UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
      One)R
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the 13 weeks ended February 1, 2009OR£
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For the transition period from
      _____________ to____________





Commission
File Number 000-23401





GAMETECH
INTERNATIONAL, INC.


(Exact
name of registrant as specified in its charter)





DELAWARE
            33-0612983(State
      or other jurisdiction
            (I.R.S.
      Employer Identification No.)of
      incorporation or organization)8850
      DOUBLE DIAMOND PKWY, RENO, NEVADA
            89521(Address
      of principal executive offices)
            (Zip
      code)Registrant’s
      telephone number, including area code: (775)
  850-6000








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.


YesRNo£





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


Large accelerated filer£
            Accelerated filerRNon-accelerated
      filer   £
            Smaller
      reporting companyR





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





On March
5, 2009, the registrant had 11,706,269 outstanding shares of its Common Stock,
par value $0.001 per share.


































GAMETECH
INTERNATIONAL, INC.


QUARTERLY
REPORT ON FORM 10-Q


FOR
THE 13 WEEKS ENDED FEBRUARY 1, 2009


INDEX





PageNo.Part
      I. Financial Information:Item
      1. Financial Statements (Unaudited)Condensed
      Consolidated Balance Sheets as of February 1, 2009 (Unaudited) and
      November 2, 2008
            3Unaudited
      Condensed Consolidated Statements of Operations for the 13 Weeks Ended
      February 1, 2009, and the Three Months Ended January 31,
    2008.
            4Unaudited
      Condensed Consolidated Statements of Cash Flows for the 13 Weeks Ended
      February 1, 2009 and the Three Months Ended January 31,
    2008
            5Notes
      to Unaudited Condensed Consolidated Financial Statements
            6Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
            15Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
            18Item
      4. Controls and Procedures
            19Part
      II. Other Information:Item
      1. Legal Proceedings
            19Item
      1A. Risk Factors
            20Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
            21Item
      3. Defaults Upon Senior Securities
            21Item
      4. Submission of Matters to a Vote of Security Holders
            21Item
      5. Other Information
            21Item
      6. Exhibits
            22Signatures
            23








PART
1.  FINANCIAL INFORMATION
 
 ITEM
1.  FINANCIAL STATEMENTS
 
 GAMETECH
INTERNATIONAL, INC.
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (In
thousands, except shares and per share amounts)


February
      1, 2009
            
            
            November
      2, 2008(Unaudited)
            
            
            (Note
      1)ASSETS:Current
      assets:Cash
      and cash equivalents
            
            $
            5,571
            
            
            $
            6,076Accounts
      receivable, net of allowances of $1,414 in 2009 and $1,217 in
      2008
            
            
            6,556
            
            
            
            6,303Inventory
            
            
            8,466
            
            
            
            8,976Deposits
            
            
            43
            
            
            
            42Prepaid
      expenses and other current assets
            
            
            851
            
            
            
            912Prepaid
      income taxes
            
            
            2,029
            
            
            
            1,634Current
      portion of notes receivable
            
            
            90
            
            
            
            119Deferred
      income taxes
            
            
            1,820
            
            
            
            1,825Total
      current assets
            
            
            25,426
            
            
            
            25,887Property,
      bingo equipment, furniture and other equipment, net
            
            
            23,416
            
            
            
            22,884Goodwill,
      net
            
            
            25,900
            
            
            
            25,900Intangibles,
      less accumulated amortization of $6,527 in 2009 and $6,197 in
      2008
            
            
            5,973
            
            
            
            6,302Restricted
      cash
            
            
            1,523
            
            
            
            3,158Notes
      receivable, net of current portion
            
            
            -
            
            
            
            1Deferred
      income taxes, long term
            
            
            4,580
            
            
            
            4,539Debt
      acquisition costs, net
            
            
            257
            
            
            
            258Investments
            
            
            566
            
            
            
            566Total
      assets
            
            $
            87,641
            
            
            $
            89,495LIABILITIES
      AND STOCKHOLDERS’ EQUITY:Current
      liabilities:Accounts
      payable
            
            $
            1,130
            
            
            $
            2,278Accrued
      payroll and related obligations
            
            
            967
            
            
            
            1,168Accrued
      loss contingencies
            
            
            4,022
            
            
            
            4,022Current
      portion of long-term debt
            
            
            4,516
            
            
            
            4,509Deferred
      revenue
            
            
            3,681
            
            
            
            3,502Other
      accrued liabilities
            
            
            1,299
            
            
            
            1,285Total
      current liabilities
            
            
            15,615
            
            
            
            16,764Long-term
      debt, net of current portion
            
            
            31,501
            
            
            
            32,652Interest
      rate swap
            
            
            1,699
            
            
            
            668Deferred
      income taxes
            
            
            1
            
            
            
            1Total
      liabilities
            
            $
            48,816
            
            
            $
            50,085Stockholders’
      equity:Common
      stock, $0.001 par value: 40,000,000 shares authorized; 14,480,537 shares
      issued
            
            $
            14
            
            
            $
            14Additional
      paid in capital
            
            
            51,659
            
            
            
            51,561Retained
      earnings (deficit)
            
            
            (139
            )
            
            
            543Treasury
      stock, at cost, 2,774,268 shares in 2009 and 2,781,283 shares in
      2008
            
            
            (12,709
            )
            
            
            (12,708
            )Total
      stockholders’ equity
            
            
            38,825
            
            
            
            39,410Total
      liabilities and stockholders’ equity
            
            $
            87,641
            
            
            $
            89,495


The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
 -3-
 GAMETECH
INTERNATIONAL, INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (In
thousands, except per share amounts)
 (Unaudited)


13
      Weeks Ended
            
            
            Three
      Months EndedFebruary
      1, 2009
            
            
            January
      31, 2008Net
      revenue
            
            $
            12,706
            
            
            $
            15,184Cost
      of revenue
            
            
            5,468
            
            
            
            6,600Gross
      profit
            
            
            7,238
            
            
            
            8,584Operating
      expenses:General
      and administrative
            
            
            2,826
            
            
            
            2,758Sales
      and marketing
            
            
            2,637
            
            
            
            2,537Research
      and development
            
            
            1,391
            
            
            
            1,489Total
      operating expenses
            
            
            6,854
            
            
            
            6,784Income
      from operations
            
            
            384
            
            
            
            1,800Interest
      expense
            
            
            (1,520
            )
            
            
            (714
            )Impairment
      of investments
            
            
            -
            
            
            
            (691
            )Other
      income, net
            
            
            54
            
            
            
            123Income
      (loss) before income taxes
            
            
            (1,082
            )
            
            
            518Provision
      (benefit) for income taxes
            
            
            (399
            )
            
            
            187Net
      income (loss)
            
            $
            (683
            )
            
            $
            331Net
      income (loss) per share:Basic
            
            $
            (0.06
            )
            
            $
            0.03Diluted
            
            $
            (0.06
            )
            
            $
            0.03Shares
      used in calculating net income (loss) per share:Basic
            
            
            11,691
            
            
            
            12,426Diluted
            
            
            11,691
            
            
            
            12,677


The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
 -4-
 GAMETECH
INTERNATIONAL, INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited,
In thousands)


13
      Weeks Ended
            
            
            Three
      Months EndedFebruary
      1, 2009
            
            
            January
      31, 2008Cash
      flows from operating activities:Net
      income (loss)
            
            $
            (683
            )
            
            $
            331Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Depreciation
      and amortization
            
            
            2,209
            
            
            
            2,691Obsolescence
      and loss on disposal of bingo terminals and related
    equipment
            
            
            -
            
            
            
            150Gain
      on disposal of furniture and other equipment
            
            
            -
            
            
            
            (6
            )Loss
      on investment impairment
            
            
            -
            
            
            
            691Stock
      compensation expense
            
            
            98
            
            
            
            52Deferred
      income taxes
            
            
            (36
            )
            
            
            50Amortization
      of debt acquisition costs
            
            
            13
            
            
            
            -Interest
      rate swap
            
            
            1,031
            
            
            
            -Interest
      on investments
            
            
            -
            
            
            
            (108
            )Interest
      on restricted cash
            
            
            (2
            )
            
            
            (4
            )Other
      changes in operating assets and liabilities:Accounts
      receivable, net
            
            
            (253
            )
            
            
            2,140Deposits
            
            
            (1
            )
            
            
            -Inventory
            
            
            510
            
            
            
            68Prepaid
      taxes
            
            
            (395
            )
            
            
            (91
            )Prepaid
      expenses and other current assets
            
            
            61
            
            
            
            (42
            )Notes
      receivable
            
            
            29
            
            
            
            32Accounts
      payable
            
            
            103
            
            
            
            (900
            )Accrued
      payroll and related obligations
            
            
            (201
            )
            
            
            88Deferred
      revenues
            
            
            179
            
            
            
            -Other
      accrued liabilities
            
            
            14
            
            
            
            (683
            )Net
      cash provided by operating activities
            
            
            2,676
            
            
            
            4,459Cash
      flows from investing activities:Proceeds
      from sale of short-term investments
            
            
            -
            
            
            
            3,513Restricted
      cash for capital expenditures
            
            
            1,635
            
            
            
            -Capital
      expenditures for property, bingo equipment, furniture, and other
      equipment
            
            
            (3,671
            )
            
            
            (1,066
            )Net
      cash provided by (used in) investing activities
            
            
            (2,036
            )
            
            
            2,447Cash
      flows from financing activities:Payments
      on long-term debt
            
            
            (1,144
            )
            
            
            (1,107
            )Repurchase
      of treasury stock
            
            
            (1
            )
            
            
            (1,797
            )Net
      cash (used in) financing activities
            
            
            (1,145
            )
            
            
            (2,904
            )Net
      increase (decrease) in cash and cash equivalents
            
            
            (505
            )
            
            
            4,002Cash
      and cash equivalents at beginning of period
            
            
            6,076
            
            
            
            3,630Cash
      and cash equivalents at end of period
            
            $
            5,571
            
            
            $
            7,632Supplemental
      cash flow information:Cash
      paid during the period for:Interest
            
            $
            625
            
            
            $
            724Income
      taxes
            
            $
            30
            
            
            $
            228Non-cash
      investing and financing activities:Acquisition
      of assets included in accounts payable
            
            $
            730
            
            
            $
            114Settlement
      of related party receivable in the company's common stock
            
            $
            -
            
            
            $
            500Issuance
      of receivable for asset disposal
            
            $
            -
            
            
            $
            7Issuance
      of note payable for insurance
            
            $
            -
            
            
            $
            130


The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
 -5-
 GAMETECH
INTERNATIONAL, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)




NOTES TO FINANCIAL STATEMENTS




1.
BASIS OF PRESENTATION




The
accompanying unaudited condensed consolidated financial statements and related
disclosures as of February 1, 2009, have been prepared in accordance with
generally accepted accounting principles in the United States (“GAAP”)
applicable to interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by GAAP for complete financial
statements. In our opinion, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of our financial
position and interim results have been included. Operating results for the 13
weeks ended February 1, 2009, are not necessarily indicative of the results that
may be expected for the current fiscal year or any other period.




