
                (1,837
                )
                
                $
                (3,867
                )
                
                $
                36
                
                
                $
                21,257Impact
      of adoption of new accounting pronouncements
                
                
                -
                
                
                
                -
                
                
                
                (1,837
                )
                
                
                -
                
                
                
                1,837
                
                
                
                -
                
                
                
                -
                
                
                
                -Cancellation
      of restricted stock
                
                
                (11,750
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Issuance
      of shares from exercise of stock options
                
                
                136,157
                
                
                
                2
                
                
                
                685
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                687Issuance
      of restricted stock
                
                
                15,000
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Tax
      benefit related to employee stock sales and vesting of restricted
      stock
                
                
                -
                
                
                
                -
                
                
                
                342
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                342Purchase
      of treasury stock
                
                
                (296,300
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (2,625
                )
                
                
                -
                
                
                
                (2,625
                )Share-based
      compensation expense
                
                
                -
                
                
                
                -
                
                
                
                581
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                581Comprehensive
      income:Foreign
      currency translation adj., net of tax
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                132
                
                
                
                132
                
                
                $
                132Net
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                3,916
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                3,916
                
                
                
                3,916Balance,
      December 31, 2006
                
                
                9,575,117
                
                
                
                104
                
                
                
                19,105
                
                
                
                11,405
                
                
                
                -
                
                
                
                (6,492
                )
                
                
                168
                
                
                
                24,290
                
                
                
                4,048Adoption
      of FASB Interpretation No. 48
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                318
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                318Opening
      balance at January 1, 2007, as adjusted
                
                
                9,575,117
                
                
                
                104
                
                
                
                19,105
                
                
                
                11,723
                
                
                
                -
                
                
                
                (6,492
                )
                
                
                168
                
                
                
                24,608Cancellation
      of restricted stock
                
                
                (9,750
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Issuance
      of shares from exercise of stock options
                
                
                33,199
                
                
                
                -
                
                
                
                149
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                149Tax
      charge related to vesting of restricted stock
                
                
                -
                
                
                
                -
                
                
                
                (97
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (97
                )Purchase
      of treasury stock
                
                
                (232,700
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,503
                )
                
                
                -
                
                
                
                (1,503
                )Share-based
      compensation expense
                
                
                -
                
                
                
                -
                
                
                
                715
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                715Comprehensive
      income (loss):Foreign
      currency translation adj., net of tax
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                10
                
                
                
                10
                
                
                
                10Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (2,274
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (2,274
                )
                
                
                (2,274
                )Balance,
      December 31, 2007
                
                
                9,365,866
                
                
                
                104
                
                
                
                19,872
                
                
                
                9,449
                
                
                
                -
                
                
                
                (7,995
                )
                
                
                178
                
                
                
                21,608
                
                
                
                (2,264
                )Cancellation
      of restricted stock
                
                
                (1,250
                )
                
                
                -
                
                
                
                (4
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (4
                )Issuance
      of shares from exercise of stock options
                
                
                66,972
                
                
                
                1
                
                
                
                313
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                314Tax
      charge related to vesting of restricted stock
                
                
                -
                
                
                
                -
                
                
                
                (98
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (98
                )Purchase
      of treasury stock
                
                
                (130,100
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (543
                )
                
                
                -
                
                
                
                (543
                )Share-based
      compensation expense
                
                
                -
                
                
                
                -
                
                
                
                807
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                807Comprehensive
      income (loss):Foreign
      currency translation adj., net of tax
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (246
                )
                
                
                (246
                )
                
                
                (246
                )Net
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,444
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,444
                
                
                
                1,444Balance,
      December 31, 2008
                
                
                9,301,488
                
                
                $
                105
                
                
                $
                20,890
                
                
                $
                10,893
                
                
                $
                -
                
                
                $
                (8,538
                )
                
                $
                (68
                )
                
                $
                23,282
                
                
                $
                1,198


See
accompanying notes to consolidated financial statements.





F-5





Table of Contents





TRANSACT TECHNOLOGIES INCORPORATED


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In
thousands)


Year
      Ended December 31,2008
                                                      
                                                      
                                                      2007
                                                      
                                                      
                                                      2006Cash
      flows from operating activities:Net
      income (loss)
                                                      
                                                      $
                                                      1,444
                                                      
                                                      
                                                      $
                                                      (2,274
                                                      )
                                                      
                                                      $
                                                      3,916Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Share-based
      compensation expense
                                                      
                                                      
                                                      803
                                                      
                                                      
                                                      
                                                      715
                                                      
                                                      
                                                      
                                                      581Incremental
      tax benefits from stock options exercised
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (342
                                                      )Depreciation
      and amortization
                                                      
                                                      
                                                      1,847
                                                      
                                                      
                                                      
                                                      1,844
                                                      
                                                      
                                                      
                                                      1,568Deferred
      income taxes
                                                      
                                                      
                                                      592
                                                      
                                                      
                                                      
                                                      (1,839
                                                      )
                                                      
                                                      
                                                      583Provision
      for excess and obsolete inventory
                                                      
                                                      
                                                      200
                                                      
                                                      
                                                      
                                                      955
                                                      
                                                      
                                                      
                                                      266(Gain)
      loss on sale of fixed assets
                                                      
                                                      
                                                      3
                                                      
                                                      
                                                      
                                                      (14
                                                      )
                                                      
                                                      
                                                      -Foreign
      currency transaction (gain) loss
                                                      
                                                      
                                                      (368
                                                      )
                                                      
                                                      
                                                      6
                                                      
                                                      
                                                      
                                                      159Reversal
      of accrued restructuring expense
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (479
                                                      )Changes
      in operating assets and liabilities:Receivables
                                                      
                                                      
                                                      (2,611
                                                      )
                                                      
                                                      
                                                      5,294
                                                      
                                                      
                                                      
                                                      (3,063
                                                      )Inventories
                                                      
                                                      
                                                      (1,457
                                                      )
                                                      
                                                      
                                                      (2,053
                                                      )
                                                      
                                                      
                                                      (1,797
                                                      )Refundable
      income taxes
                                                      
                                                      
                                                      14
                                                      
                                                      
                                                      
                                                      (9
                                                      )
                                                      
                                                      
                                                      253Other
      current assets
                                                      
                                                      
                                                      8
                                                      
                                                      
                                                      
                                                      144
                                                      
                                                      
                                                      
                                                      (276
                                                      )Other
      assets
                                                      
                                                      
                                                      29
                                                      
                                                      
                                                      
                                                      40
                                                      
                                                      
                                                      
                                                      (72
                                                      )Accounts
      payable
                                                      
                                                      
                                                      178
                                                      
                                                      
                                                      
                                                      691
                                                      
                                                      
                                                      
                                                      1,138Accrued
      liabilities and other liabilities
                                                      
                                                      
                                                      19
                                                      
                                                      
                                                      
                                                      (575
                                                      )
                                                      
                                                      
                                                      1,423Accrued
      restructuring expenses
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (315
                                                      )
                                                      
                                                      
                                                      (399
                                                      )Net
      cash provided by operating activities
                                                      
                                                      
                                                      701
                                                      
                                                      
                                                      
                                                      2,610
                                                      
                                                      
                                                      
                                                      3,459Cash
      flows from investing activities:Purchases
      of fixed assets
                                                      
                                                      
                                                      (979
                                                      )
                                                      
                                                      
                                                      (2,166
                                                      )
                                                      
                                                      
                                                      (2,891
                                                      )Proceeds
      from sale of assets
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      37
                                                      
                                                      
                                                      
                                                      -Net
      cash used in investing activities
                                                      
                                                      
                                                      (979
                                                      )
                                                      
                                                      
                                                      (2,129
                                                      )
                                                      
                                                      
                                                      (2,891
                                                      )Cash
      flows from financing activities:Payment
      of deferred financing costs
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (6
                                                      )
                                                      
                                                      
                                                      (88
                                                      )Proceeds
      from stock option exercises
                                                      
                                                      
                                                      314
                                                      
                                                      
                                                      
                                                      149
                                                      
                                                      
                                                      
                                                      687Purchases
      of common stock for treasury
                                                      
                                                      
                                                      (543
                                                      )
                                                      
                                                      
                                                      (1,503
                                                      )
                                                      
                                                      
                                                      (2,625
                                                      )Incremental
      tax benefits from stock options exercised
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      342Net
      cash used in financing activities
                                                      
                                                      
                                                      (229
                                                      )
                                                      
                                                      
                                                      (1,360
                                                      )
                                                      
                                                      
                                                      (1,684
                                                      )Effect
      of exchange rate changes on cash
                                                      
                                                      
                                                      (54
                                                      )
                                                      
                                                      
                                                      4
                                                      
                                                      
                                                      
                                                      (27
                                                      )Decrease
      in cash and cash equivalents
                                                      
                                                      
                                                      (561
                                                      )
                                                      
                                                      
                                                      (875
                                                      )
                                                      
                                                      
                                                      (1,143
                                                      )Cash
      and cash equivalents, beginning of period
                                                      
                                                      
                                                      2,561
                                                      
                                                      
                                                      
                                                      3,436
                                                      
                                                      
                                                      
                                                      4,579Cash
      and cash equivalents, end of period
                                                      
                                                      $
                                                      2,000
                                                      
                                                      
                                                      $
                                                      2,561
                                                      
                                                      
                                                      $
                                                      3,436Supplemental
      cash flow information:Interest
      paid
                                                      
                                                      $
                                                      51
                                                      
                                                      
                                                      $
                                                      51
                                                      
                                                      
                                                      $
                                                      43Income
      taxes paid
                                                      
                                                      
                                                      34
                                                      
                                                      
                                                      
                                                      742
                                                      
                                                      
                                                      
                                                      1,201Non-cash
      financing activities:Tax
      benefit related to employee stock sales and vesting of restricted
      stock
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      342Issuance
      of restricted stock
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      207


See
accompanying notes to consolidated financial statements.





