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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2005 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 FOR THE TRANSITION PERIOD FROM TO Commission File Number 000-23401 GAMETECH INTERNATIONAL, INC.  DELAWARE
(State or other jurisdiction
of incorporation or organization)
    
    33-0612983
(I.R.S. Employer Identification No.)
 900 SANDHILL ROAD, 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 Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange
Act Rule 12b-2) Yes o No þ On June 9, 2005, the registrant had 11,875,214 outstanding shares of its Common Stock, par
value $0.001 per share.




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GAMETECH INTERNATIONAL, INC.
QUARTERLY REPORT ON FORM 10Q
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2005
INDEX PageNo.Part I. Financial Information:Item 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of April 30, 2005 (Unaudited) and October 31, 2004
    
    
    3Unaudited Condensed Consolidated Statements of Income for the Three Months and Six Months Ended April 30, 2005 and 2004
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended April 30, 2005 and 2004
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    19Item 4. Controls and Procedures
    
    
    20Part II. Other Information:Item 1. Legal Proceedings
    
    
    20Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 3. Defaults Upon Senior Securities
    
    
    22Item 4. Submission of Matters to a Vote of Security Holders
    
    
    22Item 5. Other Information
    
    
    22Item 6. Exhibits
    
    
    22Signatures
    
    
    23EX-10.28EX-10.29EX-10.30EX-10.31EX-31EX-32
  2




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GAMETECH INTERNATIONAL, INC. 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Dollars in thousands)
 April 30,
    
    
    October 31,2005
    
    
    2004(Unaudited)
    
    
    (Note A)Assets:Current assets:Cash and cash equivalents
    
    $
    5,701
    
    
    $
    6,101Short-term investments
    
    
    501
    
    
    
    2,605Accounts receivable, less allowance for doubtful accounts
of $2,379 in 2005 and $2,454 in 2004
    
    
    3,639
    
    
    
    3,484Deposits
    
    
    27
    
    
    
    29Refundable income taxes
    
    
    
    
    
    
    100Restricted short-term investment
    
    
    3,406
    
    
    
    Prepaid expenses and other current assets
    
    
    751
    
    
    
    650Deferred income taxes
    
    
    3,129
    
    
    
    2,358Total current assets
    
    
    17,154
    
    
    
    15,327Bingo equipment, furniture and other equipment, net
    
    
    21,760
    
    
    
    23,952Goodwill, net
    
    
    10,184
    
    
    
    10,184Intangibles, less accumulated amortization of $4,039 in 2005 and
$3,614 in 2004
    
    
    1,746
    
    
    
    1,766Restricted cash
    
    
    450
    
    
    
    450Total assets
    
    $
    51,294
    
    
    $
    51,679Liabilities and stockholders equity:Current liabilities:Accounts payable
    
    $
    725
    
    
    $
    1,343Accrued payroll and related obligations
    
    
    1,125
    
    
    
    1,541Accrued loss contingency
    
    
    3,636
    
    
    
    3,628Income taxes payable
    
    
    511
    
    
    
    1,214Other accrued liabilities
    
    
    1,986
    
    
    
    2,392Total current liabilities
    
    
    7,983
    
    
    
    10,118Non-current employment obligations
    
    
    192
    
    
    
    202Deferred income taxes
    
    
    2,301
    
    
    
    689Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity:Common stock, $0.001 par value: 40,000,000 shares
authorized; 13,730,539 shares issued at April 30,
2005 and
13,700,339 at October 31, 2004
    
    
    14
    
    
    
    14Capital in excess of par value
    
    
    47,281
    
    
    
    47,081Retained earnings
    
    
    1,619
    
    
    
    1,671Less: Treasury stock, at cost: 1,855,325 shares in 2005 and 2004
    
    
    (8,096
    )
    
    
    (8,096
    )Total stockholders equity
    
    
    40,818
    
    
    
    40,670Total liabilities and stockholders equity
    
    $
    51,294
    
    
    $
    51,679
 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3




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GAMETECH INTERNATIONAL, INC. 
 CONDENSED CONSOLIDATED
STATEMENTS OF INCOME
 (Dollars in thousands,
except per share amounts)
 (Unaudited)
 Three Months
    
    
    Six MonthsEnded April 30,
    
    
    Ended April 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenue
    
    $
    12,746
    
    
    $
    13,359
    
    
    $
    25,066
    
    
    $
    25,973Cost of revenue
    
    
    5,146
    
    
    
    5,615
    
    
    
    10,616
    
    
    
    11,325Gross profit
    
    
    7,600
    
    
    
    7,744
    
    
    
    14,450
    
    
    
    14,648Operating expenses:General and administrative
    
    
    2,809
    
    
    
    2,957
    
    
    
    5,551
    
    
    
    5,736Sales and marketing
    
    
    3,055
    
    
    
    3,397
    
    
    
    6,114
    
    
    
    6,431Research and development
    
    
    1,049
    
    
    
    1,263
    
    
    
    2,131
    
    
    
    2,385Total operating expenses
    
    
    6,913
    
    
    
    7,617
    
    
    
    13,796
    
    
    
    14,552Income from operations
    
    
    687
    
    
    
    127
    
    
    
    654
    
    
    
    96Interest and other income (expense), net
    
    
    (15
    )
    
    
    (26
    )
    
    
    20
    
    
    
    (20
    )Income before provision for income taxes
    
    
    672
    
    
    
    101
    
    
    
    674
    
    
    
    76Provision for income taxes
    
    
    369
    
    
    
    43
    
    
    
    370
    
    
    
    32Net income
    
    $
    303
    
    
    $
    58
    
    
    $
    304
    
    
    $
    44Basic net income per share
    
    $
    0.03
    
    
    $
    0.00
    
    
    $
    0.03
    
    
    $
    0.00Diluted net income per share
    
    $
    0.03
    
    
    $
    0.00
    
    
    $
    0.03
    
    
    $
    0.00Weighted average number of common shares outstanding:Basic
    
    
    11,875
    
    
    
    11,757
    
    
    
    11,861
    
    
    
    11,747Diluted
    
    
    11,906
    
    
    
    11,818
    
    
    
    11,929
    
    
    
    11,820Cash dividends per common share
    
    $
    0.00
    
    
    $
    0.03
    
    
    $
    0.03
    
    
    $
    0.15
 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4




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GAMETECH INTERNATIONAL, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited, in thousands)
 Six Months EndedApril 30,2005
    
    
    2004Cash flows from operating activities :Net income
    
    $
    304
    
    
    $
    44Adjustments to reconcile net income to net cash provided by operating
activities:Depreciation and amortization
    
    
    6,099
    
    
    
    5,545Obsolescence
    
    
    303
    
    
    
    356Loss on disposals of furniture and other equipment
    
    
    19
    
    
    
    27Stock compensation expense
    
    
    93
    
    
    
    Deferred income taxes
    
    
    841
    
    
    
    32Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (155
    )
    
    
    261Deposits
    
    
    2
    
    
    
    (9
    )Refundable income taxes
    
    
    100
    
    
    
    34Restricted short-term investments
    
    
    (3,406
    )
    
    
    Prepaid expenses and other current assets
    
    
    (101
    )
    
    
    (288
    )Accounts payable
    
    
    (618
    )
    
    
    (238
    )Accrued payroll and related obligations
    
    
    (416
    )
    