The
balance sheet at November 2, 2008, has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by GAAP for complete financial statements. These condensed
unaudited consolidated financial statements should be read in conjunction with
the consolidated financial statements and related notes, as well as other
information included in our Annual Report on Form 10-K for the 53 weeks ended
November 2, 2008, and any other of our filings with the Securities and Exchange
Commission.




USE
OF ESTIMATES




The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Allowance for doubtful
accounts, obsolescence, impairment of goodwill, impairment of investments, loss
contingencies, provision for income taxes, and stock-based compensation are
significant estimates made by us. Actual results could ultimately differ from
those estimates.




2.
SIGNIFICANT ACCOUNTING POLICIES




INVESTMENTS




Our
long-term investments consist of principal invested in auction rate securities
(ARS). The ARS held are private placement securities with long-term nominal
maturities with the interest rates reset through a Dutch auction each month. The
monthly auctions historically have provided a liquid market for these
securities. Our investments in ARS represent interests in collateralized debt
obligations supported by pools of residential and commercial mortgages,
credit cards, insurance securitizations, and other structured credits, including
corporate bonds. Some of the underlying collateral for the ARS held consists of
sub-prime mortgages.




Consistent
with our investment policy guidelines, the ARS investments held had AAA/Aaa
credit ratings at the time of purchase. With the liquidity issues experienced in
global credit and capital markets, the ARS held by us have experienced multiple
failed auctions as the amount of securities submitted for sale exceeded the
amount of purchase orders.




In prior
periods, we classified the amount invested in ARS as marketable securities in
the current assets listed on the balance sheet. Given the failed auctions, our
ARS are illiquid until there is a successful auction for them. Accordingly, we
reclassified the entire balance of the ARS from short-term to long-term
investments in the first quarter of the 53 weeks ended November 2,
2008.




REVENUE
RECOGNITION




We
recognize revenue when the following criteria are met:




·
            Persuasive
      evidence of an arrangement between us and our customer
    exists,·
            Delivery
      has occurred or services have been rendered,·
            The
      price is fixed or determinable, and·
            Collectability
      is reasonably assured.




We earn
our revenue in a variety of ways. We offer our products for lease or sale. We
also sell service and software updates for equipment previously sold or
leased.




Bingo
Equipment




Revenue
is recognized for bingo terminals and bingo systems installed as a single
element placed in bingo halls under contracts based on (1) a fixed fee per
use per session; (2) a fixed weekly fee per terminal; or (3) a
percentage of the revenue generated by each terminal. Revenue recognition is a
key component of our results of operations, and determines the timing of certain
expenses, such as commissions. We recognize revenue when all of the following
factors exist: (a) evidence of an arrangement with the customer;
(b) play or availability of the bingo terminals; (c) a fixed or
determinable fee; and (d) collectability is reasonably assured. We exercise
judgment in assessing the credit worthiness of customers to determine whether
collectability is reasonably assured. Should changes in conditions cause us to
determine these factors are not met for future transactions, revenue recognized
for future reporting periods could be adversely affected.




-6-




Box
Equipment




Our
product sales revenues are generated from the sale of video lottery terminals
(“VLT’s”), conversion kits, content fees, license fees, participation fees,
equipment, and services. Revenues are recorded in accordance with the American
Institute of Certified Public Accountants (“AICPA”) Statement of Position
(“SOP”) No 97-2 Software Revenue Recognition and are reported net of discounts,
sales taxes and other taxes of a similar nature. Revenues related to contracted
production are recognized as the related work is delivered. We recognize license
fee revenues over the term of the associated agreement unless the fee is in
exchange for products delivered or services performed that represent the
culmination of a separate earnings process. Amounts received prior to completing
the earnings process are deferred until revenue recognition criteria are
met. In some instances, we recognize recurring participation revenue in
lieu of a one-time machine sale.  Our sales credit terms are
predominately 30 days. In certain limited circumstances, we may extend
credit terms up to 180 days.




CONCENTRATION
OF CREDIT RISKS




Financial
instruments, which potentially subject us to concentration of credit risk,
consist primarily of cash and cash equivalents, investments, restricted
short-term investments, and trade receivables. Cash equivalents, investments,
and restricted short-term investments are investment-grade, short-term debt
instruments, consisting of treasury bills, mortgage-backed securities,
asset-backed commercial paper, unsecured corporate notes, and money market
accounts, all of which are maintained with high credit quality financial
institutions. Cash and cash equivalents are in excess of Federal Deposit
Insurance Corporation insurance limits.




No single
customer comprised more than ten percent of our total revenue during fiscal
years 2008, 2007 and 2006.   We conduct a substantial amount of
its business through distributor relationships, many of which act as a
collection agent.  As of February 1, 2009, there was one distributor that
represented 15% of the consolidated accounts receivable balance with sales
during the quarter representing 74% of the box sales and 15% of overall
sales.




DEFERRED
REVENUE




Deferred
revenue consists of amounts received or billed after product is delivered or
services are rendered, but prior to meeting all of the requirements for revenue
recognition.  Complex systems and/or multiple element contracts may
take several months to complete and our deferred revenues may increase as our
products evolve toward a more systems-centric environment.  Deferred
revenue totaled $3.7 million at February 1, 2009 as compared to $3.5 million at
November 2, 2008, and primarily represents amounts received for future
deliverables.




ACCOUNTS
RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS




Accounts
receivable are recorded when revenue is recognized in accordance with our
revenue recognition policy and represent claims against third parties that will
be settled in cash. The carrying value of our receivables, net of allowances,
represents our estimated net realizable value. The balance of accounts
receivable as of February 1, 2009 is $8.0 million with an allowance for doubtful
accounts totaling $1.4 million, for net accounts receivable of $6.6
million.




Bingo
Equipment




We
estimate the possible losses resulting from non-payment of outstanding accounts
receivable arising from the lease of our bingo units. Our customer base consists
primarily of entities operating in charitable, Native American, and commercial
bingo halls located throughout United States, Canada, Mexico, and the United
Kingdom. In some jurisdictions, the billing and collection function is performed
as part of a distributor relationship, and in those instances, we maintain
allowances for possible losses resulting from non-payment by both the customer
and distributor. We perform ongoing evaluations of our customers and
distributors for credit worthiness, economic trends, changes in our customer
payment terms, and historical collection experience when evaluating the adequacy
of our allowance for doubtful accounts. We also reserve a percentage of our
accounts receivable based on aging categories. In determining these percentages,
we review historical write-offs of our receivables, payment trends, and other
available information. While such estimates have been within our expectations
and the provisions established, a change in financial condition of specific
customers or in overall trends experienced may result in future adjustments of
our estimates of recoverability of our receivables.




Box
Equipment




We
estimate the possible losses resulting from non-payment of outstanding accounts
receivable arising from the sale of video lottery terminals and related
equipment. Our customer base consists of casinos located in various states,
distributors in Louisiana and Oklahoma, and Native American territories. We
perform ongoing evaluations of our customers and distributors for credit
worthiness, economic trends, changes in our customer payment terms, and
historical collection experience when evaluating the adequacy of our allowance
for doubtful accounts.




INVENTORIES




Inventories
are stated at the lower of cost or market. Our raw materials are valued using
the first-in, first-out method and our finished goods are valued using average
costing that approximates the first-in, first-out method. Management
periodically reviews inventory balances, using recent and future expected sales
to identify slow-moving or obsolete items. Inventories consist of the following
at February 1, 2009 (in thousands):




February
      1, 2009Raw
      Materials
            
            $
            2,698Work
      in Progress
            
            
            4,480Finished
      Goods
            
            
            1,288$
            8,466


-7-




PROPERTY, BINGO EQUIPMENT, FURNITURE AND OTHER
EQUIPMENT




Bingo
equipment includes portable and fixed-base player terminals, file servers,
caller units, point-of-sale units, and other support equipment. We record bingo
equipment, furniture, and other equipment at cost and depreciate these over the
estimated useful lives of the assets using the straight-line method. The
estimated useful lives are as follows:




Bingo
      equipment
            3-5
      yearsOffice
      furniture and equipment
            3-7
      yearsLeasehold
      improvements
            Remaining
      Life of LeaseBuilding
            39
      1⁄2 years




We
provide reserves for excess or obsolete bingo terminals on hand that we do not
expect to use. The reserves are based upon several factors, including estimated
forecast of bingo terminal demand for placement into bingo halls. The estimates
of demand for future bingo terminal may prove to be inaccurate, in which case we
may have understated or overstated the provision required for excess and/or
obsolete bingo terminals. Although we attempt to assure the accuracy of these
estimated forecasts, any significant unanticipated changes in demand or
technological developments could have a significant impact on the value of bingo
terminals, results of operations, and financial condition.