F-6





Table of Contents





TRANSACT TECHNOLOGIES INCORPORATED


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





1.
Description of business




TransAct
Technologies Incorporated (“TransAct” or the “Company”), which has its
headquarters in Hamden, CT and its primary operating facility in Ithaca, NY,
operates in one industry segment, market-specific printers for transaction-based
industries.  These industries include casino, gaming, lottery,
banking, kiosk and point-of-sale.  Our printers are designed based on
market specific requirements and are sold under the Ithaca® and Epic product
brands.  We distribute our products through OEMs, value-added
resellers, selected distributors, and directly to end-users.  Our
product distribution spans across the Americas, Europe, the Middle East, Africa,
Asia, Australia, the Caribbean Islands and the South Pacific.  We
also generate revenue from the after-market side of the business, providing
printer service, supplies and spare parts.





2.
Summary of significant accounting policies




Principles of
consolidation:  The accompanying consolidated financial
statements were prepared on a consolidated basis to include the accounts of
TransAct and its wholly-owned subsidiaries.  All intercompany
accounts, transactions and unrealized profit were eliminated in
consolidation.





Reclassifications:  Certain
amounts in the prior years’ financial statements have been reclassified to
conform to the current year’s presentation.





Use of
estimates: The accompanying consolidated financial statements were
prepared using estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue and expenses, and disclosure of contingent assets
and liabilities as of the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.





Segment
reporting:  We apply the provisions of Statement of Financial
Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and
Related Information” (“FAS 131”).  We view our operations and manage
our business as one segment: the design, development, manufacture and sale of
transaction-based printers.  Factors used to identify TransAct’s
single operating segment include the organizational structure of the Company and
the financial information available for evaluation by the chief operating
decision-maker in making decisions about how to allocate resources and assess
performance.  We operate predominantly in one geographical area, the
United States of America.  See Note 17 for information regarding our
international operations.  We provide the following disclosures of
revenues from products and services:





Year
      ended
                          
                          
                          Year
      ended
                          
                          
                          Change(In
      thousands)
                          
                          December
      31, 2008
                          
                          
                          December
      31, 2007
                          
                          
                          $
                          
                          
                          
                          %Banking
      and POS
                          
                          $
                          11,866
                          
                          
                          
                          19.1
                          %
                          
                          $
                          11,046
                          
                          
                          
                          22.6
                          %
                          
                          $
                          820
                          
                          
                          
                          7.4
                          %Casino
      and gaming
                          
                          
                          22,299
                          
                          
                          
                          35.8
                          %
                          
                          
                          19,438
                          
                          
                          
                          39.9
                          %
                          
                          
                          2,861
                          
                          
                          
                          14.7
                          %Lottery
                          
                          
                          15,731
                          
                          
                          
                          25.3
                          %
                          
                          
                          5,900
                          
                          
                          
                          12.1
                          %
                          
                          
                          9,831
                          
                          
                          
                          166.6
                          %TransAct
      Services Group
                          
                          
                          12,311
                          
                          
                          
                          19.8
                          %
                          
                          
                          12,382
                          
                          
                          
                          25.4
                          %
                          
                          
                          (71
                          )
                          
                          
                          (0.6
                          )%Total
      net sales
                          
                          $
                          62,207
                          
                          
                          
                          100.0
                          %
                          
                          $
                          48,766
                          
                          
                          
                          100.0
                          %
                          
                          $
                          13,441
                          
                          
                          
                          27.6
                          %





Cash and cash
equivalents: We consider all highly liquid investments with a
maturity date of three months or less at date of purchase to be cash
equivalents.





Accountsreceivableand allowance
for doubtful accounts:  We
have standardized credit granting and review policies and procedures for all
customer accounts, including:


·
            Credit
      reviews of all new customer
accounts,


·
            Ongoing
      credit evaluations of current
customers,


·
            Credit
      limits and payment terms based on available credit
      information,


·
            Adjustments
      to credit limits based upon payment history and the customer’s current
      creditworthiness.




F-7





Table of Contents





TRANSACT
TECHNOLOGIES INCORPORATED


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





2.
Summary of significant accounting policies (continued)




We
establish an allowance for doubtful accounts to ensure trade receivables are
valued appropriately.  We maintain an allowance for doubtful accounts
based on a variety of factors, including the length of time receivables are past
due, significant one-time events and historical experience.  We record
a specific allowance for individual accounts when we become aware of a
customer’s inability to meet its financial obligations, such as in the case of
bankruptcy filings or deterioration in the customer’s operating results or
financial position.  If circumstances related to customers change, we
would further adjust estimates of the recoverability of
receivables.  Allowances for doubtful accounts on accounts receivable
balances were $55,000 and $62,000 as of December 31, 2008 and 2007,
respectively.





Inventories: Inventories
are stated at the lower of cost (principally standard cost, which approximates
actual cost on a first-in, first-out basis) or market.  We review
market value based on historical usage and estimates of future
demand.  Based on these reviews, inventory write-downs are recorded,
as necessary, to reflect estimated obsolescence, excess quantities and market
value.  Our net inventory included a reserve of $3,050,000 and
$2,850,000 as of December 31, 2008 and 2007, respectively.





Fixed
assets: Fixed assets are stated at cost.  Depreciation is
recorded using the straight-line method over the estimated useful
lives.  The estimated useful life of tooling is five years; machinery
and equipment is ten years; furniture and office equipment is five to ten years;
and computer software and equipment is three to seven
years.  Leasehold improvements are amortized over the shorter of the
term of the lease or the useful life of the asset.  Costs related to
repairs and maintenance are expensed as incurred.  The costs of sold or
retired assets are removed from the related asset and accumulated depreciation
accounts and any gain or loss is recognized.  Depreciation expense was
$1,744,000, $1,743,000 and $1,466,000 in 2008, 2007 and 2006,
respectively.





Leases:  Rent
expense under non-cancelable operating leases with scheduled rent increases or
free rent periods is accounted for on a straight-line basis over the lease term,
beginning on the date of control of physical use of the asset or of initial
possession.  The amount of the excess of straight-line rent expense
over scheduled payments is recorded as a deferred
liability.  Construction allowances and other such lease incentives
are recorded as deferred credits, and are amortized on a straight-line basis as
a reduction of rent expense beginning in the period they are deemed to be
earned, which generally coincides with the occupancy date.





Goodwill:  We
account for goodwill in accordance with the provisions of Statement of Financial
Accounting Standard No. 142, “Goodwill and Other Intangible Assets” (“FAS
142”).  We test goodwill annually for impairment, or whenever events
or changes in circumstances indicate that the carrying value may not be
recoverable.  We have performed an impairment test as of December 31,
2008 and determined that no impairment has occurred.





Revenue
recognition:Our typical contracts
include the sale of printers, which are sometimes accompanied by
separately-priced extended warranty contracts.  We also sell spare
parts, consumables, and other repair services (sometimes pursuant to multi-year
product maintenance contracts) which are not included in the original printer
sale and are ordered by the customer as needed.  We recognize revenue
pursuant to the guidance within SAB 104, “Revenue
Recognition.”  Specifically, revenue is recognized when evidence of an
arrangement exists, delivery (based on shipping terms, which are generally FOB
shipping point) has occurred, the selling price is fixed and determinable, and
collectability is reasonably assured.  We provide for an estimate of
product returns and price protection based on historical experience at the time
of revenue recognition.





Revenue
related to extended warranty and product maintenance contracts is recognized
pursuant to FASB Technical Bulletin 90-1 (“FTB 90-1”), “Accounting for
Separately Priced Extended Warranty and Product Maintenance
Contracts.”  Pursuant to FTB 90-1, revenue related to separately
priced product maintenance contracts is deferred and recognized over the term of
the maintenance period.  We record deferred revenue for advance
payments received from customers for maintenance contracts.





Our
customers have the right to return products that do not function properly within
a limited time after delivery.  We monitor and track product returns
and record a provision for the estimated future returns based on historical
experience.  Returns have historically been within expectations and
the provisions established.





F-8





Table of Contents





TRANSACT
TECHNOLOGIES INCORPORATED


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





2.
Summary of significant accounting policies (continued)




We offer
some of our customer’s price protection as an incentive to carry inventory of
our product.  These price protection plans provide that if we lower
prices, we will credit them for the price decrease on inventory they
hold.  Our customers typically carry limited amounts of inventory, and
we infrequently lower prices on current products.  As a result, the
amounts paid under these plans have not been material.





Concentration of
credit risk:  Financial instruments that potentially expose
TransAct to concentrations of credit risk are limited to cash and cash
equivalents held by our banks in excess of insured limits and accounts
receivable.