    
    12Accrued loss contingency
    
    
    8
    
    
    
    Income taxes payable
    
    
    (703
    )
    
    
    Other accrued liabilities
    
    
    (406
    )
    
    
    759Non-current employment obligations
    
    
    (10
    )
    
    
    (61
    )Net cash provided by operating activities
    
    
    1,954
    
    
    
    6,474Cash flows from investing activities:Proceeds from sale of short-term investments
    
    
    2,105
    
    
    
    1,750Payments for purchase of short-term investments
    
    
    
    
    
    
    (1,493
    )Capital expenditures for bingo equipment, furniture, and other equipment
    
    
    (3,804
    )
    
    
    (6,155
    )Payments for acquisitions of intangible assets and capitalized costs of
developed software
    
    
    (406
    )
    
    
    (448
    )Net cash used in investing activities
    
    
    (2,105
    )
    
    
    (6,346
    )Cash flows from financing activities:Payments on long-term debt
    
    
    
    
    
    
    (164
    )Payments of dividends
    
    
    (355
    )
    
    
    (1,760
    )Proceeds from exercise of stock options
    
    
    106
    
    
    
    87Net cash used in financing activities
    
    
    (249
    )
    
    
    (1,837
    )Net decrease in cash and cash equivalents
    
    
    (400
    )
    
    
    (1,709
    )Cash and cash equivalents at beginning of period
    
    
    6,101
    
    
    
    10,202Cash and cash equivalents at end of period
    
    $
    5,701
    
    
    $
    8,493
 The accompanying notes are
an integral part of these unaudited condensed consolidated financial statements. 5




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GAMETECH INTERNATIONAL, INC. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars in thousands, except per share amounts)
 APRIL 30, 2005
(UNAUDITED) NOTES TO FINANCIAL STATEMENTS NOTE A. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements and related disclosures
as of April 30, 2005 have been prepared in accordance with U.S. generally accepted accounting
principles applicable to interim financial information and with the instructions to Form 10-Q and
Rule10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes
required by U.S. generally accepted accounting principles for complete financial statements. In
our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for
a fair presentation have been included. Operating results for the three- and six-month periods
ended April 30, 2005 are not necessarily indicative of the results that may be expected for the
current year or any other period. The balance sheet at October 31, 2004 has been derived from the audited financial statements
at that date but does not include all of the information and footnotes required by U.S. generally
accepted accounting principles 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 year ended October 31, 2004 and any other filings with the Securities and Exchange
Commission. USE OF ESTIMATES The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date
of the financial statements and the reported amounts of reviewed expenses during the reported
period. Actual results could differ from these estimates. RECLASSIFICATIONS Certain prior period reclassifications have been made to conform to classifications in the
current period. NOTE B. SIGNIFICANT ACCOUNTING POLICIES REVENUE RECOGNITION We recognize revenue for bingo terminals 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. Our revenue recognition is a key component of our results of
operations, and determines the timing of certain expenses, such as commissions. We recognize
revenue in accordance with U.S. generally accepted accounting principles 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) collectibility is reasonably assured. We
exercise judgment in assessing the credit worthiness of our customers and therefore in our
determination of whether collectibility is reasonably assured. Should changes in conditions cause
us to determine these criteria are not met for future transactions, revenue recognized for future
reporting periods could be adversely affected. 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 allowance for doubtful accounts represents its estimated
net realizable value. 6




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We estimate the possible losses resulting from non-payment of outstanding accounts receivable.
Our customer base consists primarily of entities operating in charitable, Native American, and
commercial bingo halls located throughout the United States. 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 category. 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. BINGO EQUIPMENT, FURNITURE AND OTHER EQUIPMENT Bingo equipment includes portable and fixed-base player terminals as well as file servers,
caller units, point-of-sale units, and other support equipment. Bingo equipment, furniture, and
other equipment are stated at cost and depreciated using the straight-line method over the
estimated useful lives of the assets. The estimated useful lives are as follows: Bingo equipment
    
    3-5 yearsOffice furniture and equipment
    
    3-7 yearsLeasehold improvements
    
    10 years
 We accrue any impairment adjustment for excess equipment equal to the difference between fair
value and book value. Such provision is computed based on a number of factors including estimated
equipment demand. Although we attempt to assure the accuracy of our estimates, significant
unanticipated change in demand, technological developments, or competition could have a significant
impact on our results of operations and financial position. 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 are capitalizing qualified costs of software developed for new products or 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 is available for general
release. The achievement of technological feasibility and the estimate of the products economic life
require 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 assign goodwill to specific intangible assets and we review goodwill for possible
impairment at least annually or more frequently upon the occurrence of an event or when
circumstances indicate that the carrying amount is greater than fair value. Such events or
occurrences may include, among other factors, significant changes in legal factors or business
climate, an adverse action or assessment by a regulator, unanticipated competition, or a loss of
key personnel. LONG-LIVED ASSETS We have adopted the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 requires impairment losses to be recognized for long-lived assets
and identifiable intangibles, other than goodwill, used in operations when indicators of impairment
are present and the estimated undiscounted cash flows are not sufficient to recover the assets
carrying amount. The impairment loss is measured by comparing the fair value of the asset to its
carrying amount. 7




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LEGAL CONTINGENCIES We are currently involved in various claims and legal proceedings. Periodically, we review
the status of each significant 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 is reasonably
estimable. Because of uncertainties related to these matters, accruals are based only 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 their estimates.
Such revisions in the estimates of the potential liabilities could have a material impact on the
results of operations, and financial condition. PRO FORMA STOCK-BASED COMPENSATION INFORMATION Pro forma information regarding net income (loss) and net income (loss) per share is required
by SFAS No. 123, Accounting for Stock-Based Compensation,as amended by SFAS No. 148, Accounting
for Stock-Based Compensation  Transition and Disclosure,and has been determined as if we had
accounted for our employee stock options under the fair value method of that statement. Our pro forma information follows: (Dollars in thousands, except per share amounts) Three Months Ended
    
    
    Six Months EndedApril 30,
    
    
    April 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income, as reported
    
    $
    303
    
    
    $
    58
    
    
    $
    304
    
    
    $
    44Add: Stock-based
employee compensation
expense included in
reported net income,
net of related tax
benefits
    
    
    
    
    
    
    
    
    
    
    93
    
    
    
    Deduct: Total
stock-based employee
compensation expense
determined under fair
value based method, net
of related tax effects
    
    
    (140
    )
    
    
    (108
    )
    
    
    (185
    )
    
    
    (176
    )Pro forma net income (loss)
    
    $
    163
    
    
    $
    (50
    )
    
    $
    212
    
    
    $
    (132
    )Net income (loss) per share:Basic  as reported
    
    $
    0.03
    
    
    $
    0.00
    
    
    $
    0.03
    
    
    $
    0.00Basic  pro forma
    
    $
    0.01
    
    
    $
    (0.00
    )
    
    $
    0.02
    
    
    $
    (0.01
    )Diluted  as reported
    
    $
    0.03
    
    
    $
    0.00
    
    
    $
    0.03
    
    
    $
    0.00Diluted  pro forma
    
    $
    0.01
    
    
    $
    (0.00
    )
    