On August
22, 2008, we purchased from RKD Holdings, L.L.C. certain real property in
southwest Reno, Nevada for an aggregate purchase price of $7.2 million. The real
property includes an approximately 100,000 square foot building that will be
used as our new headquarters. We will invest approximately $2.7 million in
additional improvements to the interior of the building to add office space, and
provide for the manufacturing and assembly needs of bingo, VLT and slot
equipment. The purchase price of the building and related improvements are being
funded by proceeds from the New Credit Facility, of which $2.7 million was held
in a construction control cash account with U.S. Bank N.A.  At
February 1,2009, the remaining balance of $1.0 million is reflected as
restricted cash in our Long-Term Asset section of the Consolidated Balance
Sheet.  The New Credit Facility provides for the release of the funds
to cover payments for the construction of the additional improvements. Any funds
remaining in the construction control account will be returned to us upon
satisfactory completion of the building improvements. We have relocated to our
new corporate headquarters as of the beginning of the second quarter and we
expect to complete all building improvements by the end of the second fiscal
quarter in 2009.
  SOFTWARE
DEVELOPMENT CAPITALIZATION
  We
capitalize costs related to the development of certain software products that
meet the criteria of Statement of Financial Accounting Standards (“SFAS”) No. 86
- Accounting for
the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.
SFAS No. 86 provides for the capitalization of computer software that is to be
used as an integral part of a product or process to be sold or leased, after
technological feasibility has been established for the software and all research
and development activities for the other components of the product or process
have been completed. We capitalize qualified costs of software developed for new
products and for significant enhancements to existing products. We cease
capitalizing costs when the product is available for general release to our
customers. We amortize the costs on a straight-line method over the estimated
economic life of the product beginning when the product becomes available for
general release. The achievement of technological feasibility and the
estimate of the product’s economic life require management’s judgment. Any
changes in key assumptions, market conditions, or other circumstances could
result in an impairment of the capitalized asset and a charge to our operating
results.
  GOODWILL
  We
account for goodwill and intangibles according to SFAS No. 142, Goodwill and
Other Intangible Assets. This rule provides that goodwill should not be
amortized but instead should be tested for impairment annually and whenever
circumstances indicate that the carrying value may not be
recoverable.  Depending upon the results of that measurement, the
recorded goodwill may be written down and charged to income from operations when
its carrying amount exceeds its estimated fair value. Amortization is still
required for identifiable intangible assets with finite lives.
  Our
evaluation of the goodwill of our operations consists of two reporting units,
box and bingo. Goodwill of a reporting unit must be tested for impairment on at
least an annual basis.  We conduct our annual goodwill impairment
analysis during the fourth quarter of each fiscal year, measured as of July 31,
using an outside third party.  In addition to our annual review, we
assess the impairment of goodwill whenever events or changes in circumstances
indicate that the carrying value may be greater than fair
value.  Factors that we consider important that could trigger an
impairment review include significant underperformance relative to historical or
projected future operating results, significant changes in the manner of the use
of our assets or the strategy for our overall business and significant negative
industry or economic trends.
   We do not believe a triggering event requiring us to
conduct an interim impairment test has occurred as of February 1,
2009.  We performed our annual impairment test in the fourth quarter
of fiscal 2008, which resulted in an impairment charge.  The recent
drop in our stock price, while consistent with the overall market and its
industry, has caused our market capitalization to be significantly below book
value.  If this condition continues it could imply that our goodwill
may not be recoverable, thereby requiring an interim impairment test that may
result in a non-cash write-down of this asset,
whichcould have a material
adverse impact on our consolidated financial statements.
  IMPAIRMENT
OF LONG-LIVED ASSETS
  We review
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable in
accordance with SFAS No. 144,Accounting
for the Impairment or Disposal of Long-Lived Assets.  Recoverability
of long-lived assets are measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the asset,
undiscounted and without interest.  If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the
assets.
 -8-




LEGAL
CONTINGENCIES
  We
are currently involved in various claims and legal proceedings (see Note 7 Legal
Proceedings). Periodically, we review the status of each matter and assess the
potential financial exposure. If the potential loss from any claim or legal
proceeding is considered probable and the amount can be estimated, we accrue a
liability for the estimated loss. Significant judgment is required in both the
determination of probability and the determination as to whether an exposure can
be reasonably estimated.
  Because
of uncertainties related to these matters, we base accruals on the best
information available at the time. As additional information becomes available,
we reassess the potential liability related to our pending claims and litigation
and may revise these estimates. Such revisions in the estimates of the potential
liabilities could have a material impact on the results of operations and
financial condition.
  STOCK-BASED
COMPENSATION
  We
generally grant stock options to our employees for a fixed number of shares with
an exercise price equal to the fair value of the shares on the date of the
grant.
  We
have adopted the Financial Accounting Standards Board (“FASB”) SFAS No. 123(R),
Share
Based Payment. This statement is a revision of SFAS No. 123, and
supersedes APB Opinion No. 25, and its related implementation guidance. SFAS No.
123(R) addresses all forms of share-based payment awards including shares issued
under employer stock purchase plans, stock options, restricted stock, and stock
appreciation rights. Under SFAS No. 123(R), share-based payment awards result in
a cost that will be measured at fair value on the award’s grant date. Stock
options exercised in future periods will result in an adjustment within the
Consolidated Statement of Cash Flows depicting increase in net cash provided by
financing activities related to the cash received and an incremental tax
benefit. In the fourth quarter of the fiscal year 2005, our Board of Directors
approved the acceleration of the vesting of all unvested stock options awarded
under the 1997 Incentive Stock Plan. As a result, all options outstanding at
October 31, 2005, were fully vested and no compensation cost for such options
will be recognized in any future periods.
  For
the 13 weeks ended February 1, 2009 we recognized stock-based compensation
expense for stock options and restricted stock of $92,306 and a related tax
benefit of $34,430 for a net cost of $57,876.  For the three-month
period ended January 31, 2008, we recognized stock-based compensation expense of
$51,297 and a related tax benefit of $18,518 for a net cost of $32,779. For the
13 weeks ended February 1, 2009 and the three-month period ended January 31,
2008, there was no material effect to either basic and diluted earnings per
share as a result of recognizing the share-based compensation expense, net of
tax.
  As
of February 1, 2009, the total compensation cost related to unvested stock
option awards granted to employees under our stock option plans but not
recognized was $299,252. The cost of each award will be amortized on a
straight-line basis over its term, which range from two to four years, and will
be adjusted for subsequent changes in estimated forfeitures.  As of
February 1, 2009, the compensation related to unvested restricted stock awards
granted to employees under our stock option plan, but not yet recognized, was
$498,229. The cost will be adjusted for subsequent changes in estimated
forfeitures.
  During
the 13 weeks ended February 1, 2009, we granted 150,000 stock options but did
not grant any new restricted stock.  For the three-month period ended
January 31, 2008, no stock options or restricted stock was granted.
  RECENT
ACCOUNTING PRONOUNCEMENTS
  In
February 2007, the FASB issued SFAS No. 159, Fair Value
Option for Financial Assets and Financial Liabilities. SFAS No. 159
permits companies to elect to measure eligible financial instruments,
commitments and certain arrangements at fair value at specified election dates,
with changes in fair value recognized in earnings at each subsequent reporting
period. SFAS No. 159 is effective for fiscal years beginning after November 15,
2007. We have adopted SFAS No. 159 as of the beginning of the current fiscal
year and the impact was immaterial on our financial position, results of
operation, and cash flow.
  In December 2007, the FASB issued SFAS
No. 141(R), Business
Combinations, and SFAS No. 160, Accounting and
Reporting of Non-Controlling Interest in Consolidated Financial
Statements, an Amendment of ARB
No. 51. These new standards will significantly change the financial
accounting and reporting of business combination transactions and
non-controlling (or minority) interests in consolidated financial statements. We
will be required to adopt SFAS No. 141(R) and SFAS No. 160 on or after fiscal
years beginning December 15, 2008. We are evaluating the impact, if any,
that the adoption of SFAS 141(R) and SAS No. 160 will have on our consolidated
financials.  This adoption will be effective the first fiscal quarter
of 2010.
  In
December 2007, the Securities and Exchange Commission issued Staff Accounting
Bulletin  (“SAB") No. 110 to permit entities, under certain
circumstances, to continue to use the “simplified” method, in developing
estimates of expected term of “plain-vanilla” share options in accordance with
SFAS No. 123 (R) Share-Based Payment. SAB No. 110 amended SAB No. 107 to permit
the use of the “simplified” method beyond December 31, 2007. We continue to use
the “simplified” method and will do so until more detailed relevant information
about exercise behavior becomes readily available.
  In February 2008,
the FASB issued FASB Staff Position No. FAS 157-2 (“FSP 157-2”). FSP 157-2
delays the implementation of SFAS 157 for nonfinancial assets and nonfinancial
liabilities, except foritems that are recognized or disclosed at fair
value in the financial statements on a recurring basis. This statement defers
the effective date to fiscal years beginning after November 15, 2008 and
interim periods within those fiscal years, which is fiscal year 2010 for the
Company.
  In
March 2008, the FASB issued SFAS No. 161, Disclosures
about Derivative Instruments and Hedging Activities. The new standard is
intended to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable better understanding of
the effects on financial position, financial performance, and cash flows. The
effective date is for fiscal years and interim periods beginning after November
15, 2008. We have early adopted SFAS No. 161 as of the beginning of this fiscal
year and the impact on disclosure is immaterial.


-9-


In April
2008, the FASB issued Staff Position No. FAS 142-3 which amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No. 142, “Goodwill and Other Intangible Assets.” The intent of this FSP is to
improve the consistency between the useful life of a recognized intangible asset
under Statement 142 and the period of expected cash flows used to measure the
fair value of the asset under FASB Statement No. 141 (revised 2007), Business Combinations, and
other U.S. generally accepted accounting principles (GAAP). We are in the
process of evaluating the effect of FAS No. 142-3 on our consolidated financial
statements.
  In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. This Statement identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States. The FASB believes that the GAAP hierarchy should be directed
to entities because it is the entity (not its auditor) that is responsible for
selecting accounting principles for financial statements that are presented in
conformity with GAAP. The FASB does not believe this Statement will result in a
change in current practice. SFAS 162 is effective November 15, 2008. We have
adopted SFAS No. 162 as of the beginning of the current fiscal year and the
impact was immaterial on our financial position, results of operation, and cash
flow.
  3.
INVESTMENTS
  Long-term
investments at February 1, 2009 consisted of $3.9 million of principal invested
in auction rate securities (ARS). The ARS held are private placement securities
with long-term nominal maturities with the interest rates reset through a Dutch
auction each month. The monthly auctions historically have provided a liquid
market for these securities. Our investments in ARS represent interests in
collateralized debt obligations supported by pools of residential and
commercial mortgages, credit cards, insurance securitizations, and other
structured credits, including corporate bonds. Some of the underlying collateral
for the ARS we hold consists of sub-prime mortgages.
  Consistent
with our investment policy guidelines, the ARS investments held had AAA/Aaa
credit ratings at the time of purchase. With the liquidity issues experienced in
global credit and capital markets, the ARS held by us at February 1, 2009 have
experienced multiple failed auctions as the amount of securities submitted for
sale exceeded the amount of purchase orders.
  Although
six of the eight ARS continue to pay interest according to their stated terms,
based on the fair value of the investments and an analysis of
other-than-temporary impairment factors, we recorded a pre-tax impairment charge
of approximately $3.3 million for the 53 weeks ended November 2,
2008.  We did not record any additional pre-tax impairment charge for
the 13 weeks ended February 1, 2009. The current value of the ARS as of February
1, 2009 is $0.6 million.
  4.
      GOODWILL AND INTANGIBLES
  In fiscal
2007, we acquired the assets of Summit Gaming and added $26.5 million to
goodwill, which included trade names of $1.6 million. In addition, we acquired
$7.7 million in identifiable intangible assets which will be amortized over 5 to
10 years. We conduct our annual goodwill impairment analysis during the fourth
quarter of each fiscal year, measured as of July 31, using an outside third
party.  We assessed the value of our goodwill as of July 31 of 2006
and 2007 (our annual review date) and concluded that goodwill was not
impaired.  We performed our 2008 annual impairment testing of goodwill
and intangibles as of July 31, 2008. Based on a combination of factors,
including the current economic environment, decreased revenues and increased
costs, we recorded a non-cash goodwill impairment associated with our
acquisition of Summit of $10.8 million in the fourth quarter of fiscal 2008. The
annual evaluation of goodwill and other non-amortizing intangible assets
requires the use of estimates about future operating results of each reporting
unit to determine their estimated fair value.  Changes in forecasted
operations can materially affect these estimates.  Once an impairment
of goodwill or other intangible assets has been recorded, it cannot be
reversed.