Accounts
receivable from customers representing 10% or more of total accounts receivable
were as follows:





December
      31,2008
                    
                    
                    2007Customer
      A
                    
                    
                    20
                    %
                    
                    
                    12
                    %Customer
      B
                    
                    
                    *
                    
                    
                    
                    13
                    %Customer
      C
                    
                    
                    10
                    %
                    
                    
                    *Customer
      D
                    
                    
                    *
                    
                    
                    
                    10
                    %* -
      customer balances were less than 10% of total accounts
      receivable




Sales to
customers representing 10% or more of total net sales were as
follows:





Year
      ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006Customer
      A
                    
                    
                    28
                    %
                    
                    
                    14
                    %
                    
                    
                    20
                    %Customer
      B
                    
                    
                    *
                    
                    
                    
                    10
                    %
                    
                    
                    ** -
      customer balances were less than 10% of total net sales





Prior to
2008, the primary operations of our United Kingdom subsidiary, a European sales
and service center, related to revenue generated from a service contract with a
single customer in the United Kingdom.  The service contract, which
represented a substantial portion of our U.K. subsidiary’s revenue, was renewed
in April 2007 through November 2007 at a lower minimum sales value compared to
the minimum sales value of the prior year’s contract.  The service
contract ended in November 2007 and was not renewed, as the customer replaced
our printers with a different technology that we were unable to
provide.





Warranty:  We
generally warrant our products for up to 24 months and record the estimated cost
of such product warranties at the time the sale is
recorded.  Estimated warranty costs are based upon actual past
experience of product repairs and the related estimated cost of labor and
material to make the necessary repairs.





The
following table summarizes the activity recorded in the accrued product warranty
liability:





Year
      ended December 31,(In
      thousands)
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006Balance,
      beginning of year
                    
                    $
                    500
                    
                    
                    $
                    603
                    
                    
                    $
                    644Additions
      related to warranties issued
                    
                    
                    263
                    
                    
                    
                    356
                    
                    
                    
                    595Warranty
      costs incurred
                    
                    
                    (370
                    )
                    
                    
                    (459
                    )
                    
                    
                    (636
                    )Balance,
      end of year
                    
                    $
                    393
                    
                    
                    $
                    500
                    
                    
                    $
                    603





Approximately
$133,000 and $91,000 of the accrued product warranty liability were classified
as long-term at December 31, 2008 and 2007, respectively.




F-9





Table of Contents





TRANSACT
TECHNOLOGIES INCORPORATED


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





2.
Summary of significant accounting policies (continued)




Research and
development expenses:  Research and development expenses
include engineering, design and product development expenses incurred in
connection with specialized engineering and design to introduce new products and
to customize existing products, and are expensed as a component of operating
expenses as incurred.  We recorded approximately $2,942,000,
$3,129,000 and $2,824,000 of research and development expenses in 2008, 2007 and
2006, respectively.





Advertising:  Advertising
costs are expensed as incurred.  Advertising expenses, which are
included in selling and marketing expense on the accompanying consolidated
statements of operations, for 2008, 2007 and 2006 totaled $289,000, $136,000 and
$182,000, respectively.





Restructuring:  In
2001, we undertook a plan to consolidate all manufacturing and engineering into
our existing Ithaca, NY facility and close our Wallingford, CT manufacturing
facility.  We applied the consensus set forth in EITF 94-3, “Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring)” in recognizing
restructuring expenses.  For all future exit costs, we will apply the
guidance set forth in Statement of Financial Accounting Standard No. 146,
“Accounting for Costs Associated with Exit or Disposal Activities” (“FAS
146”).  See Note 8 for additional disclosures related to our
restructuring and exit costs.





Income
taxes:  The income tax amounts reflected in the accompanying
financial statements are accounted for under the liability method in accordance
with FAS 109 “Accounting for Income Taxes” (“FAS 109”).  Deferred tax
assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards.  Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in which
those temporary differences are expected to be recovered or
settled.  We assess the likelihood that net deferred tax assets will
be realized from future taxable income, and to the extent that we believe that
realization is not likely, we establish a valuation allowance.  On
January 1, 2007, we adopted FASB Interpretation 48, Accounting for Uncertainty
in Income Taxes (“FIN 48”).  In accordance with FIN 48, we identified,
evaluated and measured the amount of benefits to be recognized for our tax
return positions.  See Note 14 for information regarding our
accounting for income taxes.





Foreign currency
translation: The financial position and results of operations of our
foreign subsidiary in the United Kingdom are measured using local currency as
the functional currency.  Assets and liabilities of such subsidiary
have been translated into U.S. dollars at the year-end exchange rate, related
revenues and expenses have been translated at the weighted average exchange rate
for the year, and shareholders’ equity has been translated at historical
exchange rates.  The resulting translation gains or losses, net of
tax, are recorded in stockholders’ equity as a cumulative translation
adjustment, which is a component of accumulated other comprehensive
income.  Foreign currency transaction gains and losses, including
those related to intercompany balances, are recognized in other income
(expense).





Fair value of
financial instruments:The carrying amount for
cash and cash equivalents approximates fair value because of the short maturity
of these instruments.  The carrying amount of receivables, accounts
payable and accrued liabilities is a reasonable estimate of fair value because
of the short-term nature of these accounts.





Comprehensive
income:  Statement of Financial Accounting Standards No. 130,
“Reporting Comprehensive Income” (“FAS 130”), requires that items defined as
comprehensive income or loss be separately classified in the financial
statements and that the accumulated balance of other comprehensive income or
loss be reported separately from accumulated deficit and additional
paid-in-capital in the equity section of the balance sheet.  We
include the foreign currency translation adjustment, net of tax, related to our
subsidiary in the United Kingdom within our calculation of comprehensive
income.




F-10





Table of Contents





TRANSACT
TECHNOLOGIES INCORPORATED


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





2.
Summary of significant accounting policies (continued)




Share-based
Payments:In
December 2004, the Financial Accounting Standards Board (“FASB”) revised
Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based
Payment” (“FAS 123R”), which establishes accounting for share-based awards
exchanged for employee services and requires companies to expense the estimated
fair value of these awards over the requisite employee service
period.  We adopted the accounting provisions of FAS 123R beginning in
the first quarter of 2006.





Share-based
compensation expense is measured at the grant date, based on the estimated fair
value of the award, and is recognized as expense over the employee’s requisite
service period.  We have no awards with market or performance
conditions.
 
 We use
the Black-Scholes option-pricing model to calculate the fair value of share
based awards.  The key assumptions for this valuation method include
the expected term of the option, stock price volatility, risk-free interest
rate, dividend yield, market price of our underlying stock and exercise
price.  Many of these assumptions are judgmental and highly sensitive
in the determination of compensation expense.  In addition, we
estimate forfeitures when recognizing compensation expense, and we adjust our
estimate of forfeitures over the requisite service period based on the extent to
which actual forfeitures differ, or are expected to differ, from such
estimates.  Changes in estimated forfeitures are recognized through a
cumulative true-up adjustment in the period of change and also impacts the
amount of compensation expense to be recognized in future
periods.


Net income and
loss per share:  We report net income or loss per share in
accordance with Statement of Financial Accounting Standards No. 128, “Earnings
per Share (EPS)” (“FAS 128”).  Under FAS 128, basic EPS, which
excludes dilution, is computed by dividing income or loss available to common
shareholders by the weighted average number of common shares outstanding for the
period.  Unvested restricted stock is excluded from the calculation of
weighted average common shares for basic EPS.  Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common
stock.  Diluted EPS includes restricted stock and in-the-money stock
options using the treasury stock method.  During a loss period, the
assumed exercise of in-the-money stock options has an anti-dilutive effect, and
therefore, these instruments are excluded from the computation of dilutive
EPS.  See Note 15 for EPS calculation.




3.
Recently issued accounting pronouncements
  Fair Value
Measurements:  In September 2006, the Financial Accounting
Standards Board (“FASB”) issued Statement of Financial Accounting Standards
No. 157, “Fair Value Measurements” (“FAS 157”).  This statement defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value
measurements.  This Statement applies under other accounting
pronouncements that require or permit fair value measurements.  FAS 157
defines fair value based upon an exit price model.  A fair value
measurement assumes that the transaction to sell an asset or transfer a
liability occurs in the principal market for the asset or liability, or,
in the absence of a principal market, the most advantageous market for the
asset or liability.  This Statement was effective for the
Company beginning on January 1, 2008, except that FSP 157-2 delayed the
effective date of FAS 157 for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis, until fiscal years
beginning after November 15, 2008.  The Company adopted FAS 157 on
January 1, 2008, with the exception of the application of the Statement to
nonrecurring nonfinancial assets and liabilities measured at fair value
which include: (i) goodwill impairment testing, (ii) initial measurement of
the fair value of asset retirement obligations and (iii) measurement of
impairment of long-lived assets.  The implementation of FAS 157 did not
have an effect on the Company’s consolidated financial position, results of
operations or cash flows during 2008, and is not expected to have a material
effect on the Company upon full adoption in future periods.




F-11





Table of Contents





TRANSACT
TECHNOLOGIES INCORPORATED


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





3.
Recently issued accounting pronouncements (continued)




Fair Value Option
for Financial Assets and Financial Liabilities:  In February
2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The
Fair Value Option for Financial Assets and Financial Liabilities, including an
amendment of FASB Statement No. 115” (“FAS 159”).  This Statement
permits entities to choose to measure many financial instruments and certain
other items at fair value that are not currently required to be measured at fair
value.  The Company adopted FAS 159 on January 1, 2008 and elected not
to measure any additional financial instruments and other items at fair
value.  The adoption did not have a material effect on the Company’s
consolidated financial position, results of operations or cash flows during
2008.