    $
    0.02
    
    
    $
    (0.01
    )
 RECENT ACCOUNTING PRONOUNCEMENTS In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No.
46, Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51(FIN 46). In
December 2003, FIN 46 was revised to clarify certain provisions and effective dates for
application. FIN 46 addresses consolidation by business enterprises of variable interest entities
that have certain characteristics. Transferors to qualifying special-purpose entities and
grandfathered qualifying special-purpose entities subject to the reporting requirements of SFAS
No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities,are 8




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excluded from the scope of FIN 46. FIN 46 is applicable no later than the end of the first
interim or annual reporting period ending after March 15, 2004, unless we have an interest in a
special purpose entity, which the effective date for application is no later than the end of the
first interim or annual reporting period ending after December 15, 2003. We currently have no
contractual relationship or other business relationship with a variable interest entity. However,
if we enter into any such arrangement with a variable interest entity in the future, our financial
position, cash flows or results of operations may be adversely impacted. In November 2004, the FASB issued SFAS No. 151, Inventory Costs  an amendment of ARB No. 43,
Chapter 4. The amendments made by SFAS No. 151 clarify that abnormal amounts of idle facility
expense, freights, handling costs, and wasted materials (spoilage) should be recognized as
current-period charges and require the allocation of fixed production overheads to inventory based
on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for
inventory costs incurred during fiscal years beginning after November 23, 2004. We do not expect
the adoption of this recently issued accounting pronouncement to have a material impact on our
financial position, cash flows or results of operations. In December 2004, the FASB issued SFAS No.123 (revised 2004, or R), Share-Based Payment a
revision of FASB Statement No. 123 Accounting for Stock-Based Compensation. SFAS No. 123 supersedes
APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of
Cash Flows. SFAS No. 123 (R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their fair values. Pro
forma disclosure is no longer an alternative. SFAS No. 123 (R) will be effective for the first
annual filing period that begins after June 15, 2005. The new standard will be effective for our
first quarter of fiscal 2006. Under SFAS No. 123(R) we must determine the appropriate fair value method to be used for
valuing share-based payments, the amortization method of compensation cost and the transition
method to be used at the date of adoption. The transition methods include prospective and
retroactive adoption options. Under the retroactive option, prior periods may be restated either
as of the beginning of the year of adoption or for the periods presented. The prospective method
requires that compensation cost be recorded for the unvested stock options and unvested stock at
the beginning of the first quarter of adoption of SFAS 123(R), whereas the retroactive method
requires recording compensation cost for all unvested stock options along with unvested stock
beginning with the first period restated. We have not determined the method upon which we will
adopt SFAS No. 123(R). As permitted by SFAS No. 123, we currently account for share-based payments to employees using
APB Opinion 25s intrinsic value method and, as such, generally recognize no compensation cost for
employee stock options. Accordingly, the adoption of SFAS No. 123(R)s fair value method will have
a significant impact on our result of operations, although it will have no impact on its overall
financial position. We cannot predict the impact of adoption of SFAS No. 123(R) at this time
because it will depend on levels of share-based payments granted in the future. SFAS No. 123(R)
also requires the benefits of tax deductions in excess of recognized compensation cost to be
reported as a financing cash flow, rather than as an operating cash flow as required under current
literature. 9




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NOTE C. EARNINGS 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 dividing 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 considers the proceeds from the
exercise of all warrants and options are used to reacquire stock at market value. (In thousands, except per share amounts) Three Months Ended
    
    
    Six Months EndedApril 30,
    
    
    April 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income, as reported
    
    $
    303
    
    
    $
    58
    
    
    $
    304
    
    
    $
    44Weighted average number
of shares outstanding
    
    
    11,875
    
    
    
    11,757
    
    
    
    11,861
    
    
    
    11,747Incremental shares from
the assumed exercise of
dilutive stock options
    
    
    31
    
    
    
    61
    
    
    
    68
    
    
    
    73Dilutive prorated shares
    
    
    11,906
    
    
    
    11,818
    
    
    
    11,929
    
    
    
    11,820Net earnings per share:Basic
    
    $
    0.03
    
    
    $
    0.00
    
    
    $
    0.03
    
    
    $
    0.00Diluted
    
    $
    0.03
    
    
    $
    0.00
    
    
    $
    0.03
    
    
    $
    0.00
 NOTE D. LEGAL PROCEEDINGS On March 22, 2001, we filed a claim in the United States District Court, District of Arizona,
GameTech International, Inc. v. Trend Gaming Systems, LLC, CIV 01-0540 PHX LOA, 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 $600,000. 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 as of April 30, 2005 and October 31, 2004. 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 May 12, 2005, in the amount of
$2.8 million, plus simple interest on that sum at the rate of 3.31% per annum running from 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 stays any action by Trend to collect on the judgment, pending appeal. Any cash used in
the collateralization of the bond is accounted for as restricted short-term investment on our
consolidated balance sheets. Trend initially sought an award of $810,000 in legal fees and 10




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$26,000 in expenses and costs. In an amended request,
Trend is seeking an award of $1.4
million in legal fees and $61,000 in expenses and costs. We plan to
contest the amount of the fee request. If and when fees are awarded, we plan to appeal the fee
award and to post a second bond, likely in the amount of 120% of the fee award, pending appeal. We
cannot provide assurance that we will succeed in setting the judgment aside on appeal. For the
year ended October 31, 2004, we recorded an estimated loss contingency in the Trend Gaming Systems
litigation of $3.6 million, which was estimated based on the amounts of the judgment described
above. We feel the amount recorded is appropriate as of April 30, 2005. An additional loss
contingency of $8,000 was recorded in the quarter ended April 30, 2005 to account for interest
accrued on the Trend judgment. On October 30, 2002, Capital Gaming Supplies (Capital) filed a claim in the United States
District Court, Southern District of Mississippi, CAPITAL GAMING SUPPLIES, INC. V. GAMETECH
INTERNATIONAL, INC. Civil Action No. 3:02 CV1636WS, seeking a judgment that we tortiously
interfered with alleged existing and prospective customer accounts. We denied the allegations and
filed a counter-claim seeking a judgment that Capital tortiously interfered with our customer
accounts. On April 18, 2003, Capital filed an amended complaint adding other claims against us and
other defendants, including a claim for malicious breach of contract against International Gaming
Systems, Inc. (IGS), and its principals. In November 2002, we acquired certain assets of IGS and
we assumed certain claims filed by Capital against IGS and its principals. Capital sought
compensatory and punitive damages from all defendants. On September 30, 2004, the district court
entered a summary judgment in favor of all defendants dismissing all of Capitals claims with
prejudice. Capital is currently appealing the judgment to the Fifth Circuit Court of Appeals. We
continue to believe that Capitals claims are without merit and that the district courts judgment
will be affirmed. However, we cannot provide assurance that we will successfully defend the
judgment on appeal. An unfavorable outcome could have a material adverse effect on our financial
position, cash flows, and results of operations. On March 2, 2004 the jury rendered a verdict in our favor awarding compensatory and punitive
damages against Trend Gaming (involving a prior distribution agreement in Virginia) 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 GameTech 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 have appealed the judgment against them. The Appellate Court has not set a
date for oral argument. Defendants did not post a supersedeas bond, and we are therefore not
precluded from pursuing collection on the judgment during the appeal. We have not recorded an
estimated gain contingency, as we can make no assurances whether we will be able to collect any
award from the defendants. On March 3, 2005, we received an Original Notice of Opportunity to Show
Compliance (Notice) from the Texas Lottery Commission (the Commission). The Notice alleged
that we engaged in acts prohibited by Sections 2001.553, 2001.556, 2001.206 and 2001.407 of the
Texas Bingo Enabling Act (Enabling Act). On May 16, 2005, the Commission sent a First Amended
Notice of Opportunity to Show Compliance (Amended Notice). The Amended Notice reduced the
alleged violations to Sections 2001.553 and 2001.556 of the Enabling Act. The Amended Notice
specifically alleges that a former employee of ours, acting solely or
in conjunction with others,
engaged in conduct in violation of the Enabling Act, including price fixing and unlicensed
distribution. In the event that we are found to have violated the Enabling Act, administrative penalties, up
to and including revocation of our Texas license, could be imposed. We deny the allegations and
intend to defend vigorously this matter. However, we cannot provide assurance that we will prevail
in this matter or that any administrative penalties that may be imposed will not have a material
effect on our financial position, cash flows, and results of operations. 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, financial position, or results of operations. 11