Intangible
assets consisted of the following as of February 1, 2009 (dollars in
thousands):


Stated
      Value
            
            
            Accumulated
      Amortization
            
            
            Net
      Carrying Value
            
            
            Weighted
      Average Amortization Period (in years)Intellectual
      property (software)
            
            $
            4,173
            
            
            $
            (4,132
            )
            
            $
            41
            
            
            
            0.5Copyrights/trademarks
            
            
            247
            
            
            
            (60
            )
            
            
            187
            
            
            
            10.6Distributor
      buyouts
            
            
            260
            
            
            
            (260
            )
            
            
            —
            
            
            
            —Summit
      Gaming identifiable intangible assets:Customer
      relationships
            
            
            3,600
            
            
            
            (1,320
            )
            
            
            2,280
            
            
            
            3.2Patent
      applications
            
            
            620
            
            
            
            (95
            )
            
            
            525
            
            
            
            8.2Game
      software library
            
            
            3,600
            
            
            
            (660
            )
            
            
            2,940
            
            
            
            8.2$
            12,500
            
            
            $
            (6,527
            )
            
            $
            5,973




-10-


Intangible
assets consisted of the following as of November 2, 2008 (dollars in
thousands):


Stated
      Value
            
            
            Accumulated
      Amortization
            
            
            Net
      Carrying Value
            
            
            Weighted
      Average Amortization Period (in years)Intellectual
      property (software)
            
            $
            4,173
            
            
            $
            (4,090
            )
            
            $
            83
            
            
            
            0.7Copyrights/trademarks
            
            
            247
            
            
            
            (55
            )
            
            
            192
            
            
            
            10.8Distributor
      buyouts
            
            
            260
            
            
            
            (260
            )
            
            
            —
            
            
            
            —Summit
      Gaming identifiable intangible assets:Customer
      relationships
            
            
            3,600
            
            
            
            (1,140
            )
            
            
            2,460
            
            
            
            3.4Patent
      applications
            
            
            620
            
            
            
            (82
            )
            
            
            538
            
            
            
            8.4Game
      software library
            
            
            3,600
            
            
            
            (571
            )
            
            
            3,029
            
            
            
            8.4$
            12,500
            
            
            $
            (6,198
            )
            
            $
            6,302




Estimated
future aggregate amortization expense for intangible assets subject to
amortization as of February 1, 2009 is as follows (dollars in
thousands):


2009
            
            $
            8992010
            
            
            1,1532011
            
            
            1,1502012
            
            
            7302013
            
            
            430After
      2013
            
            
            1,511$
            5,873




A prepaid
royalty of $100,000 was paid during fiscal year 2008 related to a license
agreement to develop, manufacture, sell or lease games and gaming devices that
use the technology protected by claims in patents owned by Patent Investments
Co. Amortization will not be recognized on this until the life is determined
which will not occur until after the software is approved. As a result, the
table above does not include any amortization of this amount.




5. NET INCOME PER SHARE




Basic net
income per share is computed by dividing reported net income by the weighted
average number of common shares outstanding each period. Diluted net income per
share is computed by using the weighted average number of common shares and
other common equivalent shares outstanding during each period. Diluted common
shares are calculated in accordance with the treasury stock method, which treats
the proceeds from the exercise of all warrants and options as if they were used
to reacquire stock at market value.


(In
thousands, except per share amounts)




13
      Weeks Ended
              February
      1, 2009
            
            
            Three
      Months Ended
              January
      31, 2008Net
      income (loss), as reported
            
            $
            (683
            )
            
            $
            331Weighted
      average number of shares outstanding
            
            
            11,691
            
            
            
            12,426Incremental
      shares from the assumed exercise of dilutive stock options
            
            
            76
            
            
            
            251Dilutive
      weighted shares
            
            
            11,767
            
            
            
            12,677Weighted
      average number of anti-dilutive shares outstanding
            
            
            774
            
            
            
            100Net
      income (loss) per share:Basic
            
            $
            (0.06
            )
            
            $
            0.03Diluted
            
            $
            (0.06
            )
            
            $
            0.03




6.
TREASURY STOCK




On September 4, 2007, the Board of Directors
authorized spending up to $5.0 million in a share repurchase program. On
September 16, 2008, this program was extended through close of the trading day
December 31, 2008.  The actual amount and timing of dollars expended
and shares repurchased are subject to business and market conditions and
applicable SEC rules.  As of December 31, 2008, we had acquired
918,943 shares at a cost of approximately $4.7 million.  This program
is now expired, with no additional shares purchased.




-11-


7.
LEGAL PROCEEDINGS




On March
22, 2001, we filed GameTech International, Inc. v. Trend Gaming Systems, LLC,
CIV 01-0540 PHX LOA, a claim in the United States District Court for the
District of Arizona, seeking a declaratory judgment that we are not in material
breach of our November 1, 1999 Distribution Agreement with Trend Gaming Systems,
LLC (“Trend”), and seeking damages for past due payments and wrongful
withholdings by Trend. Trend counterclaimed, alleging that its payments were in
compliance with its contractual obligations. Trend also contended that we were
in breach of certain of our contractual obligations to Trend, including that we
had wrongfully terminated Trend. On December 16, 2002, the court entered at our
request an order enjoining Trend from using approximately $540,000 in funds it
had collected on our behalf, pending a trial on our ownership interest in those
funds. The money was placed in two bank accounts/constructive trusts, subject to
the court’s control. The sums in those accounts now total approximately
$646,000. In addition, collections of accounts receivable by Trend, if any, are
also being placed in that account, pending the resolution of the case. We have
posted a $450,000 deposit with the court as a bond, which is presented as
restricted cash on our condensed consolidated balance sheets. The accounts
receivable from Trend were fully reserved. During the quarter ended April 30,
2008, we wrote off all receivables and related reserves. Trial in this matter
commenced October 4, 2004. On November 1, 2004, the jury returned a verdict
in favor of Trend against us in the amount of $3.5 million in compensatory
damages. The jury also awarded us $735,000 in compensatory damages against Trend
for funds Trend collected on our behalf but failed to remit to us. The court
denied all of our post-trial motions, except that it maintained the injunction
imposing a constructive trust, pending resolution of the issues on appeal. The
court setoff the jury awards and entered an amended judgment for Trend on March
12, 2005, in the amount of $2.8 million, plus interest on that sum at the rate
of 3.31% per annum beginning March 30, 2005.




We
appealed to the United States Court of Appeals for the Ninth Circuit on April 8,
2005. We posted a supersedeas bond on April 8, 2005, in the court-appointed
amount of $3.4 million, which bond stayed any action by Trend to collect on the
judgment, pending appeal. Trend initially sought an award of $810,000 in legal
fees and $26,000 in expenses and costs. In an amended request, Trend sought an
award of $1.4 million in legal fees and $61,000 in expenses and costs. The court
awarded Trend $909,000 in legal fees, expenses and costs plus interest of 3.77%
per annum beginning August 5, 2005. We appealed the fee award to the United
States Court of Appeals for the Ninth Circuit on August 5, 2005. We posted an
additional supersedeas bond with the court on August 18, 2005, in the amount of
$1.1 million, thereby staying any action by Trend to collect the fees, pending
appeal. Any cash used in the collateralization of the bonds was accounted for as
restricted short-term investments on our consolidated balance sheets. On April
19, 2007, a three-judge panel of the United States Court of Appeals for the
Ninth Circuit heard oral arguments for the appeal.




On May
16, 2007, the United States Court of Appeals for the Ninth Circuit issued its
ruling in our favor upholding each of the items we appealed, reversing the trial
court’s rulings and remanding the matter back to the trial court for a new
trial. Currently, there is no set date as to when the matter will be returned to
the control of the lower court. Additionally, as a result of this decision, the
supersedeas bonds we posted prior to filing the appeal were released by the
lower court as of August 18, 2007. Upon receipt of the released supersedeas
bonds from the court we terminated the supporting insurance policies and had the
letters of credit released giving us access to the certificates of deposit,
which had served as the cash security for the supersedeas bonds.




For the
year ended October 31, 2004, we recorded an estimated loss contingency in the
Trend litigation of $2.8 million, which was estimated based on the amounts of
the judgment described above. We recorded an additional loss contingency of $0.9
million in the third quarter of fiscal 2005 to account for the increased total
award to Trend for legal fees and expenses and costs. In addition, we recorded a
loss of $313,000 through October 31, 2007, for the interest accrued on the Trend
judgment. With the United States Court of Appeals for the Ninth Circuit ruling
upholding each of the items we appealed, reversing the trial court’s rulings and
remanding the matter back to the trial court for a new trial, we believe there
is no further justification at this time for continuing to accrue loss
contingencies. This matter is now pending retrial.




On March
2, 2004, a jury rendered a verdict in our favor and against Trend Gaming, LLC, a
Kentucky LLC (“Trend Gaming”) (involving a prior distribution agreement in
Virginia) awarding compensatory and punitive damages in the total amount of
approximately $1.5 million. The jury also returned a verdict against Steven W.
and Rhonda Hieronymus awarding compensatory and punitive damages of $1.0
million. The court reduced compensatory damages against Trend Gaming to $1.1
million. The court affirmed $150,000 in punitive damages against Trend Gaming
and awarded us fees and costs of suit against Trend Gaming in the amount of
$650,000. Compensatory damages against Mr. and Mrs. Hieronymus have been reduced
to $762,000 but the punitive damage award against them in the amount of $150,000
remains unchanged. Of the total compensatory damages of $1.1 million awarded to
us, $762,000 represents compensation for lost profits. We can only collect such
damages from one of the defendants to avoid a double recovery. Defendants
appealed the judgment against them. On March 5, 2007, the Appellate Court
entered its ruling affirming the judgment of the lower court in our favor. On
June 16, 2008, the Ninth Circuit Court of Appeals awarded attorney fees in the
amount of $139,177 in favor of GameTech and jointly and severally against Trend
Gaming L.L.C., Steven W. Hieronymous, and the marital estate of Steven W.
Hieronymous and Rhonda Hieronymous. We have not recorded an estimated gain
contingency, as we can give no assurances whether we will be able to collect any
award from the defendants.