Business
Combinations:  In December 2007, the FASB issued Statement of
Financial Accounting Standards No. 141 (revised 2007), “Business Combinations”
(“FAS 141(R)”).  FAS 141(R) amends Statement of Financial Accounting
Standards No. 141, “Business Combinations” and provides revised guidance
requiring the acquirer to recognize and measure, at fair value on the
acquisition date, identifiable assets and goodwill acquired, liabilities
assumed, and any non-controlling interest in the
acquiree.  Transaction and restructuring costs generally will be
expensed as incurred.  The Statement also provides disclosure
requirements to enable users of the financial statements to evaluate the nature
and financial effects of the business combination.  FAS 141(R) is
effective for fiscal years beginning on or after December 15, 2008 and will be
applied prospectively.  This statement is not expected to have any
effect on our financial statements until such time as we acquire a
business and its
effect on future periods will depend on the nature and significance of any
acquisition.





Derivative
Instruments and Hedging Activities:  In March 2008, the FASB
issued FAS No. 161, “Disclosures about Derivative Instruments and Hedging
Activities—an amendment of FASB No. 133” (“FAS 161”).  This statement
amends FAS No. 133 by requiring enhanced qualitative, quantitative and
credit-risk disclosures about an entity’s derivative instruments and hedging
activities, but does not change FAS No. 133’s scope or
accounting.  FAS 161 is effective for fiscal years, and interim
periods within those fiscal years, beginning after November 15, 2008, with
earlier adoption permitted.  As we do not currently engage in
activities accounted for under the provision of FAS No. 133, the adoption of FAS
No. 161 is not expected to have any impact on our financial
statements.





4.
Inventories




The
components of inventories, net of allowances, are:


December
      31,(In
      thousands)
                      
                      2008
                      
                      
                      2007Raw
      materials and purchased component parts
                      
                      $
                      7,207
                      
                      
                      $
                      8,019Work-in-process
                      
                      
                      27
                      
                      
                      
                      57Finished
      goods
                      
                      
                      2,685
                      
                      
                      
                      589$
                      9,919
                      
                      
                      $
                      8,665




5.
Fixed assets
  The
components of fixed assets are:
 December
      31,(In
      thousands)
                    
                    2008
                    
                    
                    2007Tooling,
      machinery and equipment
                    
                    $
                    13,316
                    
                    
                    $
                    12,697Furniture
      and office equipment
                    
                    
                    1,694
                    
                    
                    
                    1,730Computer
      software and equipment
                    
                    
                    4,694
                    
                    
                    
                    4,940Leasehold
      improvements
                    
                    
                    1,872
                    
                    
                    
                    1,86721,576
                    
                    
                    
                    21,234Less:
      accumulated depreciation and amortization
                    
                    
                    (16,013
                    )
                    
                    
                    (14,896
                    )$
                    5,563
                    
                    
                    $
                    6,338


F-12





Table of Contents





TRANSACT
TECHNOLOGIES INCORPORATED


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





6.
Intangible assets




On June
30, 2005, we acquired certain intangible assets related to casino ticket printer
designs and technology from Bally Gaming, Inc. (“Bally”) for $475,000, plus the
costs of effecting the acquisition (approximately $35,000).  Prior to
the acquisition, pursuant to the terms of a license agreement, we were required
to pay Bally a royalty on sales of certain gaming printers utilizing the
licensed technology.  As a result of the acquisition, effective July
1, 2005, we were no longer required to pay any future royalties to
Bally.





The
purchase price was allocated, based on management’s estimates, to intangible
assets based on their relative fair value at the date of
acquisition.  The fair value of the intangibles, comprised of
purchased technology and a covenant not to compete, was determined using the
future discounted cash flows method.  The intangible assets are being
amortized on a straight-line basis over six and seven years, respectively, for
the estimated life of the assets.





The
following summarizes the allocation of the purchase price for the acquisition of
certain intangible assets from Bally (in thousands):





Purchased
      technology
                    
                    $
                    364Covenant
      not to compete
                    
                    
                    146Consideration
      paid
                    
                    $
                    510





As of
December 31, 2008 and 2007, the net intangible asset balance associated with the
technology purchased from Bally was $226,000 and $307,000,
respectively.  Amortization expense associated with the technology
purchased from Bally was $81,000 in 2008, 2007 and 2006,
respectively.  Amortization expense for each of the next four years
ending December 31 is expected to be as follows: $81,000 in each of 2009 through
2010; $54,000 in 2011; and $10,000 in 2012.





7.
Accrued liabilities




The
components of accrued liabilities (current portion) are:


December
      31,(In
      thousands)
                  
                  2008
                  
                  
                  2007Payroll
      and fringe benefits
                  
                  $
                  1,771
                  
                  
                  $
                  929Income
      taxes
                  
                  
                  134
                  
                  
                  
                  -Warranty
                  
                  
                  260
                  
                  
                  
                  409Professional
      and consulting
                  
                  
                  114
                  
                  
                  
                  782Other
                  
                  
                  568
                  
                  
                  
                  627$
                  2,847
                  
                  
                  $
                  2,747




F-13





Table of Contents





TRANSACT
TECHNOLOGIES INCORPORATED


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





8.
Accrued business consolidation and restructuring expenses




In
February 2001, we announced plans to establish a global engineering and
manufacturing center at our Ithaca, NY facility.  As part of this
strategic decision, we undertook a plan to consolidate all manufacturing and
engineering into our existing Ithaca, NY facility and close our Wallingford, CT
manufacturing facility (the “Consolidation”).  As of December 31,
2001, we successfully transferred substantially all our Wallingford operations
to Ithaca, NY, with the exception of our corporate headquarters and a service
center that remain in Connecticut.  The closing of the Wallingford
manufacturing facility resulted in the termination of employment of
approximately 70 production, administrative and management
employees.





During
2001 through 2004, we recorded expenses of approximately $5,957,000 related to
costs associated with the Consolidation, including severance pay, stay bonuses,
employee benefits, moving expenses, non-cancelable lease payments, accelerated
depreciation and other costs.





In
November 2006, we executed an agreement effective May 1, 2007 to terminate the
lease agreement for our Wallingford, CT facility (the “Release Agreement”).
Prior to the execution of the Release Agreement, we accrued the remaining
non-cancelable lease payments and other related costs for the unused portion of
this facility through the expiration date of the lease (March 31, 2008). As a
result of the Release Agreement and the early termination of the lease, we were
released from the legal obligation to make lease payments after May 1, 2007 and,
accordingly, we reversed approximately $479,000 of previously accrued
restructuring reserve in the fourth quarter of 2006.  During the
second quarter of 2007, we recorded an additional $12,000 of expense to finalize
the termination of the lease agreement.  As of December 31, 2007, all
non-cancelable lease payments related to our Wallingford, CT facility had
been made.





The
following table summarizes the activity recorded in the restructuring
accrual:





Year
      ended December 31,(In
      thousands)
                  
                  2007
                  
                  
                  2006Accrual
      balance, beginning of year
                  
                  $
                  315
                  
                  
                  $
                  1,193Business
      consolidation and restructuring expenses:Facility
      closure and consolidation expenses
                  
                  
                  12
                  
                  
                  
                  -Reversal
      of lease obligation related to unused space
                  
                  
                  -
                  
                  
                  
                  (479
                  )12
                  
                  
                  
                  (479
                  )Cash
      payments
                  
                  
                  (327
                  )
                  
                  
                  (399
                  )Accrual
      balance, end of year
                  
                  $
                  -
                  
                  
                  $
                  315





9.
Retirement savings plan




On April
1, 1997, we established the TransAct Technologies Retirement Savings Plan (the
“401(k) Plan”), a defined contribution plan under Section 401(k) of the Internal
Revenue Code.  All full-time employees are eligible to participate in
the 401(k) Plan at the beginning of the calendar quarter immediately following
their date of hire.  We match employees’ contributions at a rate of
50% of employees’ contributions up to the first 6% of the employees’
compensation contributed to the 401(k) Plan.  Our matching
contributions were $244,000, $247,000 and $249,000 in 2008, 2007 and 2006,
respectively.





10.
Borrowings




On
November 28, 2006, we signed a five-year $20 million credit facility (the “TD
Banknorth Credit Facility”) with TD Banknorth, N.A. (“TD Banknorth”). The credit
facility provides for a $20 million revolving credit line expiring on November
28, 2011.  Borrowings under the revolving credit line bear a floating
rate of interest at the prime rate minus one-percent and are secured by a lien
on all of our assets.  We also pay a fee of 0.25% on unused borrowings
under the revolving credit line.  Deferred financing costs relating to
expenses incurred to complete the TD Banknorth Credit Facility were
$94,000.  The TD Banknorth Credit Facility imposes certain quarterly
financial covenants on us and prohibits the payment of dividends on our common
stock and the creation of other liens.  On November 7, 2007, we
amended the TD Banknorth Credit Facility to revise a financial covenant
effective September 30, 2007.  We were
in compliance with all financial covenants of the TD Banknorth Credit Facility
at December 31, 2008.





As of
December 31, 2008, we had no outstanding borrowings on the revolving credit
line.  Undrawn commitments under the TD Banknorth Credit Facility were
$20,000,000 at December 31, 2008.