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NOTE E. CREDIT AGREEMENTS Effective April 2, 2005, we renewed our revolving line-of-credit agreement with a bank. The
maximum amount available under the terms of the agreement is $2.5 million. Borrowings bear
interest based on the banks prime rate or LIBOR plus 2.0 %, at our option. Interest is payable

monthly and the agreement expires on April 2, 2006. We can give no assurance that the credit
agreement will be renewed. Our obligations under the agreement are secured by substantially all of
our assets. The agreement contains certain restrictive covenants, which among other things,
require that specified financial balances and ratios be maintained, requires profitability to be
maintained on a quarterly basis, and restrict the incurrence of additional indebtedness and payment
of dividends. In addition, our aggregate of cash and readily marketable securities must at all
times exceed 1.5 multiplied by the amount of the line-of-credit. At April 30, 2005, there was no
outstanding balance under the line-of-credit and we were in compliance with all terms and
covenants. NOTE F. INCOME TAXES We recorded our income tax provision at an effective rate of 54.9% for the six-months ended
April 30, 2005 compared with 42.9% for the six-months ended April 30, 2004. The actual effective
tax rate is different from the expected federal rate of 34%, reflecting certain permanent
differences between financial accounting and tax accounting, timing differences related to
depreciation and certain state tax adjustments. NOTE G. STOCK COMPENSATION In December 2004, the vesting period for 20,000 options to purchase shares of our common stock
was accelerated and became fully vested. As a result of this stock option modification, we
recorded compensation expense of $29,000 for the quarter ended January 31, 2005. The stock
compensation expense was calculated using the intrinsic value method, which compares the common
stock option exercise price to the fair market value of the underlying common stock on the date of
modification. The stock compensation expense is recorded in cost of revenue in the consolidated
statement of operations. In January 2005, the term for 67,500 fully vested options to purchase shares of our common
stock was extended for an additional six months as the result of an executed consulting agreement.
As a result of this consulting agreement and resulting stock option modification, we recorded
compensation expense of $64,000 for the quarter ended January 31, 2005. The stock options are
subject to measurement under Financial Accounting Standards 123 (FAS 123) and Emerging Issues Task
Force Issue No. 96-18 (ETIF 96-18). FAS 123 set forth the requirements with respect to accounting
for transactions involving a companys stock that is issued in exchange for goods or services.
According to FAS 123, these transactions should be measured at the fair value of the equity issued.
In accordance EITF 96-18, compensation expense is measured based on the fair value of the option
at the date the performance commitment is reached. We have determined that the performance
commitment was reached upon the effective date of the consulting agreement that occurred January 2,
2005. The fair value of the stock options was measured at that date based on the Black-Scholes
model using a FAS 123 approach. Per EITF 96-18 a recognized expense should not be reversed even if
the exercise expires unexercised. The stock compensation expense is recorded in sales and
marketing expense in the consolidated statement of operations. NOTE H. RESTRICTED SHORT TERM INVESTMENT On April 8, 2005 we posted a supersedeas bond in the court appointed amount of $3,350,000 in
order to proceed with our appeal with our former Texas distributor. The bond was collateralized
with a certificate of deposit in the amount of $3,406,000, scheduled to mature in April 2006, which
is held by a third party and classified as a current asset at April 30, 2005. See Note D. NOTE I. SUBSEQUENT EVENTS On May 23, 2005, the U.S. District Court in Las Vegas issued judgment in our favor in a
long-standing patent lawsuit brought by a competitor. The District Court ruled that we did not
violate the competitors patents and also ruled that certain patent claims by the competitor were
invalid. No amount had been accrued in connection with this matter at April 30, 2005. 12




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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 fiscal year ended October 31, 2004
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 Sections 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 Commission, 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 materially differ 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 in our annual report on Form 10-K for the year ended October 31, 2004. 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 interactive electronic player terminals and bingo systems. We
currently market portable systems that can be played anywhere within a bingo hall and fixed-base
systems with light-pen or touchscreen-activated monitors. For our three most recent fiscal years
ended October 31, 2004, 2003, and 2002, our portable terminals generated approximately 74%, 73%,
and 77% of our revenue, respectively, while our fixed-base terminals generated the balance of our
revenue during those same years. For the three-months ended April 30, 2005, portable systems
accounted for 77% of our revenue and fixed-base systems accounted for 23% of our revenue. For the
six-months ended April 30, 2005, portable systems accounted for 76% of our revenue and fixed-base
systems accounted for 24% of our revenue. As of April 30, 2005, we had systems in service in 37
states and in six foreign countries. We generate revenue by placing electronic player terminals and 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 is affected by player
acceptance of electronic bingo as an addition or an alternative to paper bingo, our ability to
expand operations into new markets and our ability to increase our market share, and regulatory
acceptance within jurisdictions. 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 player terminals and bingo systems at no charge to our
customers, and we capitalize the costs. We record depreciation of bingo equipment over a three- and
five-year estimated useful life using the straight-line method of depreciation. Our expenses consist primarily of (a) cost of revenue, consisting of expenses associated with
technical and operational support of the bingo systems within bingo halls, depreciation and
amortization of bingo terminals, repair, refurbishment, and disposals of bingo terminals and
related support equipment, and excess or obsolescence reserve; (b) general and administrative
expenses, consisting of activities associated with management of our company and related support,
which includes finance and accounting, legal, compliance, information systems, human resources, and
accounts receivable reserve; (c) sales and marketing, consisting primarily of commissions paid to
distributors for promoting and supporting our products and an internal sales force with a focus
upon generating new customers and upgrades for existing customers; and (d) research and
development, consisting of company-sponsored research and development activities to provide players
with new or enhanced products on which to play electronic bingo. A number of events occurred that affected, or may in the future affect, our results of
operations or liquidity and capital resources. 13