We are
involved in various other legal proceedings arising in the ordinary course of
our business. We do not believe that any of those proceedings will have a
material adverse effect on our business, results of operations, or financial
condition.




8.
INCOME TAXES




We
recorded our income tax benefit at an effective rate of 36.9% for the 13 weeks
ended February 1, 2009, compared with 36.1% for the three months ended January
31, 2008. The actual effective tax rate is different from the expected federal
rate of 34%, reflecting certain permanent differences between financial
accounting and tax accounting, and state and foreign tax
provisions.




-12-


In fiscal
2008, we adopted FIN No. 48, Accounting for Uncertainty in Income
Taxes, an Interpretation of FASB Statement No. 109, which creates a
single model to address uncertainty in income tax positions and prescribes the
minimum recognition threshold a taxation is required to meet before being
recognized in the financial statements.  FIN No. 48 also provides
guidance on the derecognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure, and
transition.  The 2008 fiscal year is the first year that we were
required to adopt FIN No. 48 as it became effective after the beginning of an
entity’s first fiscal year that begins after December 15, 2006.  The
impact of FIN No. 48 on our financial position, cash flows and results of
operations is not material, therefore during fiscal 2008 and the 13 weeks ended
February 1, 2009, we did not book any interest or penalties related to
unrecognized tax positions.




We file
numerous consolidated and separate income tax returns in the United States and
in many state and foreign jurisdictions. With few exceptions, we are no longer
subject to United States federal income tax examinations for years
before 2004, and are no longer subject to state and local, or foreign
income tax examinations for years before 2003.  However, we have
been notified by the IRS that they will be examining fiscal year
2007.  At this time, we are not aware of any tax
deficiencies.


9.
CREDIT AGREEMENT and ACQUISITION OF REAL PROPERTY
  Our New
Credit Facility, as amended, provides a Senior Secured Revolving Credit Facility
(the “Revolver”) of $2.0 million, maturing on August 31, 2010, with monthly
interest-only payments due on the last day of each month beginning September 30,
2008. We select the interest rate calculation for each advance under the
Revolver from two allowable interest rate calculations. The first allowed
interest rate calculation, called the Base Rate, is the higher of the Agent’s
prime rate or the Federal Funds rate plus 0.50% (a “Base Rate Loan”). The second
allowed interest rate calculation is the 1, 2, 3, 6, or 12-month LIBOR rate plus
2.5%. As of February 1, 2009, there were no outstanding borrowings under the
Revolver.
  Our New
Credit Facility also provided for a Senior Secured Term Credit Facility (the
“Term Loan”) of $38.0 million that required monthly interest payments beginning
September 30, 2008, and quarterly principal payments of approximately $1.1
million beginning October 31, 2008, until its maturity on August 28, 2013, when
the balance will be due in full. The interest rate for the term loan varies
based upon the one-month LIBOR rate plus 2.80%. In connection with the Term Loan
agreement, we also entered into an interest rate swap agreement with U.S. Bank
N. A., which exchanged the variable one-month LIBOR rate of the Term Loan
for a fixed LIBOR rate of 3.99% per annum effective August 22, 2008,
through the maturity of the Term Loan. As of February 1, 2009, there was $35.8
million outstanding under the Term Loan at an average interest rate of 6.79% and
the value of the interest rate swap was ($1.7) million.
  Under the
New Credit Facility, as amended, we must comply with various financial and
non-financial covenants. The financial covenants include a cash flow leverage
ratio, fixed charge coverage ratio, working capital requirement and liquidity
requirement. The non-financial covenants include restrictions on asset
divestitures; liens; transactions with related parties; limitations on
additional indebtedness; mergers, acquisitions and consolidations; cash
dividends; redemptions of stock (other than the existing stock repurchase
program publicly announced on September 4, 2007); and change of control. The New
Credit Facility provides for a mandatory prepayment of principal equal to 50% of
free cash flow when a collateral shortfall is present, measured on an annual
basis beginning October 31, 2009. A collateral shortfall will exist if the
outstanding principal balance of the New Credit Facility exceeds the sum of (i)
100% of cash held in a control account, (ii) 80% of accounts receivable, (iii)
50% of net book value of finished goods and raw materials, (iv) 75% of the net
book value of land, buildings, and property improvements, and (v) 50% of the net
book value of all other fixed assets. Free cash flow is defined as EBITDA as of
the fiscal year then ended less the sum of (i) unfinanced capital expenditures,
(ii) cash paid interest, (iii) cash paid taxes, (iv) the change in working
capital, and (v) debt amortization under New Credit Facility.  On
January 28, 2009, we entered into an amendment with both lenders of the New
Credit Facility (“Amendment”).  The Amendment waives the fixed charge
coverage ratio requirement for the fiscal 2008 year end.  The
Amendment also reduces the minimum fixed charge coverage ratio for the first
fiscal quarter of 2009, increases the base rate on the Revolver by 0.25%, and
increases the LIBOR spread on the Revolver from 2.0% to 2.5%.  At
February 1 2009, we were in compliance with all the covenants as
amended.


Principal
              Repayments2009
            
            $
            3,3542010
            
            
            4,4712011
            
            
            4,4712012
            
            
            4,4712013
            
            
            18,998$
            35,765




10. BUSINESS SEGMENT
INFORMATION




Management
reviewed the Company’s operating segments in accordance with SFAS 131, Disclosure about Segments of an
Enterprise and Related Information. As a result of our acquisition of
Summit in March 2007, management determined that a new operating segment was
appropriate.  The segment discussion outline below represents the
adjusted segment structure as determined by management in accordance with SFAS
No. 131.





Management
has identified two operating segments. Each operating segment is considered a
reporting segment, which is described as follows:  the design,
development, and marketing of interactive electronic bingo systems consisting of
portable and fixed-based systems and the manufacturing and sale of gaming
equipment.




-13-


The
accounting policies of the reporting segments are the same as those described in
the summary of significant accounting policies. We evaluate the performance of
these segments based on many factors including sales, sales trends, margins, and
operating performance.




Financial
information for our reporting segments is as follows: (in
thousands):


13
      Weeks Ended
              February
      1, 2009
            
            
            Three
      Months Ended
              January
      31, 2008Net
      RevenueBingo
      Equipment
            
            $
            10,152
            
            
            $
            11,068Box
      Equipment
            
            
            2,554
            
            
            
            4,116$
            12,706
            
            
            $
            15,184Net
      Cost of RevenueBingo
      Equipment
            
            $
            3,876
            
            
            $
            4,691Box
      Equipment
            
            
            1,592
            
            
            
            1,909$
            5,468
            
            
            $
            6,600Net
      Income/(Loss)Bingo
      Equipment
            
            $
            766
            
            
            $
            281Box
      Equipment
            
            
            (1,449
            )
            
            
            50$
            (683
            )
            
            $
            331Depreciation
      and AmortizationBingo
      Equipment
            
            $
            1,882
            
            
            $
            2,371Box
      Equipment
            
            
            327
            
            
            
            320$
            2,209
            
            
            $
            2,691Interest
      ExpenseBingo
      Equipment
            
            $
            190
            
            
            $
            10Box
      Equipment
            
            
            1,330
            
            
            
            704$
            1,520
            
            
            $
            714







February
      1, 2009
            
            
            November
      2, 2008Identifiable
      AssetsBingo
      Equipment
            
            $
            46,679
            
            
            $
            47,088Box
      Equipment
            
            
            40,962
            
            
            
            42,407$
            87,641
            
            
            $
            89,495




11. RELATED PARTY TRANSACTIONS




As of
November 2, 2008, there is a balance owing to a member of the board of the
Company in the amount of $34,454, net of discount. As of February 1, 2009, the
remaining balance was $30,305. This relates to the coverage of the board member
for medical insurance until the age of retirement.


-14-


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




The
following discussion should be read in conjunction with our unaudited condensed
consolidated financial statements and notes thereto included elsewhere in this
report, as well as our audited consolidated financial statements for the 53
weeks ended November 2, 2008, contained in our Annual Report on Form
10-K.




This
document includes various “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, which represent our expectations or
beliefs concerning future events. Statements containing expressions such as
“believes,” “anticipates,” or “expects,” used in our press releases and periodic
reports on Forms 10-K and 10-Q filed with the SEC, are intended to identify
forward-looking statements. All forward-looking statements involve risks and
uncertainties. Although we believe our expectations are based upon reasonable
assumptions within the bounds of our knowledge of our business and operations,
there can be no assurances that actual results will not differ materially from
expected results. We caution that these and similar statements included in this
report are further qualified by important factors that could cause actual
results to differ materially from those in the forward-looking statements. Such
factors include those discussed under the heading “Risk Factors” in our Annual
Report on Form 10-K for the 53 weeks ended November 2, 2008, and in this report.
Readers are cautioned not to place undue reliance on forward-looking statements,
which speak only as of the date thereof. We undertake no obligation to publicly
release any revisions to such forward-looking statements to reflect events or
circumstances after the date hereof.




OVERVIEW


We
design, develop, and market bingo systems, VLT’s, slot machines and related
software, and server-based wireless gaming systems.  VLT’s, slot
machines and related software are collectively referred to as “box business”. We
entered the box business in March 2007 with our acquisition of Summit Gaming for
$40.9 million in cash.
 
 For the
first quarter of 2009, our revenue from box business sales equaled 20% of the
total revenue, lease revenue from portable bingo systems equaled 62% of total
revenue, and lease revenue from fixed-based bingo units equaled 18% of total
revenue.  For the first quarter of 2008, our revenue from box business
sales equaled 27% of the total revenue, lease revenue from portable bingo
systems equaled 59% of total revenue, and lease revenue from fixed-based bingo
units equaled 14% of total revenue.
 