F-14





Table of Contents





TRANSACT
TECHNOLOGIES INCORPORATED


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





11.
Commitments and contingencies




We had
been involved in patent litigation with FutureLogic with respect to our patents
U.S. Patent 6,924,903 and U.S. Patent 7,099,035.  On May 13, 2008, we
signed a Patent License and Settlement Agreement with FutureLogic that settled
the current patent litigation and all other legal matters outstanding between
the two parties.  Under the Patent License and Settlement Agreement,
FutureLogic agreed to license our dual port technology for printers and
upgrade kits that utilize the patented technology.  The license grants
FutureLogic worldwide, perpetual rights for U.S. Patent 6,924,903, U.S. Patent
7,099,035, related applications and patents, and foreign
counterparts.





At
December 31, 2008, we were lessee on operating leases for equipment and real
property.  Rent expense was approximately $1,030,000, $1,152,000 and
$1,330,000 in 2008, 2007 and 2006, respectively.  Minimum aggregate
rental payments required under operating leases that have initial or remaining
non-cancelable lease terms in excess of one year as of December 31, 2008 are as
follows:  $970,000 in 2009;
$810,000 in
2010; $816,000 in 2011; $459,000 in 2012;
$223,000 in 2013; and $773,000thereafter.





12.
Stock incentive plans




Stock incentive
plans.We currently
have four primary stock incentive plans: the 1996 Stock Plan, which provided for
the grant of awards to officers and other key employees of the Company; the 1996
Directors’ Stock Plan, which provided for non-discretionary awards to
non-employee directors; the 2001 Employee Stock Plan, which provided for the
grant of awards to key employees of the Company and other non-employees who
provided services to the Company; and the 2005 Equity Incentive Plan, which
provides for awards to executives, key employees, directors and
consultants.  The plans generally provide for awards in the form of:
(i) incentive stock options, (ii) non-qualified stock options, (iii) restricted
stock, (iv) restricted stock units, (v) stock appreciation rights or (vi)
limited stock appreciation rights.  However, the 2001 Employee Stock
Plan does not provide for incentive stock option awards.  Options
granted under these plans have exercise prices equal to 100% of the fair market
value of the common stock at the date of grant.  Options granted have
a ten-year term and generally vest over a three- to five-year period, unless
automatically accelerated for certain defined events.  As of May 2005,
no new awards will be made under the 1996 Stock Plan, the 1996 Directors’ Stock
Plan or the 2001 Employee Stock Plan.  At December 31, 2008,
approximately 187,250 shares of common stock remained available for issuance
under the 2005 Equity Incentive Plan.





Under the
assumptions indicated below, the weighted-average fair value of stock option
grants for the years ended December 31, 2008, 2007 and 2006 was $5.85,
$5.81 and $5.91, respectively.  The table below indicates the key
assumptions used in the option valuation calculations for options granted in the
years ended December 31, 2008, 2007 and 2006 and a discussion of our methodology
for developing each of the assumptions used in the valuation model:





Year
      ended December 31,2008
                        
                        
                        2007
                        
                        
                        2006Expected
      option term
                        
                        5.7
      years
                        
                        
                        6.0
      years
                        
                        
                        5.2
      yearsExpected
      volatility
                        
                        
                        61.7
                        %
                        
                        
                        71.2
                        %
                        
                        
                        78.4
                        %Risk-free
      interest rate
                        
                        
                        3.0
                        %
                        
                        
                        4.5
                        %
                        
                        
                        4.5
                        %Dividend
      yield
                        
                        
                        0
                        %
                        
                        
                        0
                        %
                        
                        
                        0
                        %





Expected
Option Term - This is the weighted average period of time over which the options
granted are expected to remain outstanding giving consideration to our
historical exercise patterns.  Options granted have a maximum term of
ten years.  An increase in the expected term will increase
compensation expense.





Expected
Volatility – The stock volatility for each grant is measured using the weighted
average of historical daily price changes of our common stock over the most
recent period approximately equal to the expected option term of the
grant.  An increase in the expected volatility factor will increase
compensation expense.





Risk-Free
Interest Rate - This is the U.S. Treasury rate in effect at the time of grant
having a term approximately equal to the expected term of the
option.  An increase in the risk-free interest rate will increase
compensation expense.





Dividend
Yield - We have not made any dividend payments on our common stock, and we have
no plans to pay dividends in the foreseeable future.  An increase in
the dividend yield will decrease compensation expense.




F-15





Table of Contents





TRANSACT
TECHNOLOGIES INCORPORATED


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





12.
Stock incentive plans (continued)




Prior to
adopting the provisions of FAS 123R, we recorded estimated compensation expense
for employee stock options based upon their intrinsic value on the date of grant
pursuant to APB 25 and provided the required pro forma disclosures of FAS
123.  Because we established the exercise price based on the fair
market value of our common stock at the date of grant, the stock options had no
intrinsic value upon grant, and therefore no expense was recorded prior to
adopting FAS 123R.  We recorded compensation expense for restricted
stock at the fair value of the stock at the date of grant, recognized over the
service period.  Each accounting period, we reported the potential
dilutive impact of stock options in our diluted earnings per common share using
the treasury-stock method.  Out-of-the-money stock options (i.e., the
average stock price during the period was below the exercise price of the
stock option) were not included in diluted earnings per common share as their
effect was anti-dilutive.





We
recognize compensation expense associated with awards granted after January 1,
2006, and the unvested portion of previously granted restricted stock awards
that were outstanding as of January 1, 2006 in our consolidated statement of
operations.  During 2006, we recognized compensation expense of
$111,000 for stock options and $470,000 for restricted stock, which was recorded
in our consolidated statement of operations in accordance with
FAS123R.  The income tax benefits from share-based payments recorded
in our consolidated statement of operations totaled $204,000 for
2006.


During
2007, we recognized compensation expense of $225,000 for stock options and
$490,000 for restricted stock, which was recorded in our consolidated statement
of operations in accordance with FAS123R.  The income tax benefits
from share-based payments recorded in our consolidated statement of operations
totaled $270,000 for 2007.


During
2008, we recognized compensation expense of
$335,000 for stock
options and $468,000 for restricted stock, which was recorded in our
consolidated statement of operations in accordance with FAS123R.  The
income tax benefits from share-based payments recorded in our consolidated
statement of operations totaled$280,000 for
2008.




The 1996
Stock Plan, 1996 Directors’ Stock Plan, 2001 Employee Stock Plan and 2005 Equity
Incentive Plan option activity is summarized below:





Year
      Ended December 31,2008
                        
                        
                        2007
                        
                        
                        2006Shares
                        
                        
                        Weighted
      Average Exercise Price
                        
                        
                        Shares
                        
                        
                        Weighted
      Average Exercise Price
                        
                        
                        Shares
                        
                        
                        Weighted
      Average Exercise PriceOutstanding
      at beginning of period
                        
                        
                        764,696
                        
                        
                        $
                        6.95
                        
                        
                        
                        707,344
                        
                        
                        $
                        6.67
                        
                        
                        
                        741,501
                        
                        
                        $
                        6.10Granted
                        
                        
                        167,500
                        
                        
                        
                        5.85
                        
                        
                        
                        144,500
                        
                        
                        
                        8.82
                        
                        
                        
                        115,000
                        
                        
                        
                        8.83Exercised
                        
                        
                        (66,972
                        )
                        
                        
                        4.68
                        
                        
                        
                        (33,199
                        )
                        
                        
                        4.49
                        
                        
                        
                        (136,157
                        )
                        
                        
                        5.05Forfeited
                        
                        
                        (3,000
                        )
                        
                        
                        5.24
                        
                        
                        
                        (29,500
                        )
                        
                        
                        9.23
                        
                        
                        
                        (10,000
                        )
                        
                        
                        8.83Expired
                        
                        
                        (10,575
                        )
                        
                        
                        11.25
                        
                        
                        
                        (24,449
                        )
                        
                        
                        10.25
                        
                        
                        
                        (3,000
                        )
                        
                        
                        16.62Outstanding
      at end of period
                        
                        
                        851,649
                        
                        
                        $
                        6.87
                        
                        
                        
                        764,696
                        
                        
                        $
                        6.95
                        
                        
                        
                        707,344
                        
                        
                        $
                        6.67Options
      exercisable at end of period
                        
                        
                        530,149
                        
                        
                        $
                        6.62
                        
                        
                        
                        565,696
                        
                        
                        $
                        6.32
                        
                        
                        
                        602,344
                        
                        
                        $
                        6.29Options
      vested or expected to vest
                        
                        
                        828,348
                        
                        
                        $
                        6.87
                        
                        
                        
                        755,468
                        
                        
                        $
                        6.94
                        
                        
                        
                        704,530
                        
                        
                        $
                        6.66







Options
      Outstanding
                
                
                Options
      ExercisableRange
      of Exercise Prices
                
                Number
      Outstanding at December 31, 2008
                
                
                Weighted-Average
      Exercise Price
                
                
                Weighted-Average
      Remaining Contractual Life
                
                
                Number
      Exercisable at December 31, 2008
                
                
                Weighted-Average
      Exercise Price(In
      years)$2.00
      - $5.00
                
                
                340,149
                
                
                $
                3.63
                
                
                
                3.1
                
                
                
                340,149
                
                
                $
                3.63$5.01
      - $7.50
                
                
                253,250
                
                
                
                5.90
                
                
                
                6.6
                
                
                
                102,750
                
                
                
                6.57$7.51
      - $10.00
                
                
                221,000
                
                
                
                8.93
                
                
                
                7.9
                
                
                
                50,000
                
                
                
                9.06$10.01
      - $25.00
                
                
                2,500
                
                
                
                18.33
                
                
                
                5.0
                
                
                
                2,500
                
                
                
                18.33$25.01
      - $35.00
                
                
                34,750
                
                
                
                31.66
                
                
                
                5.4
                
                
                
                34,750
                
                
                
                31.66851,649
                
                
                
                6.87
                
                
                
                5.5
                
                
                
                530,149
                
                
                
                6.62




F-16




Table of Contents




TRANSACT
TECHNOLOGIES INCORPORATED


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




12.
Stock incentive plans (continued)




At
December 31, 2008 and 2007, outstanding options had an intrinsic value of
$325,000 and $447,000 with a weighted average remaining contractual life of 5.5
and 5.3 years, respectively.  At December 31, 2008 and 2007, options
vested or expected to vest had an intrinsic value of $325,000 and $447,000 with
a weighted average remaining contractual life of 5.4 and 5.3 years,
respectively.  In addition, exercisable options at December 31, 2008
and 2007 had an intrinsic value of $325,000 and $447,000 with a weighted average
remaining contractual life of 3.6 and 4.1 years, respectively.  Shares
that are issued upon exercise of employee stock options are newly issued shares
and not issued from treasury stock.  As of December 31, 2008,
unrecognized compensation cost related to stock options totaled $1,147,000,
which is expected to be recognized over a weighted average period of 3.7
years.