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We have continued to incur significant expenses in aggressively defending or pursuing certain
legal issues, including the following:  
    Trend (Texas) Litigation.We continue to engage in litigation with a former Texas
distributor. As we have previously reported, on November 1, 2004, a jury awarded the
former Texas distributor $3.5 million in compensatory damages while awarding our
company $735,000 in compensatory damages. Trend initially sought an award of $810,000
in legal fees and $26,000 in expenses and costs. In an amended request, Trend is
seeking an award of $1.4 million in legal fees and $61,000 in
expenses and costs. We have posted a supersedeas bond to stay collection while
we take an appeal to the Ninth Circuit Court of Appeals. At and for the year ended
October 31, 2004 we recorded an estimated loss contingency in the Trend Gaming Systems
litigation of $3.6 million.
    Texas Lottery Commission.On March 3, 2005, we received an Original Notice of
Opportunity to Show Compliance (Notice) from the Texas Lottery Commission (the
Commission). The Notice alleged that we engaged in acts prohibited by Sections
2001.553, 2001.556, 2001.206 and 2001.407 of the Texas Bingo Enabling Act (Enabling
Act). On May 16, 2005, the Commission sent a First Amended Notice of Opportunity to
Show Compliance (Amended Notice). The Amended Notice reduced the alleged violations
to Sections 2001.553 and 2001.556 of the Enabling Act. The Amended Notice specifically
alleges that a former employee of ours, acting solely or in
conjunction with others,
engaged in conduct in violation of the Enabling Act, including price fixing and
unlicensed distribution. During
the six-month period ended April 30, 2005, capital expenditures were approximately $3.8
million primarily related to an investment in bingo systems and related support equipment. This
investment included primarily an increase in the number of installed TravelerTM
terminals, in addition to TED2C terminals. APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES Managements Discussion and Analysis of Financial Condition and Results of Operations
discusses 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, and contingencies and litigation. We base our
estimates and judgments on historical experience and on various other factors we believe that 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. Changes in internal or external conditions could cause actual results to differ from our
estimates and could cause future reporting periods to be adversely affected. If changes in
conditions lead us to believe that our criteria for revenue recognition are not met for future
transactions, revenue recognized for future reporting periods could be significantly less. Changes
in financial conditions of specific customers or in overall collection trends may result in
adjustments to our reserves for doubtful accounts. Changes in technology, our competitors
offerings, market conditions, or other factors affecting our business prospects could result in an
increase in reserves for bingo terminal obsolescence or in an impairment to the carrying value of
goodwill, other intangible assets or the capitalized cost of developed software. As additional
information becomes available and we reassess our potential liability related to litigation or
other contingencies, we may revise our estimates and such revisions could have an adverse effect on
our results of operations, cash flows, and financial position. REVENUE RECOGNITION We recognize revenue for bingo terminals 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. Our revenue recognition is a key component of our results of
operations, and determines the timing of certain expenses, such as commissions. We recognize
revenue in accordance with U.S. generally accepted accounting principles 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) collectibility is reasonably assured. We
exercise judgment in assessing the credit worthiness of our customers and therefore in our
determination of whether collectibility is reasonably assured. Should changes in conditions cause
us to determine these criteria are not met for future transactions, revenue recognized for future
reporting periods could be adversely affected. 14




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##### Table of Contents



BINGO EQUIPMENT, FURNITURE AND OTHER EQUIPMENT Bingo equipment includes portable and fixed-base player terminals as well as file servers,
caller units, point-of-sale units, and other support equipment. Bingo equipment, furniture, and
other equipment are stated at cost and depreciated using the straight-line method over the
estimated useful lives of the assets. The estimated useful lives are as follows: Bingo equipment
    
    3-5 yearsOffice furniture and equipment
    
    3-7 yearsLeasehold improvements
    
    10 years
 We accrue any impairment adjustment for excess equipment equal to the difference between fair
value and book value. Such provision is computed based on a number of factors including estimated
equipment demand. Although we attempt to assure the accuracy of our estimates, significant
unanticipated change in demand, technological developments or competition could have a significant
impact on our results of operations and financial position. 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 are capitalizing qualified costs of software developed for new products or 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 is available for general
release. The
achievement of technological feasibility and the estimate of a
products economic life
require 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 assign goodwill to specific intangible assets and we review goodwill for possible
impairment at least annually or more frequently upon the occurrence of an event or when
circumstances indicate that the carrying amount is greater than fair value. Such events or
occurrences may include, among other factors, significant changes in legal factors or business
climate, an adverse action or assessment by a regulator, unanticipated competition, or a loss of
key personnel. LONG-LIVED ASSETS We have adopted the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 requires impairment losses to be recognized for long-lived assets
and identifiable intangibles, other than goodwill, used in operations when indicators of impairment
are present and the estimated undiscounted cash flows are not sufficient to recover the assets
carrying amount. The impairment loss is measured by comparing the fair value of the asset to its
carrying amount. 15




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RESULTS OF OPERATIONS The following table sets forth certain selected unaudited condensed consolidated financial
data for the periods indicated in thousands of dollars and as a percentage of total revenue: Three Months Ended April 30,
    
    
    Six Months Ended April 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)Revenue
    
    $
    12,746
    
    
    
    100.0
    %
    
    $
    13,359
    
    
    
    100.0
    %
    
    $
    25,066
    
    
    
    100.0
    %
    
    $
    25,973
    
    
    
    100.0
    %Cost of Revenue
    
    
    5,146
    
    
    
    40.4
    %
    
    
    5,615
    
    
    
    42.0
    %
    
    
    10,616
    
    
    
    42.4
    %
    
    
    11,325
    
    
    
    43.6
    %Gross Profit
    
    
    7,600
    
    
    
    59.6
    %
    
    
    7,744
    
    
    
    58.0
    %
    
    
    14,450
    
    
    
    57.6
    %
    
    
    14,648
    
    
    
    56.4
    %Operating expenses:General and administrative
    
    
    2,809
    
    
    
    22.0
    %
    
    
    2,957
    
    
    
    22.1
    %
    
    
    5,551
    
    
    
    22.1
    %
    
    
    5,736
    
    
    
    22.1
    %Sales and marketing
    
    
    3,055
    
    
    
    24.0
    %
    
    
    3,397
    
    
    
    25.4
    %
    
    
    6,114
    
    
    
    24.4
    %
    
    
    6,431
    
    
    
    24.8
    %Research and development
    
    
    1,049
    
    
    
    8.2
    %
    
    
    1,263
    
    
    
    9.5

    %
    
    
    2,131
    
    
    
    8.5
    %
    
    
    2,385
    
    
    
    9.2
    %Total operating expenses
    
    
    6,913
    
    
    
    54.2
    %
    
    
    7,617
    
    
    
    57.0
    %
    
    
    13,796
    
    
    
    55.0
    %
    
    
    14,552
    
    
    
    56.0
    %Income from operations
    
    
    687
    
    
    
    5.4
    %
    
    
    127
    
    
    
    1.0
    %
    
    
    654
    
    
    
    2.6
    %
    
    
    96
    
    
    
    0.4
    %Interest and other income
(expense), net
    
    
    (15
    )
    
    
    (0.1
    %)
    
    
    (26
    )
    
    
    (0.2
    %)
    
    
    20
    
    
    
    0.1
    %
    
    
    (20
    )
    
    
    (0.1
    %)Income before provision for
income taxes
    
    
    672
    
    
    
    5.3
    %
    
    
    101
    
    
    
    0.8
    %
    
    
    674
    
    
    
    2.7
    %
    
    
    76
    
    
    
    0.3
    %Provision for income taxes
    
    
    369
    
    
    
    2.9
    %
    
    
    43
    
    
    
    0.3
    %
    
    
    370
    
    
    