 As of
February 1, 2009, we had bingo systems in service in 40 states, one US
territory, various Native American locations and in five foreign
countries.  We had box sales in 7 states, one US territory, and
various Native American locations.  We are marketing new server-based
wireless gaming systems where users play a range of games including bingo, video
poker, keno and other slot machine games.  The MiniTM wireless
server-based gaming system was installed in Europe during the second quarter of
2008.  The Elite TM server-based gaming system was installed
domestically in the third quarter of 2008 and in Europe during the first quarter
of fiscal 2009.  The European configuration supports wireless bingo
and fast action gaming for the European bingo market.
  We
generate revenue by placing electronic bingo systems in bingo halls under
contracts based on (1) a fixed fee per use per session; (2) a fixed
weekly fee per terminal; or (3) a percentage of the revenue generated by
each terminal. Revenue growth for our bingo systems is affected by player
acceptance of electronic bingo as an addition or an alternative to paper
bingo.  Additionally, our revenue growth is dependent on our ability
to expand operations into new markets and our ability to increase our market
share in our current markets. Fixed-base bingo terminals generate greater
revenue per terminal than portable bingo terminals, but also require a greater
initial capital investment.
  We
typically install our electronic bingo systems at no charge to our customers,
and we capitalize the costs. We record depreciation of bingo equipment over
either a three- or five-year estimated useful life using the straight-line
method of depreciation.
  Our box
business generates revenue from the sale of boxes (new and used), software
conversion kits, content fees, license fees, participation fees, parts, and
services. For the 13 weeks ending February 1, 2009 and the three months ended
January 31, 2008, 94.5% and 82.1%, respectively, of our box business sales were
derived from the sale of new and used equipment, conversion kits, and
parts.  In some instances, we recognize recurring participation
revenue in lieu of a one-time machine sale. Increasing market share in existing
markets and expanding product placement into new markets drives revenue
growth.
  Our bingo
and box expenses consist primarily of cost of revenue, general and
administrative expense, sales and marketing expense, and research and
development expense.  Cost of revenue consists of expenses associated
with technical and operational support of the bingo systems in bingo halls,
depreciation and amortization of bingo terminals, cost of sales related to
equipment sold, and repair/refurbishment/disposal costs of bingo terminals and
related support equipment.  General and administrative costs consist
of expenses associated with management of our company and the related support
including finance and accounting, legal, compliance, information systems, human
resources, allowance for doubtful accounts receivable, and amortization of
intangible assets acquired from the Summit acquisition.  Sales and
marketing expenses consist primarily of commissions paid to distributors for
promoting and supporting our products, and compensation paid to our internal
sales force to manage existing customers, to generate new customers, and sell
additional and upgraded equipment.  Research and development costs
consist of company-sponsored activities to provide customers with new or
enhanced games or game themes for our VLT and slot machines, improved bingo
terminals, and to develop and test new wireless server-based
systems.
  We
reported a net loss of $0.7 million for the 13 weeks ended February 1, 2009,
compared to a net profit of $0.3 million for the three months ended January 31,
2008. Although we experienced a $2.5 million decline in revenue for the first
quarter of 2009 compared to same period of 2008, our gross margin improved
slightly from 56.5% in 2008 to 57.0% for 2009.  This improvement is
the result of planned expense management primarily in our bingo
business.  General and administrative, sales and marketing, and
research and development expenses remained relatively constant year over year
for the first quarters, respectively.  Interest expense for 2009
includes a $1.0 million non-cash adjustment for the value of the interest swap
contract.  Primarily as a result of the adjustment for the interest
rate swap contract, we recorded a deferred tax benefit of $0.4 million in 2009
which brought our net loss to $0.7 million for the first quarter of 2009 or a
loss of $0.06 cents per share.
 -15-
  The stock
repurchase program that was approved on September 4, 2007 and authorized
spending up to $5.0 million expired as of the close of business on December 31,
2008. As of the expiration date of December 31, 2008, we had acquired 918,943
shares at a cost of approximately $4.7 million pursuant to this
program.
 
 On
approximately February 6, 2009, we completed our relocation to the new corporate
headquarters. Although substantially all the improvements to our new 100,000
square foot facility were completed by the relocation date, we are continuing to
incur minor capital improvements which we expect to complete by the end of our
second quarter of fiscal 2009.





APPLICATION
OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES




Management’s
Discussion and Analysis of Financial Condition and Results of Operations discuss
our condensed consolidated financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles. The preparation
of these financial statements requires us to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the balance sheet dates and reported
amounts of revenue and expenses during the reporting period. On an ongoing
basis, we evaluate our estimates and judgments, including those related to
revenue recognition, bad debts, bingo terminal depreciation, goodwill
impairment, obsolescence, provision for income taxes, and contingencies and
litigation. We base our estimates and judgments on historical experience and on
various other factors that we believe are reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.




Our
critical accounting policies are those that are both important to the portrayal
of our financial condition and results of operations and require management’s
most difficult, subjective, and complex judgment. These critical accounting
policies are discussed in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in our 2008 Form 10-K. There have been no
changes to our critical accounting policies since the filing of our 2008 Form
10-K.




RESULTS
OF OPERATIONS




13
Weeks Ended February 1, 2009, compared to the Three Months Ended January 31,
2008




The
following table sets forth certain selected unaudited condensed consolidated
financial data for the periods indicated:




13
      Weeks Ended February 1, 2009 and Three Months Ended January 31,
      2008(In
      thousands)Bingo
      Equipment
            
            
            Box
      Equipment13
      Wks
            
            
            Three Mths
            
            
            %
      Change
            
            
            13
      Wks
            
            
            Three Mths
            
            
            %
      ChangeEnded
            
            
            Ended
            
            
            Favorable/
            
            
            Ended
            
            
            Ended
            
            
            Favorable/2/1/09
            
            
            1/31/08
            
            
            (Unfavorable)
            
            
            2/1/09
            
            
            1/31/08
            
            
            (Unfavorable)Net
      Revenue
            
            $
            10,152
            
            
            $
            11,068
            
            
            
            (8.3
            %)
            
            $
            2,554
            
            
            $
            4,116
            
            
            
            (37.9
            %)Cost
      of Revenue
            
            
            3,876
            
            
            
            4,691
            
            
            
            17.4
            %
            
            
            1,592
            
            
            
            1,909
            
            
            
            16.6
            %Gross
      Profit
            
            
            6,276
            
            
            
            6,377
            
            
            
            (1.6
            %)
            
            
            962
            
            
            
            2,207
            
            
            
            (56.4
            %)Operating
      Expenses:General
      and administrative
            
            
            1,640
            
            
            
            1,867
            
            
            
            12.2
            %
            
            
            1,186
            
            
            
            892
            
            
            
            (33.0
            %)Sales
      and marketing
            
            
            2,294
            
            
            
            2,408
            
            
            
            4.7
            %
            
            
            343
            
            
            
            129
            
            
            
            (165.9
            %)Research
      and Development
            
            
            875
            
            
            
            1,052
            
            
            
            16.8
            %
            
            
            516
            
            
            
            437
            
            
            
            (18.1
            %)Total
      operating expenses
            
            
            4,809
            
            
            
            5,327
            
            
            
            9.7
            %
            
            
            2,045
            
            
            
            1,457
            
            
            
            (40.4
            %)Income
      from operations
            
            
            1,467
            
            
            
            1,050
            
            
            
            39.7
            %
            
            
            (1,083
            )
            
            
            750
            
            
            
            (244.4
            %)Interest
      Expense
            
            
            (190
            )
            
            
            (10
            )
            
            
            (1800.0
            %)
            
            
            (1,330
            )
            
            
            (704
            )
            
            
            (88.9
            %)Impairment
      of investments
            
            
            -
            
            
            
            (691
            )
            
            
            100.0
            %
            
            
            -
            
            
            
            -
            
            
            
            0.0
            %Other
      income (expense), net
            
            
            49
            
            
            
            108
            
            
            
            54.6
            %
            
            
            5
            
            
            
            15
            
            
            
            (66.7
            %)Income
      (loss) before income taxes
            
            
            1,326
            
            
            
            457
            
            
            
            190.2
            %
            
            
            (2,408
            )
            
            
            61
            
            
            
            (4047.5
            %)Provision
      (benefit) for income taxes
            
            
            560
            
            
            
            176
            
            
            
            (218.2
            %)
            
            
            (959
            )
            
            
            11
            
            
            
            8818.2
            %Net
      income (loss)
            
            $
            766
            
            
            $
            281
            
            
            
            172.6
            %
            
            $
            (1,449
            )
            
            $
            50
            
            
            
            (2998.0
            %)




Net
Revenue




Bingo net
revenue decreased $0.9 million for the 13 weeks ended February 1, 2009, or 8.3%
to $10.2 million from $11.1 million compared to the three months ended January
31, 2008. The decrease in bingo net revenue is primarily due to hall closures
and price adjustments from the economy and competition, as well as the impact of
the currency exchange losses.  This was partially offset by an
increase due to new business from new products.




Box net
revenues decreased $1.6 million for the 13 weeks ended February 1, 2009, or
37.9% to $2.6 million from $4.1 million compared to the three months ended
January 31, 2008.  The decrease in box revenues is primarily due to
lack of sales caused by delayed software programming approvals as well as a
weakened demand as a result of the economy.


-16-




Cost
of Revenue




Bingo
cost of revenue decreased 17.4% to $3.9 million, or 38.2% of net revenue for the
13 weeks ended February 1, 2009, from $4.7 million, or 42.4% of net revenue, for
the three months ended January 31, 2008. Bingo equipment depreciation decreased
by approximately $0.4 million primarily due to certain product becoming fully
depreciated, and service labor decreased by $0.3 million due to the
implementation of an expense management plan in this area. In addition,
amortization of capitalized software decreased $0.1 million as a result of
projects becoming fully depreciated.




Box
business cost of revenue decreased 16.6% to $1.6 million, or 62.4% of net
revenues for the 13 weeks ended February 1, 2009, from $1.9 million or 46.4% of
net revenue for the three months ended January 31, 2008. The decrease in cost of
revenue is related to the decline in sales. The increase in cost of revenue as a
percent of net revenue is related to a decline in software sales, which are at a
higher margin.




Gross
Profit




Bingo
gross profit decreased 1.6% to $6.3 million, or 61.9% of net revenue for the 13
weeks ended February 1, 2009, from $6.4 million, or 57.7% of net revenue, for
the three months ended January 31, 2008. The slight decrease in gross profit is
directly related to the decline in net revenue, while the increase in gross
margin is related to a decrease in cost of revenue as described
above.




Box gross
profit decreased 56.4% to $1.0 million, or 37.7% of net revenue for the 13 weeks
ended February 1, 2009, from $2.2 million or 53.7% of net revenue for the three
months ended January 31, 2008 directly related to the decrease in revenue. The
decrease in gross margin is primarily due to lower high-margin software sales in
2009.




Operating
Expenses




Bingo
general and administrative costs decreased 12.2% to $1.6 million or 16.2% of net
revenue for the 13 weeks ended February 1, 2009, from $1.9 million, or 16.9% of
net revenue for the three months ended January 31, 2008. The decrease is due to
lower outside legal fees as the activity on major lawsuits, such as the Trend
case, has declined since the first quarter of 2008 as well as higher equipment
testing in the prior year due to the testing and licensing costs for an upgrade
to a system platform. Box general and administrative costs increased 33.0% to
$1.2 million or 46.5% of net revenue in the 13 weeks ended February 1, 2009,
from $0.9 million, or 21.7% of net revenue for the three months ended January
31, 2008. The increase is due to  higher costs as we expand our
product lines and the jurisdictions in which we distribute.