The total
intrinsic value of stock options exercised was $402,000, $61,000 and $825,000
and the total fair value of stock options vested was $247,000, $124,000, and $0
during the year ended December 31, 2008, 2007 and 2006, respectively.  As a
result of the exercise of non-qualified stock options, we have net operating
loss carry forwards of approximately $114,000 attributable to excess tax
benefits from stock compensation deductions, which can be used to offset future
taxable income, if any.  If and when realized, the related tax
benefits of these net operating losses carry forwards will be credited directly
to paid-in capital.


Restricted
stock:Under
the 1996 Stock Plan, 2001 Employee Stock Plan
and2005 Equity Incentive Plan, we have granted shares of restricted
common stock, for no consideration, to our officers, directors and certain key
employees.  Restricted stock activity
for the 1996 Stock Plan, 2001 Employee Stock Plan
and2005 Equity Incentive Planis summarized
below:


Year
      Ended December 31,2008
                        
                        
                        2007
                        
                        
                        2006Shares
                        
                        
                        Weighted
      Average Grant Date Fair Values
                        
                        
                        Shares
                        
                        
                        Weighted
      Average Grant Date Fair Values
                        
                        
                        Shares
                        
                        
                        Weighted
      Average Grant Date Fair ValuesNonvested
      shares at beginning of period
                        
                        
                        106,683
                        
                        
                        $
                        12.10
                        
                        
                        
                        154,116
                        
                        
                        $
                        12.22
                        
                        
                        
                        187,550
                        
                        
                        $
                        12.23Granted
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        15,000
                        
                        
                        
                        13.78Vested
                        
                        
                        (44,583
                        )
                        
                        
                        12.15
                        
                        
                        
                        (37,683
                        )
                        
                        
                        13.01
                        
                        
                        
                        (36,684
                        )
                        
                        
                        12.78Canceled
                        
                        
                        (1,250
                        )
                        
                        
                        7.58
                        
                        
                        
                        (9,750
                        )
                        
                        
                        10.49
                        
                        
                        
                        (11,750
                        )
                        
                        
                        12.64Nonvested
      shares at end of period
                        
                        
                        60,850
                        
                        
                        $
                        12.15
                        
                        
                        
                        106,683
                        
                        
                        $
                        12.10
                        
                        
                        
                        154,116
                        
                        
                        $
                        12.22





As of
December 31, 2008, unrecognized compensation cost related to restricted stock
totaled $363,000, which is expected to be recognized over a weighted average
period of 1.6 years.  The total
intrinsic value of restricted stock that vested during 2008, 2007 and 2006 was
$205,000, $180,000 and $338,000, respectively.




13.
Stockholder rights plan




In
December 1997, our Board of Directors adopted a Stockholder Rights Plan
declaring a distribution of one right (the “Rights”) for each outstanding share
of our common stock to shareholders of record at December 15,
1997.  Initially, each of the Rights entitled the registered holder to
purchase from the Company one one-thousandth of a share of Series A Preferred
Stock, $0.01 par value, at a price of $69 per one one-thousandth of a
share.  The Rights, however, would not become exercisable unless and
until, among other things, any person or group of affiliated persons acquired
beneficial ownership of 15 percent or more of the then outstanding shares of the
Company’s Common Stock.  If a person, or group of persons, acquired 15
percent or more of the outstanding Common Stock of the Company (subject to
certain conditions and exceptions more fully described in the Rights Agreement),
each Right entitled the holder (other than the person, or group of persons, who
acquired 15 percent or more of the outstanding Common Stock) to purchase
Preferred Stock of the Company having a market value equal to twice the exercise
price of the Right.  The Rights were redeemable, under certain
circumstances, for $0.0001 per Right and expired on December 2,
2007.




F-17







Table of Contents





TRANSACT
TECHNOLOGIES INCORPORATED


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




14.
Income taxes




The
components of the income tax provision (benefit) are as follows:
 Year
      Ended December 31,(In
      thousands)
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006Current:Federal
                    
                    $
                    -
                    
                    
                    $
                    (32
                    )
                    
                    $
                    952State
                    
                    
                    16
                    
                    
                    
                    35
                    
                    
                    
                    41Foreign
                    
                    
                    166
                    
                    
                    
                    452
                    
                    
                    
                    541Deferred:Federal
                    
                    
                    386
                    
                    
                    
                    (1,693
                    )
                    
                    
                    552State
                    
                    
                    207
                    
                    
                    
                    (144
                    )
                    
                    
                    31Foreign
                    
                    
                    (1
                    )
                    
                    
                    (2
                    )
                    
                    
                    -Income
      tax provision (benefit)
                    
                    $
                    774
                    
                    
                    $
                    (1,384
                    )
                    
                    $
                    2,117


At
December 31, 2008, we have $2,119,000 of state net operating loss carryforwards
that begin to expire in 2009, and $393,000 of federal net operating loss
carryforwards that begin to expire in 2027.  We also have
approximately $641,000 in federal research and development tax credit
carryforwards that begin to expire in 2024, $118,000 in state tax credit
carryforwards that begin to expire in 2009, and foreign tax credit carryforwards
of approximately $834,000 that begin to expire in 2014.  We had
foreign income before taxes of $541,000, $1,486,000 and $1,813,000 in 2008, 2007
and 2006, respectively.




Deferred
income taxes arise from temporary differences between the tax basis of assets
and liabilities and their reported amounts in the financial
statements.  Our gross deferred tax assets and liabilities were
comprised of the following:
 December
      31,(In
      thousands)
                          
                          2008
                          
                          
                          2007Gross
      deferred tax assets:Net
      operating losses
                          
                          $
                          96
                          
                          
                          $
                          1,549Capitalized
      research and development
                          
                          
                          413
                          
                          
                          
                          494Inventory
      reserves
                          
                          
                          1,081
                          
                          
                          
                          1,034Deferred
      revenue
                          
                          
                          139
                          
                          
                          
                          186Warranty
      reserve
                          
                          
                          139
                          
                          
                          
                          181FAS
      123R stock compensation expense
                          
                          
                          360
                          
                          
                          
                          147Foreign
      tax and other credits
                          
                          
                          1,437
                          
                          
                          
                          781Other
      liabilities and reserves
                          
                          
                          456
                          
                          
                          
                          306Net
      deferred tax assets
                          
                          
                          4,121
                          
                          
                          
                          4,678Gross
      deferred tax liabilities:Depreciation
                          
                          
                          269
                          
                          
                          
                          236Other
                          
                          
                          39
                          
                          
                          
                          84Net
      deferred tax liabilities
                          
                          
                          308
                          
                          
                          
                          320Net
      deferred tax assets
                          
                          $
                          3,813
                          
                          
                          $
                          4,358


During
2008, we recorded a full valuation allowance of $27,000 on the foreign net
operating loss from our Macau subsidiary.  The valuation allowance is
included in other liabilities and reserves in the net deferred tax assets table
above.




In order
to utilize our deferred tax assets, we will need to generate approximately $10.9
million of taxable income in future years.  In one of the last three
years, we have had U.S. taxable losses and there is no assurance that we will
generate future taxable income sufficient to realize all of our deferred tax
assets.  During 2008, we recorded a full valuation allowance of
$27,000 on the foreign net operating loss from our Macau
subsidiary.  We have determined that it is more likely than not that
the remaining net deferred tax assets will be realized, and therefore no
additional valuation allowance is considered necessary, as of December 31,
2008.  However, if our future projections of taxable income are less
than expected, we may need to establish an additional valuation allowance for
all or a portion of our net deferred tax assets, which may have a material
adverse effect on our results of operations and financial
condition.