    1.5
    %
    
    
    32
    
    
    
    0.1
    %Net income
    
    $
    303
    
    
    
    2.4
    %
    
    $
    58
    
    
    
    0.4
    %
    
    $
    304
    
    
    
    1.2
    %
    
    $
    44
    
    
    
    0.2
    %
 Income from operations for the three months ended April 30, 2005 increased to $687,000 from
$127,000 in the comparable 2004 period. Income from operations for the six months ended April 30,
2005 increased to $654,000 from $96,000 in the comparable six-month period in 2004. The increase
in income from operations in both the second quarter and the six month period ended April 30, 2005
is attributable to increased gross profit as a percentage of revenue, resulting from reductions in
operations personnel, efficiencies in travel and service costs, savings in refurbishments and other
cost savings offset in part by revenue reductions in certain states resulting from legislative
changes and loss of certain customers, increased depreciation and amortization in the Traveler and
fixed base terminals, and other changes. Costs associated with bingo terminal repair,
refurbishment, and replacement decreased by $441,000 in the second quarter and $801,000 for the six
months in comparison to the 2004 comparable periods. In addition, operating costs were more
favorable as a percentage of revenue related to reductions in administrative staffing, more
favorable distributor commission arrangements, and more selective research and development
projects. Net income for the three-month period ended April 30, 2005 increased to $303,000, from
$58,000 in the comparable 2004 period. Net income for the six months ended April 30, 2005
increased to $304,000 from $44,000 in the comparable 2004 period. Overall savings in employee and
administrative related costs, reductions in travel, and improvements in operating costs have offset
the reduction in revenue, and increased depreciation of $340,000 in the second quarter and $850,000
for the six months in 2005 resulting primarily from capital additions in Traveler portable color
terminals and our fixed-base terminals. Revenue Revenue for the three months ended April 30, 2005 decreased 4.6% to $12.7 million from $13.4
million in the comparable 2004 quarter. Similarly, revenue for the six months ended April 30, 2005
decreased 3.5% to $25.1 million from $26.0 million in the comparable 2004 period. The decrease in
revenue for the three and six months ended April 30, 2005 is primarily due to the loss of
significant customer accounts in the last quarter of our prior 16




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##### Table of Contents



fiscal year and unfavorable legislative changes in the state of Oklahoma. These occurrences
are expected to have a negative impact on fiscal year 2005 revenue in comparison with fiscal 2004.
These unfavorable occurrences have offset, to a large extent, increased revenue in other states,
international business, and placement of our Traveler terminals. Cost of Revenue Total cost of revenue decreased 8.4% to $5.1 million, or 40.4% of revenue in the three months
ended April 30, 2005 from $5.6 million, or 42.0% of revenue for the comparable 2004 quarter. Total
cost of revenue decreased 6.3% to $10.6 million, or 42.4% of revenue, in the six months ended April
30, 2005 from $11.3 million or 43.6% of revenue for the comparable 2004 period. Cost reductions
were effected by reductions in service and operations personnel, increased efficiencies in our
refurbishments, and reductions in travel related costs. Savings during the period were partially
offset by increased depreciation and amortization expenses, primarily as a result of our investment
in Traveler portable color terminals this fiscal year, and our fixed base terminals last fiscal
year. Gross Profit Gross profit decreased 1.9% to $7.6 million, or 59.6% of revenue in the three months ended
April 30, 2005 from $7.7 million, or 58.0% of revenue for the comparable 2004 quarter. Gross
profit decreased 1.4% to $14.4 million, or 57.6% of revenue, in the six months ended April 30, 2005
from $14.6 million or 56.4% of revenue for the comparable 2004 period. While gross profit
decreased in absolute dollars for both the three and six month period ended April 30, 2005 compared
to comparable prior year periods, gross profit margins increased 1.6% and 1.2%, respectively, for
both current year periods compared to prior year comparable periods. Operating Expenses Total operating expenses decreased 9.2% to $6.9 million, or 54.2% of revenue in the three
months ended April 30, 2005 from $7.7 million, or 57.0% of revenue for the comparable 2004 quarter.
Total operating expenses decreased 5.2% to $13.8 million, or 55.0% of revenue, in the six months
ended April 30, 2005 from $14.6 million, or 56.0% of revenue, for the comparable 2004 period.
Operating expenses include sales and marketing, including distributor commissions, research and
development, and general and administrative. Sales and marketing expenses decreased 10.1% to $3.1 million, or 24.0% of revenue, in the
three months ended April 30, 2005 from $3.4 million or 25.4% of revenue for the comparable 2004
quarter. Sales and marketing decreased 4.9% to $6.1 million, or 24.4% of revenue in the six
months ended April 30, 2005 from $6.4 million, or 24.8% of revenue for the comparable 2004 period.
The decrease resulted primarily from reductions in personnel and travel costs and reductions in
distributor commissions which decreased $282,000 in the quarter to $2.0 million or 15.6% of revenue
and decreased $531,000 for the six months to $3.8 million or 15.3% revenues. Research and development expenses decreased 16.9% to $1.0 million, or 8.2% of revenue in the
three months ended April 30, 2005 from $1.3 million, or 9.5% of revenue for the comparable 2004
quarter. Research and development decreased 10.6% to $2.1 million, or 8.5% of revenue for the six
months ended April 30, 2005 from $2.4 million, or 9.2% of revenue for the comparable 2004 period.
The cost reductions were accomplished with reductions in personnel and employee related costs and
reduced, but more focused, project costs. During the second quarter of 2005 and the six-month period
ended April 30, 2005, approximately $114,000 and $262,000, respectively, of payroll costs related to
research and development and quality assurance were capitalized under FASB Statement No. 86. For
the comparable periods in 2004, $203,000 and $341,000 were capitalized, respectively. General and administrative costs decreased 5.0% to $2.8 million or 22.0% of revenue in the
three months ended April 30, 2005 from $3.0 million, or 22.1% of revenue for the comparable 2004
quarter. General and administrative expenses decreased 3.2% to $5.6 million, or 22.1% of revenue
for the six-month period ended April 30, 2005 from $5.7 million, or 22.1% of revenue for the
comparable 2004 period. Legal expenses for the second quarter of 2005 and the six months ended
April 30, 2005 were $773,000 and $1.4 million, respectively, and were favorable to the periods in
the comparable prior year by $216,000 and $394,000. Legal expenses for the quarter and six months
ended April 30, 2005 to date relate primarily to litigation with a former distributor in Texas,
patent infringement claims in Nevada, litigation with a former distributor in Mississippi, and
other proceedings. The decreases in legal expenses were partially offset with increased accounting
fees, and increased compliance reviews associated with the Sarbanes-Oxley Act of 2002. 17