Bingo
sales and marketing expenses for the 13 weeks ended February 1, 2009 decreased
by $0.1 million or 4.7% over the three months ended January 31, 2008 to $2.3
million. This decrease in bingo sales and marketing expenses is due to lower
distributor commissions as net revenues from distributors decreased for the
period. Box sales and marketing expenses for the 13 weeks ended February 1, 2009
increased to $0.3 million, from $0.1 million for the three months ended January
31, 2008. This increase is primarily due to higher costs for customers to
promote sales of our newer product.




Bingo
research and development expenses decreased 16.8% to $0.9 million for the 13
weeks ended February 1, 2009, from $1.1 million for the three months ended
January 31, 2008. The decrease is primarily due to higher costs in 2008 related
to final development of the Tracker. Box research and development expenses
increased by $0.1 million to $0.5 million for the 13 weeks ended February 1,
2009, from $0.4 million for the three months ended January 31, 2008. The
increase is primarily due to costs expended for developing new product lines,
and new hardware design and software development costs for a major VLT
customer.




Interest
Expense




Interest
expense was $1.5 million for the 13 weeks ended February 1, 2009, compared to
$0.7 million for the three months ended January 31, 2008, an increase of $0.8
million. The increase is primarily due to the value adjustment for the interest
rate swap contract, offset in part by a lower effective annual borrowing rate
(6.79% for the 13 weeks ended February 1, 2009 compared to 9.0% for the three
months ended January 31, 2008).


LIQUIDITY
AND CAPITAL RESOURCES
  We have
funded our operations to date primarily through cash from operations and other
capital sources. This capital is for operations, research and development,
capital expenditures of bingo equipment and associated support equipment, and
software. As of February 1, 2009, and November 2, 2008, we had a working capital
balance of $9.8 million and $9.1 million, respectively. As of February 1, 2009,
our principal source of liquidity included cash and cash equivalents of $5.6
million and a $2.0 million revolving credit facility with no amounts
drawn.  In addition, we have $1.0 million in restricted cash for use
on the construction improvements of the real property purchased in the fourth
quarter of 2008.  Current liabilities include an accrued liability of
$4.0 million in connection with a contingent litigation judgment.
  Operating
activities provided $2.7 million of cash for the 13 weeks ended February 1, 2009
compared with $4.5 million for the three months ended January 31, 2008. The $2.7
million consisted of a net loss of $0.7 million, adjusted positively by $2.2
million for depreciation, amortization, obsolescence provisions, and loss on
disposal of equipment, a $1.0 million adjustment for the interest rate swap, and
$0.2 million used by other net changes in operating assets and liabilities.
During the three months ended January 31, 2008, the $4.5 million consisted
primarily of our net income of $0.3 million adjusted by $2.8 million from
depreciation, amortization, obsolescence provisions, and loss on disposal of
bingo terminals and related equipment provisions, a $0.7 million impairment of
investments, and $0.7 million provided by other net changes in operating assets
and liabilities.
  We used
approximately $2.0 million of cash in investing activities during the 13
weeks ended February 1, 2009 compared to $2.4 million of cash provided
during the three months ended January 31, 2008. The $2.0 million consisted
of $3.6 million of capital expenditures, offset by use of $1.6 million of
restricted cash to fund capital spending on the improvements for our new
headquarters.  During the three months ended January 31, 2008, the
$2.4 million included $3.5 million received from the sale of short-term
investments offset by $1.1 million of capital expenditures.
  -17-
  Financing
activities used $1.1 million during the 13 weeks ended February 1, 2009 compared
to $2.9 million during the three months ended January 31, 2008. The $1.1 million
used during the 13 weeks ended February 1, 2009 was for the payments on
long-term debt. The $2.9 million used during the three months ended January 31,
2008 included payments on long-term debt of approximately $1.1 million and the
purchase of the Company’s common stock for approximately $1.8
million.
  Our New
Credit Facility, as amended, provided a total of $40.0 million of financing,
$38.0 million of which is in the form of a term loan and $2.0 million of which
is in the form of a revolving line of credit.  Proceeds from the New
Credit Facility were used to refinance our prior credit facility, acquire real
property, and for general corporate purposes.  The term loan matures
on August 28, 2013 with monthly interest payments beginning September 30, 2008
based upon one-month LIBOR rate plus 2.80% and quarterly principal payments of
approximately $1.1 million beginning October 31, 2008 until the loan is repaid
in full.  The Senior Secured Revolving Credit Facility matures on
August 31, 2010, with monthly interest-only payments due on the last day of each
month beginning September 30, 2008 with an interest rate of either (i) the
higher of the Agent's prime rate or the Federal Funds rate plus 0.50% (a "Base
Rate Loan) or (ii) 1, 2, 3, 6, or 12-month LIBOR rate plus 2.5%. With respect to
the term loan, we entered into an interest rate swap agreement which exchanged
the variable one-month LIBOR rate for a fixed LIBOR rate of 3.99% per annum
effective August 22, 2008 through the maturity of the loan.  In the
event we were unable to raise additional capital if needed, further measures
would be necessary, including the delay or reduction of our operations, research
and development and other activities. Certain of these measures may require
third-party consent or approvals, including our lenders under the New Credit
Facility, certain regulatory bodies, and others, and there are no assurances
such consent or approvals could be obtained. Management does not believe that
these limitations will adversely affect our operations or our ability to acquire
necessary capital equipment.
  We
believe that cash flows from operations, cash, cash equivalents, and amounts
available under our New Credit Facility will be sufficient to support our
operations, provide for budgeted capital expenditures, and meet liquidity
requirements through the remainder of fiscal 2009. Our long-term liquidity
requirements depend on many factors, including the rate at which we expand our
business and whether we do so internally or through acquisitions. In addition,
we may pursue strategic opportunities that could require us to fund our portion
of operating expenses of such ventures and may require us to advance additional
amounts should any partners in such ventures be unable to meet unanticipated
capital requirements or similar funding events. To the extent that the funds
generated from the sources described above are insufficient to fund our
activities in the long term, we may be required to raise additional funds
through public or private financing. No assurance can be given that the
additional financing will be available or that, if it is available, it will be
on terms acceptable to us.
  On
September 4, 2007, the Board of Directors authorized expending up to $5.0
million in a share repurchase program. On September 16, 2008, this program was
extended through close of the trading day December 31, 2008.  The
actual amount and timing of dollars expended and shares repurchased are subject
to business and market conditions and applicable SEC rules.  As of
December 31, 2008, we had acquired 918,943 shares at a cost of approximately
$4.7 million.  This program is now expired, with no additional shares
purchased.


Contractual
Obligations




The
following table presents information on contractual obligations held as of
February 1, 2009 (in thousands):


Payments
      Due by PeriodTotal
            
            
            Less
      than 1 year
            
            
            1
      - 3 years
            
            
            3
      - 5 years
            
            
            More
      than 5 yearsLong-Term
      Debt Obligations:Term
      Loan Facility
            
            $
            35,765
            
            
            $
            4,471
            
            
            $
            13,413
            
            
            $
            17,881
            
            
            $
            —Estimated
      Interest Payments
            
            
            8,111
            
            
            
            2,314
            
            
            
            5,124
            
            
            
            673
            
            
            
            —Other
      Notes Payable
            
            
            252
            
            
            
            46
            
            
            
            146
            
            
            
            16
            
            
            
            44Operating
      Leases
            
            
            1,291
            
            
            
            797
            
            
            
            494
            
            
            
            —
            
            
            
            —Total
            
            $
            45,419
            
            
            $
            7,628
            
            
            $
            19,177
            
            
            $
            18,570
            
            
            $
            44





Purchase
Commitments
  From time
to time, we enter into commitments with our vendors to purchase box parts, bingo
terminals and support equipment at fixed prices and/or guaranteed quantities. We
entered into a construction agreement in September 2008 with a general
contractor for $2.7 million for improvements to our new corporate headquarters,
which will be funded by amounts in the restricted cash account. As of February
1, 2009, $1.0 million of this commitment was still outstanding.  We
expect the building improvements to be completed by the end of second quarter in
fiscal year 2009.
  Various
orders for product have been placed throughout fiscal 2008 and the first quarter
of 2009, of which $1.6 million was outstanding as of February 1,
2009.  All purchases are expected to occur by the end of fiscal
2009.
  ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Market
Risks
  At
February 1, 2009, we held auction rate securities (“ARS”) with an aggregate
purchase price of approximately $3.9 million. With the liquidity issues
experienced in global credit and capital markets, the ARS held by us at February
1, 2009 have experienced multiple failed auctions as the amount of securities
submitted for sale exceeded the amount of purchase orders.  Although
seven of the eight ARS continue to pay interest according to their stated terms,
based on the fair value of the investments and an analysis of other-than
temporary impairment factors, we recorded a pre-tax impairment charge of
approximately $3.3 million as of the 53 weeks ended November 2, 2008.  We
did not incur an impairment charge for the 13 weeks ended February 1, 2009.
 If uncertainties in the credit and capital markets deteriorate further or
we experience any additional rating downgrades on any of our ARS, we may incur
up to an additional $0.6 million impairment charge related to our ARS
(representing the aggregate fair value of our ARS at February 1, 2009), which
could negatively affect our financial condition and reported
earnings.
  -18-
  On August
22, 2008, we terminated our existing credit facility. Concurrently, we entered
into a Senior Secured Credit Facility (the “New Credit Facility”) with U.S. Bank
N.A. as lender, lead arranger and administrative agent, and Bank of the West as
lender (collectively “Lenders”) that provides up to $40.0 million of financing
for our company, $38.0 million of which is represented by a term loan note and
$2 million of which is a Senior Secured Revolving Credit Facility. U.S. Bank
N.A. will hold up to $25.0 million of the New Credit Facility and Bank of the
West will hold up to $15.0 million. As of February 1, 2009, the balance of the
term loan was $35.8 million, and there was no outstanding balance on the
revolver.
 