F-18





Table of Contents





TRANSACT
TECHNOLOGIES INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 14.
Income taxes (continued)


Differences
between the U.S. statutory federal income tax rate and our effective income tax
rate are analyzed below:





Year
      Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006Federal
      statutory tax rate
                  
                  
                  34.0
                  %
                  
                  
                  (34.0
                  )%
                  
                  
                  34.0
                  %State
      income taxes, net of federal income taxes
                  
                  
                  6.6
                  
                  
                  
                  (2.0
                  )
                  
                  
                  1.1Tax
      benefit from tax credits, net of valuation allowance
                  
                  
                  (5.6
                  )
                  
                  
                  (4.0
                  )
                  
                  
                  (0.7
                  )Foreign
      rate differential
                  
                  
                  (2.4
                  )
                  
                  
                  0.2
                  
                  
                  
                  -Valuation
      allowance and tax accruals
                  
                  
                  1.2
                  
                  
                  
                  -
                  
                  
                  
                  0.4Permanent
      items
                  
                  
                  1.4
                  
                  
                  
                  0.9
                  
                  
                  
                  0.6Other
                  
                  
                  (0.3
                  )
                  
                  
                  1.1
                  
                  
                  
                  (0.3
                  )Effective
      tax rate
                  
                  
                  34.9
                  %
                  
                  
                  (37.8
                  )%
                  
                  
                  35.1
                  %




We
adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes (“FIN
48”), at the beginning of 2007.  As a result of the implementation, we
recognized a decrease to reserves for uncertain tax positions.  This
decrease was accounted for as a $318,000 adjustment to the beginning balance of
retained earnings on the Consolidated Balance Sheet.  Including the
cumulative effect decrease, at the beginning of 2007 we had approximately
$79,000 of total gross unrecognized tax benefits that, if recognized, would
favorably affect the effective income tax rate in any future
periods.
 
 The total gross
unrecognized tax benefits at December 31, 2008 are $160,000, of which $116,000
is recorded as a reduction of the related deferred tax asset, and $44,000 is
recorded as a long term liability.At December 31, 2008 and
2007, we had approximately $160,000 and $125,000 of total gross unrecognized tax
benefits that, if recognized, would favorably affect the effective income tax
rate in any future periods.  We are not aware of any events that could
occur within the next twelve months that could cause a significant change in the
total amount of unrecognized tax benefits.  A tabular reconciliation
of the gross amounts of unrecognized tax benefits excluding interest and
penalties at the beginning and end of the year is as follows:


2008
                      
                      
                      2007Unrecognized
      tax benefits as of January 1
                      
                      $
                      125
                      
                      
                      $
                      79Tax
      positions taken during prior periods
                      
                      
                      -
                      
                      
                      
                      33Tax
      positions taken during the current period
                      
                      
                      36
                      
                      
                      
                      21Settlements
                      
                      
                      -
                      
                      
                      
                      -Lapse
      of statute of limitations
                      
                      
                      (1
                      )
                      
                      
                      (8
                      )Unrecognized
      tax benefits as of December 31
                      
                      $
                      160
                      
                      
                      $
                      125
 We are
subject to U.S. federal income tax as well as income tax of certain state and
foreign jurisdictions.  We have substantially concluded all U.S.
federal income tax, state and local, and foreign tax matters through
2002.  During 2008, a limited scope examination of our 2005 and 2006
federal tax returns was completed.  However, our federal tax returns
for the years 2003 through 2007 remain open to examination.  Various
state and foreign tax jurisdiction tax years remain open to examination as well,
though we believe that any additional assessment would be immaterial to the
consolidated financial statements.  No federal, state or foreign tax
jurisdiction income tax returns are currently under examination.
 
 We do not
anticipate that the total unrecognized tax benefits will significantly change
due to the settlement of audits and the expiration of statute of limitations
prior to December 31, 2009.
 
 We
recognize interest and penalties related to uncertain tax positions in income
tax expense.  As of December 31, 2008 and 2007, we have approximately
$7,000 and $2,000 of accrued interest and penalties related to uncertain tax
positions.


F-19





Table of Contents





TRANSACT
TECHNOLOGIES INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


15.
Earnings per share




For 2008,
2007 and 2006, earnings per share were computed as follows (in thousands, except
per share amounts):





Year
      Ended December 31,2008
                
                
                2007
                
                
                2006Net
      income (loss)
                
                $
                1,444
                
                
                $
                (2,274
                )
                
                $
                3,916Shares:Basic:  Weighted
      average common shares outstanding
                
                
                9,308
                
                
                
                9,364
                
                
                
                9,577Add:  Dilutive
      effect of outstanding options as determined by the treasury stock
      method
                
                
                181
                
                
                
                -
                
                
                
                293Diluted:  Weighted
      average common and common equivalent shares
    outstanding
                
                
                9,489
                
                
                
                9,364
                
                
                
                9,870Net
      income (loss) per common share:Basic
                
                $
                0.16
                
                
                $
                (0.24
                )
                
                $
                0.41Diluted
                
                
                0.15
                
                
                
                (0.24
                )
                
                
                0.40





For the
year ended December 31, 2008, potentially dilutive shares that were excluded
from the earnings per share calculation, consisting of out-of-the-money stock
options, were 258,250 shares.





For the
year ended December 31, 2007, there were 871,379 potentially dilutive shares
(prior to consideration of the treasury stock method), consisting of stock
options and nonvested restricted stock, that were excluded from the earnings per
share calculation, because such shares would be anti-dilutive due to our net
loss in the period.





For the
year ended December 31, 2006, potentially dilutive shares that were excluded
from the earnings per share calculation, consisting of out-of-the-money stock
options, were 101,750 shares.





16.
Stock repurchase program




On March
25, 2005, our Board of Directors approved a stock repurchase program (“the Stock
Repurchase Program”).  Under the Stock Repurchase Program, we were
authorized to repurchase up to $10 million of our outstanding shares of common
stock from time to time in the open market over a three-year period ending on
March 25, 2008, depending on market conditions, share price and other
factors.





On
November 1, 2007, our Board of Directors approved an increase in our stock
repurchase authorization under the Stock Repurchase Program to $15 million from
$10 million.  In addition, the Board approved a two-year extension of
the Stock Repurchase Program to March 31, 2010.  As of December 31,
2008, we repurchased a total of 1,164,100 shares of common stock for
approximately $8,538,000 under this program, at an average price of $7.33 per
share.  We use the cost method to account for treasury stock
purchases, under which the price paid for the stock is charged to the treasury
stock account.





17.
International operations




We have
foreign operations primarily from TransAct Technologies Ltd., a wholly-owned
subsidiary in the United Kingdom, which had sales to its customers of
approximately $120,000, $2,121,000 and $2,722,000 in 2008, 2007 and 2006,
respectively.  Tangible assets at foreign locations are not
material.  We had sales from the United States to our customers
outside of the United States of approximately $10,006,000, $8,674,000 and
$11,416,000 in 2008, 2007 and 2006, respectively.  International sales
do not include sales of printers made to domestic distributors or other domestic
customers who in turn may ship those printers to international
destinations.




F-20





Table of Contents





TRANSACT
TECHNOLOGIES INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


18.
Quarterly results of operations (unaudited)
  Our
quarterly results of operations for 2008 and 2007 are as follows:


Quarter
      Ended(In
      thousands, except per share amounts)
                
                March
      31
                
                
                June
      30
                
                
                September
      30
                
                
                December
      312008:Net
      sales
                
                $
                14,285
                
                
                $
                16,319
                
                
                $
                17,326
                
                
                $
                14,277Gross
      profit
                
                
                4,779
                
                
                
                5,460
                
                
                
                5,894
                
                
                
                4,817Net
      income (loss)
                
                
                (692
                )
                
                
                290
                
                
                
                1,210
                
                
                
                636Net
      income (loss) per share:Basic
                
                
                (0.07
                )
                
                
                0.03
                
                
                
                0.13
                
                
                
                0.07Diluted
                
                
                (0.07
                )
                
                
                0.03
                
                
                
                0.13
                
                
                
                0.07





2007:Net
      sales
                      
                      $
                      11,468
                      
                      
                      $
                      13,947
                      
                      
                      $
                      11,737
                      
                      
                      $
                      11,614Gross
      profit
                      
                      
                      3,753
                      
                      
                      
                      4,940
                      
                      
                      
                      3,885
                      
                      
                      
                      3,418Net
      income (loss)
                      
                      
                      (223
                      )
                      
                      
                      284
                      
                      
                      
                      (1,016
                      )
                      
                      
                      (1,319
                      )Net
      income (loss) per share:Basic
                      
                      
                      (0.02
                      )
                      
                      
                      0.03
                      
                      
                      
                      (0.11
                      )
                      
                      
                      (0.14
                      )Diluted
                      
                      
                      (0.02
                      )
                      
                      
                      0.03
                      
                      
                      
                      (0.11
                      )
                      
                      
                      (0.14
                      )




F-21





Table of Contents





TRANSACT TECHNOLOGIES INCORPORATED


Schedule
II


Valuation
and Qualifying Accounts


(Amounts
in thousands)





Description
                    
                    Balance
      at Beginning of Period
                    
                    
                    Provision
                    
                    
                    Write-offs,
      net of recoveries
                    
                    
                    Balance
      at End of PeriodValuation
      account for accounts receivable:Year
      ended December 31, 2008
                    
                    $
                    62
                    
                    
                    $
                    -
                    
                    
                    $
                    (7
                    )
                    
                    $
                    55Year
      ended December 31, 2007
                    
                    $
                    204
                    
                    
                    $
                    -
                    
                    
                    $
                    (142
                    )
                    
                    $
                    62Year
      ended December 31, 2006
                    
                    $
                    240
                    
                    
                    $
                    -
                    
                    
                    $
                    (36
                    )
                    
                    $
                    204Valuation
      account for inventories:Year
      ended December 31, 2008
                    