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Provision for Income Taxes Provision for income taxes approximated $369,000 for the three months ended April 30, 2005
and $370,000 for the six-month period ended April 30, 2005 in comparison to $43,000 and $32,000,
respectively, for the same periods in the previous year. The year to date provision is 54.9% of
income before taxes compared with the previous year of 42.1% and includes the impacts of certain
timing differences, principally the reversal of accelerated tax depreciation of certain capital
assets and certain state tax adjustments. LIQUIDITY AND CAPITAL RESOURCES We have funded our operations to date primarily through cash from operations and other capital
sources. This capital is used for operations, research and development, and capital expenditures
of bingo equipment and associated support equipment and software. At April 30, 2005 and October
31, 2004 we had a working capital balance of $9.2 million and $5.2 million, respectively. As of
April 30, 2005 our principal sources of liquidity included cash and short term investments of $6.2
million and the revolving credit facility of $2.5 million which had no borrowings as of that date.
In April 2005, we renewed our revolving line-of-credit through April 2, 2006 with Wells Fargo, N.A.
for a line of credit of $2.5 million with interest based on the banks prime rate or, at our
option, on LIBOR plus 2.0%. The agreement contains certain restrictive covenants, which among
other things require that specified financial balances and ratios be maintained, quarterly
profitability be maintained, restrictions on the incurrence of additional indebtedness and payment
of dividends. In addition, our aggregate of cash and readily marketable securities must at all
times exceed 1.5 multiplied by the amount of the line-of-credit. We were in compliance
with the terms and covenants of the revolving credit facility as of April 30, 2005. Current assets
and current liabilities include a restricted short-term investment and accrued liability of $3.6
million in connection with litigation settlements. Operating activities provided $2.0 million of cash for the six-month period ended April 30,
2005 compared with $6.5 million for the six-month period ended April 30, 2004. The $2.0 million
consisted primarily of our net income of $304,000 adjusted by $6.4 million from depreciation,
amortization, and obsolescence provisions, less a net use of funds of $4.8 million from changes in
other operating assets and liabilities including $3.4 million used to purchase a restricted short
term investment related to the Trend litigation issue. During the six month period ended April 30,
2004, the $6.5 million consisted primarily of our net income of $44,000 adjusted by $5.9 million
from depreciation, amortization, and obsolescence provisions and $529,000 provided by changes in
other operating assets and liabilities. We used approximately $2.1 million of cash in investing activities for the six-month period
ended April 30, 2005 compared with $6.3 million of cash for the six month period ended April 30,
2004. The $2.1 million consisted of $3.8 million of capital expenditures ($3.7 million of which was
expended on bingo terminals and associated support equipment) and the purchase and development of
software and other intangible assets of $406,000 partially offset by the sale of short-term
investments with proceeds of $2.1 million. During fiscal 2004, the $6.5 million consisted of $6.2
million of capital expenditures ($5.5 million of bingo terminals and associated support equipment)
and the purchase and development of software and other intangible assets of $448,000, partially
offset with net proceeds received from short-term investments of $257,000. We used net cash of $249,000 in financing activities for the six-month period ended April 30,
2005 compared with $1.8 million used for the six-month period ended April 30, 2004. The $249,000
used for the current six-month period ended April 30, 2005 was primarily for cash dividends of
$355,000, which were discontinued in January 2005, partially offset with proceeds from stock option
exercises of $106,000. The $1.8 million used for the prior six month period ended April 30, 2004
was primarily for cash dividends of nearly $1.8 million and payments of $164,000 on long-term debt
partially offset with proceeds of $87,000 from stock option exercises. Our revolving credit facility agreement restricts our ability to incur additional
indebtedness. In addition, our low stock price and trading volume could further restrict our
ability to obtain capital from other sources at favorable costs, if at all. The restrictions and
limitations of available capital other than from cash flow from operations could curtail our
business strategy of expansion and development, and could result in a curtailment of our capital
expenditures for bingo devices, and related equipment. In the event we are unable to raise
additional working capital, further measures could be necessary, including the delay or reduction
of our operations, research and development and other activities. Certain of such measures may
require third-party consent or approvals, including the financial institution under the revolving
credit facility, certain regulatory bodies, and others, and there are no assurances such consent or
approvals could be obtained. 18




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We believe that cash flows from operations and cash, cash equivalents, and short-term
investments on hand and our available line of credit will be sufficient to support our operations,
provide for budgeted capital expenditures, provide the remaining cash collateral for the posting of
a bond to appeal the jury decision relating to our former distributor in Texas, and meet liquidity
requirements through the remainder of fiscal 2005. Our long-term liquidity requirements will
depend on many factors, including the rate at which we expand our business and whether we do so
internally or through acquisition. 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. Contractual Obligations From time to time we enter into commitments with our vendors to purchase terminals and support
equipment at fixed prices or guaranteed quantities. During the second quarter of fiscal 2004, we
entered into such an agreement with one of our vendors to provide approximately $5.2 million in
Traveler terminals. At April 30, 2005, approximately $393,000 of that commitment was outstanding
and all purchases are expected to occur by the end of the third quarter of fiscal 2005. In
addition, during the second quarter of fiscal 2005, we entered into an additional agreement with
the same vendor to provide $1.2 million in Traveler units. These purchases are expected to occur
in the third and fourth quarters of fiscal 2005. There were no other significant contractual
obligations at April 30, 2005. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Currency Rate Fluctuations Revenue and results of operations derived from our non-U.S. markets are denominated in their
local currencies and are affected by changes in the relative values of non-U.S. currencies and the
U.S. dollar. Our non-U.S. markets are small and local currencies are stable versus the U.S.
dollar. We do not currently utilize hedging instruments. Market Risks We maintain an investment portfolio, of approximately $500,000, in available-for-sale debt
securities of the U.S. Government and its agencies, and in investment grade corporate issues. The
values of these investments are subject to changes in interest rates. However, because these
investments are short-term and are generally allowed to mature, we do not believe that any risk
inherent in our portfolio is likely to have a material effect on expected cash flows. We monitor
these investments for impairment and make appropriate reductions in carrying value when necessary.
As of April 30, 2005 we had no derivative financial instruments. Our revolving credit facility with Wells Fargo includes a $2.5 million line of credit with a
variable interest rate based on the prime rate or LIBOR plus 2%, at our option. The agreement
contains certain restrictive covenants, which among other things require that specified financial
balances and ratios be maintained, quarterly profitability be maintained, restrictions on the
incurrence of additional indebtedness and payment of dividends. In addition, our aggregate of cash
and readily marketable securities must at all times exceed 1.5 multiplied by the amount of the
line-of-credit. The line of credit expires on April 2, 2006. No assurance can be made for renewal.
We currently maintain a zero balance on the revolving credit facility. Because the interest rate on the revolving credit facility is variable, our cash flow may be
affected by increases in interest rates, in that we would be required to pay more interest in the
event that both the prime and LIBOR interest rates increase. We do not believe, however, that any
risk inherent in the variable-rate nature of the loan is likely to have a material effect on our
interest expense or available cash. Sensitivity Analysis Market Risks.Assuming we had a $2.0 million balance outstanding as of
April 30, 2005, the rate of interest calculated using the prime rate option would be 5.75%. Our
monthly interest payment, if the rate stayed constant, would be $9,583. If the prime rate rose to
10.0%, which assumes an unusually large increase, our monthly payment would be $16,667. A more
likely increase of 1.0% or 2.0%, given the recent trend of relatively low interest rates, would
result in a monthly payment of $11,250 or $12,917, respectively. We do not believe the 19