 The term
loan requires monthly interest payments which began on September 30, 2008, and
quarterly principal payments of approximately $1.1 million which began on
October 31, 2008, until its maturity on August 28, 2013, when the balance will
be due in full. The interest rate for the term loan varies based upon the
one-month LIBOR rate plus 2.80%.  With respect to the term loan, we
also entered into an interest rate swap agreement with U.S. Bank N.
A., which exchanged the variable one-month LIBOR rate of the term loan for
a fixed LIBOR rate of 3.99% per annum effective August 22, 2008, through
the maturity of the term loan. As of February 1, 2009, there was $35.8 million
outstanding under the term loan, and the average interest rate is
6.79%.
  Because
the interest rate on the term loan is fixed under a LIBOR swap agreement,
increases in interest rates will not affect our cash flow. However, if we find
it necessary to accelerate the amortization of the term loan, we could be
required to pay early breakage fees on the LIBOR contracts in the event that
interest rates decrease. We do not anticipate the need to accelerate
amortization of the term loan at any time for the remainder of fiscal
2009.
 
 ITEM
4. CONTROLS AND PROCEDURES
  Disclosure
Controls and Procedures
  We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC rules and forms, including, without
limitation, controls and procedures designed to ensure that such information is
accumulated and communicated to our management, including our Chief Executive
Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow
timely decisions regarding required disclosure.
  We have
evaluated, with the participation of our Chief Executive Officer and Chief
Financial Officer, the effectiveness of our disclosure controls and procedures
as of February 1, 2009. Based on this evaluation, our Chief Executive Officer
and Chief Financial Officer have concluded that our disclosure controls and
procedures are effective as of February 1, 2009 to ensure that the information
required to be disclosed by us in the reports we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms, including that
such information is accumulated and communicated to our management, including
our Chief Executive Officer and Chief Financial Officer, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.
  Internal Control
over Financial Reporting
  Management’s
Report on Internal Control over Financial Reporting
  Internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) refers to the process designed by, or under the
supervision of, our CEO and CFO, and effected by our board of directors,
management and other personnel, 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.  Management is responsible for establishing and
maintaining adequate internal control over our financial reporting.
  Changes
in Internal Control over Financial Reporting
  There
have been no changes in our internal control over financial reporting during the
13 weeks ended February 1, 2009, that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
  PART II. OTHER INFORMATION
  ITEM
1. LEGAL PROCEEDINGS
  For a
discussion of our current litigation, see Note 7 (Legal Proceedings) to our
consolidated financial statements included herein.
  We are
involved in various other legal proceedings arising in the ordinary course of
our business. We do not believe that any of those proceedings will have a
material adverse effect on our business, results of operations, or financial
condition.
  -19-
 ITEM
1A. RISK FACTORS
  Our business is
vulnerable to changing economic conditions and current unfavorable economic
conditions have and could continue to negatively impact the play levels of our
bingo and box equipment, our product sales, and our ability to collect
outstanding receivables from our customers.
  Existing
unfavorable domestic and international general economic conditions reduce
disposable income of bingo and casino patrons and result in fewer
patrons.  This decline in disposable income likely results in reduced
play levels on our bingo and box equipment, causing our cash flows and revenues
from our recurring revenue products to decline.  Current unfavorable
economic conditions have also resulted in a tightening in credit markets,
decreased liquidity in many financial markets, and resulted in significant
volatility in the credit and equity markets.  A decline in the
relative health of the gaming industry and the difficulty or inability of our
customers to obtain adequate levels of capital to finance their ongoing
operations would reduce their resources
available to purchase our products and services, which would adversely affect
our revenues.  Current unfavorable economic conditions could impact
the ability of our customers to make timely payments to us.  If that
were to occur, we may incur additional provisions for bad debt.
  Economic factors
beyond our control may adversely affect our investments and we may incur
additional impairment charges to our investment
portfolio.
  As of
February 1, 2009, we had $3.9 million of principal invested in Auction Rate
Securities (“ARS”), representing interests in collateralized debt obligations
supported by pools of residential and commercial mortgages or credit cards,
insurance securitizations and other structured credits, including corporate
bonds. Some of the underlying collateral for the ARS held by us consists of
sub-prime mortgages. The estimated market value of our ARS holdings at February
1, 2009, was $0.6 million, which reflected a $3.3 million adjustment to the
principal amount of $3.9 million.
  Although
six of the eight ARS continue to pay interest according to their stated terms,
based on the fair value of the investments and an analysis of
other-than-temporary impairment factors, we have recorded an impairment charge
of approximately $3.3 million in the 53 weeks ended November 2, 2008. This
impairment charge reflects the portion of ARS holdings that is an
other-than-temporary decline in value.   We did not incur any
additional impairment charges for the 13 weeks ended February 1,
2009.
  The
credit and capital markets could continue to deteriorate in 2009. If
uncertainties in these markets deteriorate further or we experience any
additional rating downgrades on any investments in our portfolio (including
ARS), we may incur additional impairment charges to our investment portfolio,
which could negatively affect our financial condition and reported
earnings.
  We
must continue to meet NASDAQ Global Market continued listing requirements or we
risk delisting.
  Our
common stock is listed on the NASDAQ Global Market.  In order to maintain
that listing, we are required to satisfy minimum financial and other continued
listing requirements, including, without limitation, maintaining a $1.00 per
share minimum closing bid price for our common stock.  In response to
current market conditions, NASDAQ has temporarily suspended the enforcement
rules requiring the minimum $1.00 closing bid price through April 19,
2009.
  If the
closing bid price of our common stock is below $1.00 for 30 consecutive business
days after April 19, 2009, we could receive notice from NASDAQ stating that the
minimum bid price of our common stock is below continued listing
standards.  To regain compliance, our common stock would need to close at
$1.00 or more for any 10 consecutive business days during the 180 calendar days
following our receipt of the notice.  If we are unable to regain compliance
within 180 calendar days, NASDAQ would determine whether we meet the initial
listing criteria for the NASDAQ Capital Market other than the bid price
requirement.  If we met such criteria, we would be afforded an additional
180 calendar days to regain compliance with the minimum bid price
rule.
  Given
current economic conditions and the volatility of our stock price, there is no
guarantee that we will be in compliance with the NASDAQ Global Market’s minimum
bid requirement when the suspension is lifted.  If we are unable to meet
the minimum bid when the temporary suspension is lifted, or if we fail to
satisfy any other continued listing standard under the NASDAQ Global Market
rules, NASDAQ may commence delisting proceedings against us. If we were to be
delisted, the market liquidity of our common stock would likely be adversely
affected and the market price of our common stock would likely decrease. 
In addition, our stockholders’ ability to trade or obtain quotations on our
shares could be severely limited because of lower trading volumes and
transaction delays.  These factors could contribute to lower prices and
larger spreads in the bid and ask price of our common stock.
  -20-
 ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  Issuer Purchases
of Equity SecuritiesThe following table provides information regarding
repurchases of our common stock made by or on behalf of us, or any “affiliated
purchaser” as defined in SEC rules, of our equity securities registered pursuant
to Section 12 of the Exchange Act, for each month during the first quarter of
fiscal year 2009, in the format required by SEC rules:


Total
      Number of Shares Purchased
            
            
            Average
      Price Paid per Share
            
            
            Total
      Number of Shares Purchased as Part of Publicly Announced Plans or
      Programs (1)
            
            
            Maximum
      Dollar Amount of Shares (in thousands) That May Yet Be Purchased Under the
      Plans or Programs (1)November
      3, 2008 – December 7, 2008
            
            
            790
            
            
            $
            2.55
            
            
            
            790
            
            
            $
            335December
      8, 2008 – January 4, 2009
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -January
      5, 2009 – February 1, 2009
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      repurchased for the first quarter
            
            
            790
            
            
            $
            2.55
            
            
            
            790
            
            
            $
            -(1) On
      September 4, 2007 the Board of Directors announced that it authorized
      expending up to $5.0 million in a share repurchase program. On
      September 16, 2008, this program was extended through close of the trading
      day December 31, 2008. The actual amount and timing of dollars
      expended and shares repurchased are subject to business and market
      conditions and applicable SEC rules. As of December 31, 2008, we had
      acquired 918,943 shares at a cost of approximately $4.7 million. This
      program is now expired, with no additional shares
    purchased.




ITEM
3. DEFAULTS UPON SENIOR SECURITIES




Not
Applicable






ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS




Not
Applicable






ITEM
5. OTHER INFORMATION




Not
Applicable




-21-


ITEM 6. EXHIBITS




2.1
            Asset
      Purchase Agreement dated August 30, 2006, between GameTech International,
      Inc. and Summit Amusement & Distributing Ltd. (1)3.1
            Certificate
      of Incorporation of the Registrant, as amended (2)3.2
            Certificate
      of Designation of Series A Junior Participating Preferred Stock of the
      Registrant (3)3.3
            Second
      Amended and Restated Bylaws of the Registrant (4)4.1
            GameTech
      International, Inc. Registration Rights
  Agreement (5)4.2
            Rights
      Agreement, dated as of March 7, 2003, between GameTech International, Inc.
      and Mellon Investor Services, LLC, as rights agent (6)4.3
            Specimen
      Common Stock Certificate (3)10.1
            First
      Amendment to August 22, 2008 Financing Agreement, dated as of January 28,
      2009 (7)31.1
            Certification
      of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a)
      promulgated under the Securities Exchange Act of 1934, as
      amended.31.2
            Certification
      of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a)
      promulgated under the Securities Exchange Act of 1934, as
      amended.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.








(1)
            Incorporated
      by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
      dated August 30, 2006 as filed with the Commission on or about August 31,
      2006.(2)
            Incorporated
      by reference to Exhibits 3.1 to the Registrant’s Registration Statement on
      Form S-1 (Registration No. 333-34967) as filed with the
      Commission on or about September 4, 1997.(3)
            Incorporated
      by reference to Exhibits 3.2 and 4.3 to the Registrant’s Quarterly Report
      on Form 10-Q for the quarterly period ended July 31, 2003, as filed with
      the Commission on or about March 17, 2003.(4)
            Incorporated
      by reference to Exhibit 3.3 to the Registrant’s Quarterly Report on Form
      10-Q for the quarterly period ended April 30, 2004, as filed with the
      Commission on or about March 16, 2004.(5)
            Incorporated
      by reference to Exhibit 4.1 to Amendment No. 1 to the Registrant’s
      Registration Statement on Form S-1 (Registration No. 333-34967)
      as filed with the Commission on or about October 17,
      1997.(6)
            Incorporated
      by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K
      dated March 7, 2003, as filed with the Commission on or about March 10,
      2003.(7)
            Incorporated
      by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
      10-K dated November 2, 2008, as filed with the Commission on or about
      January 30, 2009.





-22-





SIGNATURES







Pursuant
to the requirements 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.






Signature
            
            Title
            
            Date/S/ Jay M. Meilstrup
            
            Chief
      Executive Officer and President(Principal
      Executive Officer)
            
            March
      6, 2009/S/ Marcia R. Martin
            
            Chief
      Financial Officer(Principal
      Financial and Accounting Officer)
            
            March
      6, 2009







-23-