                    $
                    2,850
                    
                    
                    $
                    200
                    
                    
                    $
                    -
                    
                    
                    $
                    3,050Year
      ended December 31, 2007
                    
                    $
                    1,900
                    
                    
                    $
                    955
                    
                    
                    $
                    (5
                    )
                    
                    $
                    2,850Year
      ended December 31, 2006
                    
                    $
                    2,165
                    
                    
                    $
                    266
                    
                    
                    $
                    (531
                    )
                    
                    $
                    1,900




F-22





Table of Contents





Index to Exhibits





3.1(a)
                        Certificate
      of Incorporation of TransAct Technologies Incorporated (“TransAct” or the
      “Company”), filed with the Secretary of State of Delaware on June 17,
      1996.
                        (2)3.1(b)
                        Certificate
      of Amendment of Certificate of Incorporation of the Company, filed with
      the Secretary of State of Delaware on June 4, 1997.
                        (4)3.1(c)
                        Certificate
      of Designation, Series A Preferred Stock, filed with the Secretary of
      State of Delaware on December 2, 1997.
                        (5)3.1(d)
                        Certificate
      of Designation, Series B Preferred Stock, filed with the Secretary of
      State of Delaware on April 6, 2000.
                        (8)3.2
                        Amended
      and Restated By-laws of the Company.
                        (6)4.1
                        Specimen
      Common Stock Certificate.
                        (2)10.1(x)
                        1996
      Stock Plan, effective July 30, 1996.
                        (3)10.2(x)
                        Non-Employee
      Directors’ Stock Plan, effective August 22, 1996.
                        (3)10.3(x)
                        2001
      Employee Stock Plan.
                        (10)10.4(x)
                        2005
      Equity Incentive Plan.
                        (15)10.5(x)
                        Employment
      Agreement, dated July 31, 1996, by and between TransAct and Bart C.
      Shuldman.
                        (2)10.6(x)
                        Severance
      Agreement by and between TransAct and Michael S. Kumpf, dated September 4,
      1996.
                        (3)10.7(x)
                        Severance
      Agreement by and between TransAct and Steven A. DeMartino, dated June 1,
      2004.
                        (14)10.8(x)
                        Severance
      Agreement by and between TransAct and James B. Stetson, dated January 24,
      2001.
                        (9)10.9(x)
                        Severance
      Agreement by and between TransAct and Tracey S. Chernay, dated July 29,
      2005.
                        (19)10.10(x)
                        Amendment
      to Employment Agreement, effective
      January 1, 2008, by and between TransAct and Bart C.
      Shuldman.
                        (1)10.11(x)
                        Amendment
      to Severance Agreement by and between TransAct and Michael S. Kumpf, effective
      January 1, 2008.
                        (1)10.12(x)
                        Amendment
      to Severance Agreement by and between TransAct and Steven A. DeMartino,
      effective
      January 1, 2008.
                        (1)10.13(x)
                        Amendment
      to Severance Agreement by and between TransAct and James B. Stetson, effective
      January 1, 2008.
                        (1)10.14(x)
                        Amendment
      to Severance Agreement by and between TransAct and Tracey S. Chernay,
      effective
      January 1, 2008.
                        (1)10.15
                        Lease
      Agreement by and between Bomax Properties and Ithaca, dated as of March
      23, 1992.
                        (2)10.16
                        Second
      Amendment to Lease Agreement by and between Bomax Properties and Ithaca,
      dated December 2, 1996.
                        (4)10.17
                        Agreement
      regarding the Continuation and Renewal of Lease by and between Bomax
      Properties, LLC and TransAct, dated July 18, 2001.
                        (12)10.18
                        Lease
      Agreement by and between Las Vegas Airport Properties LLC and TransAct
      dated December 2, 2004.
                        (14)10.19
                        Lease
      Agreement by and between 2319 Hamden Center I, L.L.C. and TransAct dated
      November 27, 2006.
                        (17)10.20
                        OEM
      Purchase Agreement by and between GTECH Corporation, TransAct and Magnetec
      Corporation commencing July 14, 1999.  (Pursuant to Rule 24-b-2
      under the Exchange Act, the Company has requested confidential treatment
      of portions of this exhibit deleted from the filed copy.)
                        (7)10.21
                        OEM
      Purchase Agreement by and between GTECH Corporation and TransAct
      commencing July 2, 2002.  (Pursuant to Rule 24-b-2 under the
      Exchange Act, the Company has requested confidential treatment of portions
      of this exhibit deleted from the filed copy.)
                        (11)10.22
                        Amendment
      to OEM Purchase Agreement by and between GTECH Corporation and TransAct,
      dated February 17, 2006.  (Pursuant to Rule 24-b-2 under the
      Exchange Act, the Company has requested confidential treatment of portions
      of this exhibit deleted from the filed copy.)
                        (16)10.23
                        Amended
      and Restated Revolving Credit and Security Agreement between TransAct and
      TD Banknorth, N.A. dated November 28, 2006
                        (17)10.24
                        First
      Amendment to Amended and Restated Revolving Credit and Security Agreement
      between TransAct and TD Banknorth, N.A. effective September 30,
      2007.
                        (18)10.25
                        License
      Agreement between Seiko Epson Corporation and TransAct dated May 17, 2004
      (Pursuant to Rule 24b-2 under the Exchange Act, the Company has requested
      confidential treatment of portions of this exhibit deleted from the filed
      copy.)
                        (13)23.1
                        Consent
      of PricewaterhouseCoopers LLP.
                        (1)31.1
                        Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.
                        (1)31.2
                        Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.
                        (1)32.1
                        Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
                        (1)32.2
                        Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
                        (1)




Table of Contents




(1)
                  These
      exhibits are filed herewith.(2)
                  These
      exhibits, which were previously filed with the Company’s Registration
      Statement on Form S-1 (No. 333-06895), are incorporated by
      reference.(3)
                  These
      exhibits, which were previously filed with the Company’s Quarterly Report
      on Form 10-Q for the period ended September 30, 1996, are incorporated by
      reference.(4)
                  These
      exhibits, which were previously filed with the Company’s Annual Report on
      Form 10-K for the year ended December 31, 1997, are incorporated by
      reference.(5)
                  This
      exhibit, which was previously filed with the Company’s Current Report on
      Form 8-K filed February 18, 1999, is incorporated by
      reference.(6)
                  This
      exhibit, which was previously filed with the Company’s Annual Report on
      Form 10-K for the year ended December 31, 1998, is incorporated by
      reference.(7)
                  This
      exhibit, which was previously filed with the Company’s Quarterly Report on
      Form 10-Q for the period ended September 25, 1999, is incorporated by
      reference.(8)
                  These
      exhibits, which were previously filed with the Company’s Quarterly Report
      on Form 10-Q for the period ended March 25, 2000, are incorporated by
      reference.(9)
                  This
      exhibit, which was previously filed with the Company’s Annual Report on
      Form 10-K for the year ended December 31, 2000, is incorporated by
      reference.(10)
                  This
      exhibit, which was previously filed with the Company’s Registration
      Statement on Form S-8 (No. 333-59570), is incorporated by
      reference.(11)
                  This
      exhibit, which was previously filed with the Company’s Quarterly Report on
      Form 10-Q for the period ended June 30, 2002, is incorporated by
      reference.(12)
                  This
      exhibit, which was previously filed with the Company’s Quarterly Report on
      Form 10-Q for the period ended June 30, 2003, is incorporated by
      reference.(13)
                  This
      exhibit, which was previously filed with the Company’s Quarterly Report on
      Form 10-Q for the period ended June 30, 2004, is incorporated by
      reference.(14)
                  These
      exhibits, which were previously filed with the Company’s Annual Report on
      Form 10-K for the year ended December 31, 2004, are incorporated by
      reference.(15)
                  This
      exhibit, which was previously filed with the Company’s Current Report on
      Form 8-K filed June 1, 2005, is incorporated by
  reference.(16)
                  This
      exhibit, which was previously filed with the Company’s Annual Report on
      Form 10-K for the year ended December 31, 2005, is incorporated by
      reference.(17)
                  These
      exhibits, which were previously filed with the Company’s Annual Report on
      Form 10-K for the year ended December 31, 2006, are incorporated by
      reference.(18)
                  This
      exhibit, which was previously filed with the Company’s Quarterly Report on
      Form 10-Q for the period ended September 30, 1997, is incorporated by
      reference.(19)
                  This
      exhibit, which was previously filed with the Company’s Annual Report on
      Form 10-K for the year ended December 31, 2007, is incorporated by
      reference.(x)
                  Management
      contract or compensatory plan or
arrangement.





Table of Contents





EXHIBIT
LIST




The
following exhibits are filed herewith.


Exhibit10.10(x)
                  Amendment
      to Employment Agreement, effective
      January 1, 2008, by and between TransAct and Bart C.
      Shuldman.10.11(x)
                  Amendment
      to Severance Agreement by and between TransAct and Michael S. Kumpf, effective
      January 1, 2008.10.12(x)
                  Amendment
      to Severance Agreement by and between TransAct and Steven A. DeMartino,
      effective
      January 1, 2008.10.13(x)
                  Amendment
      to Severance Agreement by and between TransAct and James B. Stetson, effective
      January 1, 2008.10.14(x)
                  Amendment
      to Severance Agreement by and between TransAct and Tracey S. Chernay,
      effective
      January 1, 2008.23.1
                  Consent
      of PricewaterhouseCoopers LLP.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 18 U.S.C. Section 1350 as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.32.2
                  Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.