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risk resulting from such fluctuations is material or that the payment required would have a
material effect on cash flow. Sensitivity Analysis Foreign Currency Exchange Rate Risk.Our foreign markets generally use
their domestic currency as their functional currency. A 10% fluctuation in the exchange rates of
these currencies against the U.S. dollar would result in a corresponding change in annual earnings
reported in the consolidated group of approximately $0.2 million, net of tax. 
 ITEM 4. CONTROLS AND PROCEDURES. We have evaluated, with the participation of our Chief Executive Officer and Acting Principal
Financial Officer, the effectiveness of our disclosure controls and procedures as of April 30,
2005. Based on this evaluation, our Chief Executive Officer and Acting Principal Financial Officer
has concluded that our disclosure controls and procedures are effective to ensure that we record,
process, summarize, and report information required to be disclosed by us in our quarterly reports
filed under the Securities Exchange Act within the time periods specified by the Securities and
Exchange Commissions rules and forms. During the quarterly period covered by this report, there
have not been any changes in our internal controls over financial reporting that have materially
affected, or are reasonably likely to materially affect, our internal control over financial
reporting. CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 This document includes various forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Sections 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 Commission, 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
materially differ 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 in
our annual report on Form 10-K for the year ended October 31, 2004. 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. 
 PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS. On March 22, 2001, we filed a claim in the United States District Court, District of Arizona,
GameTech International, Inc. v. Trend Gaming Systems, LLC, CIV 01-0540 PHX LOA, 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 $600,000. 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 as of April 30, 2005 and October 31, 2004. 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 May 12, 2005, in the amount of
$2.8 million, plus 20




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simple interest on that sum at the rate of 3.31% per annum running from 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 stays
any action by Trend to collect on the judgment, pending appeal. Any cash used in the
collateralization of the bond is accounted for as restricted short-term investment on our
consolidated balance sheets. Trend initially sought an award of $810,000 in legal fess and $26,000
in expenses and costs. In an amended request, Trend is seeking an award of $1.4 million in legal
fees and $61,000 in expenses and costs. We plan to contest the amount
of the fee request. If and when fees are awarded, we plan to appeal the fee award and to post a
second bond, likely in the amount of 120% of the fee award, pending appeal. We cannot provide
assurance that we will succeed in setting the judgment aside on appeal. For the year ended October
31, 2004, we recorded an estimated loss contingency in the Trend Gaming Systems litigation of $3.6
million, which was estimated based on the amounts of the judgment described above. We feel the
amount recorded is appropriate as of April 30, 2005. An additional loss contingency of $8,000 was
recorded in the quarter ended April 30, 2005 to account for interest accrued on the Trend judgment. On October 30, 2002, Capital Gaming Supplies (Capital) filed a claim in the United States
District Court, Southern District of Mississippi, CAPITAL GAMING SUPPLIES, INC. V. GAMETECH
INTERNATIONAL, INC. Civil Action No. 3:02 CV1636WS, seeking a judgment that we tortiously
interfered with alleged existing and prospective customer accounts. We denied the allegations and
filed a counter-claim seeking a judgment that Capital tortiously interfered with our customer
accounts. On April 18, 2003, Capital filed an amended complaint adding other claims against us and
other defendants, including a claim for malicious breach of contract against International Gaming
Systems, Inc. (IGS), and its principals. In November 2002, we acquired certain assets of IGS and
we assumed certain claims filed by Capital against IGS and its principals. Capital sought
compensatory and punitive damages from all defendants. On September 30, 2004, the district court
entered a summary judgment in favor of all defendants dismissing all of Capitals claims with
prejudice. Capital is currently appealing the judgment to the Fifth Circuit Court of Appeals. We
continue to believe that Capitals claims are without merit and that the district courts judgment
will be affirmed. However, we cannot provide assurance that we will successfully defend the
judgment on appeal. An unfavorable outcome could have a material adverse effect on our financial
position, cash flows, and results of operations. On March 2, 2004, the jury rendered a verdict in our favor awarding compensatory and punitive
damages against Trend Gaming (involving a prior distribution agreement in Virginia) 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 GameTech 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 have appealed the judgment against them. The Appellate Court has not set a
date for oral argument. Defendants did not post a supersedeas bond, and we are therefore not
precluded from pursuing collection on the judgment during the appeal. We have not recorded an
estimated gain contingency, as we can make no assurances whether we will be able to collect any
award from the defendants. On March 3, 2005, we received an Original Notice of Opportunity to Show Compliance
(Notice) from the Texas Lottery Commission (the Commission). The Notice alleged that we
engaged in acts prohibited by Sections 2001.553, 2001.556, 2001.206 and 2001.407 of the Texas Bingo
Enabling Act (Enabling Act). On May 16, 2005, the Commission sent a First Amended Notice of
Opportunity to Show Compliance (Amended Notice). The Amended Notice reduced the alleged
violations to Sections 2001.553 and 2001.556 of the Enabling Act. The Amended Notice specifically
alleges that a former employee of ours, acting solely or in
conjunction with others, engaged in
conduct in violation of the Enabling Act, including price fixing and unlicensed distribution. In the event that we are found to have violated the Enabling Act, administrative penalties, up
to and including revocation of our Texas license, could be imposed. We deny the allegations and
intend to defend vigorously this matter. However, we cannot provide assurance that we will prevail
in this matter or that any administrative penalties that may be imposed will not have a material
effect on our financial position, cash flows, and results of operations. On
May 23, 2005, the U.S. District Court in Las Vegas issued judgment in
our favor in a long-standing patent lawsuit brought by a competitor.
The District Court ruled that we did not violate the
competitors patents and also ruled that certain patent claims
by the competitor were invalid. No amount has been accrued in
connection with this matter at April 30, 2005. 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, financial position, or results of operations. 21




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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. Not applicable. 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. ITEM 6. EXHIBITS.  10.28
    
    Credit Agreement, dated April 2, 2005, by and between
Gametech International, Inc. and Wells Fargo Bank, National
Association.10.29
    
    Revolving Line of Credit Note, dated April 2, 2005 in favor
of Wells Fargo Bank, National Association.10.30
    
    Security Agreement relating to equipment, dated April 2,
2005, in favor of Wells Fargo Bank, National Association.10.31
    
    Continuing Security Agreement relating to rights to payment
and inventory, dated April 2, 2005, in favor of Wells Fargo Bank,
National Association.31
    
    Certification of Chief Executive Officer, and Acting 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
    
    Certification of Chief Executive Officer, and Acting Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. 22




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SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. Signature
    
    Title
    
    Date/S/ John B. Furman
    
    Chief Executive Officer/Acting Chief Financial Officer
    
    June 14, 2005John B. Furman
    
    (Principal Executive Officer and Acting Principal Financial Officer)/S/ Ann D. McKenzie
    
    Corporate Controller
    
    June 14, 2005Ann D. McKenzie
    
    (Principal Accounting Officer)
 23




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EXHIBIT INDEX  ExhibitNumber
    
    Description10.28
    
    Credit Agreement, dated April 2, 2005, by and between
Gametech International, Inc. and Wells Fargo Bank, National
Association.10.29
    
    Revolving Line of Credit Note, dated April 2, 2005 in favor
of Wells Fargo Bank, National Association.10.30
    
    Security Agreement relating to equipment, dated April 2,
2005, in favor of Wells Fargo Bank, National Association.10.31
    
    Continuing Security Agreement relating to rights to payment
and inventory, dated April 2, 2005, in favor of Wells Fargo Bank,
National Association.31
    
    Certification of Chief Executive Officer, and Acting 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
    
    Certification of Chief Executive Officer, and Acting Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.