**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
                1934****FOR
                THE QUARTERLY PERIOD ENDED JANUARY 31, 2007****OR**£
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934****FOR
                THE TRANSITION PERIOD FROM****TO**





**Commission
      File Number 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)





**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 R No £





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


Large
                accelerated filer£
            Accelerated
                filer£
            Non-accelerated
                filerR





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





On
      March
      8, 2007, the registrant had 12,552,707  outstanding
      shares of its Common Stock, par value $0.001 per share.

















**GAMETECH
      INTERNATIONAL, INC.**


**QUARTERLY
      REPORT ON FORM 10-Q**


**FOR
      THE QUARTERLY PERIOD ENDED JANUARY 31, 2007**


**INDEX**





**Page**
              **No.**Part
                I. Financial Information:Item
                1. Financial Statements (Unaudited)Condensed
                Consolidated Balance Sheets as of January 31, 2007 (Unaudited) and
                October
                31, 2006
            3Unaudited
                Condensed Consolidated Statements of Income for the Three Months
                Ended
                January 31, 2007 and 2006
            4Unaudited
                Condensed Consolidated Statements of Cash Flows for the Three Months
                Ended
                January 31, 2007 and 2006
            5Notes
                to Unaudited Condensed Consolidated Financial Statements
            6Item
                2. Management’s Discussion and Analysis of Financial Condition and Results
                of Operations
            11Item
                3. Quantitative and Qualitative Disclosures About Market
                Risk
            17Item
                4. Controls and Procedures
            17Part
                II. Other Information:Item
                1. Legal Proceedings
            18Item
                1A. Risk Factors
            19Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            19Item
                3. Defaults Upon Senior Securities
            19Item
                4. Submission of Matters to a Vote of Security Holders
            19Item
                5. Other Information
            19Item
                6. Exhibits
            19Signatures
            21





2





**PART
      I. FINANCIAL INFORMATION**





**ITEM
      1. FINANCIAL STATEMENTS.**





**GAMETECH
      INTERNATIONAL, INC.**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


**(In
      thousands, except share and per share amounts)**





**January
                31,**
              **2007**
            
            **October
                31,**
              **2006****(Unaudited)**
            
            **(Note
                A)****Assets:**Current
                assets:Cash
                and cash equivalents
            
            $
            4,872
            
            $
            5,411Short-term
                investments
            
            
            7,526
            
            
            7,408Accounts
                receivable, less allowance of $2,376 in 2007 and $2,230 in
                2006
            
            
            3,860
            
            
            3,734Deposits
            
            
            17
            
            
            17Refundable
                income taxes
            
            
            —
            
            
            64Restricted
                short-term investments
            
            
            4,515
            
            
            4,515Prepaid
                expenses and other current assets
            
            
            597
            
            
            377Deferred
                income taxes
            
            
            2,496
            
            
            2,458Total
                current assets
            
            
            23,883
            
            
            23,984Bingo
                equipment, furniture and other equipment, net
            
            
            23,599
            
            
            22,868Goodwill,
                net
            
            
            10,184
            
            
            10,184Intangibles,
                less accumulated amortization of $3,557 in 2007 and $4,071 in
                2006
            
            
            1,031
            
            
            1,217Restricted
                cash
            
            
            490
            
            
            483Deferred
                income taxes, long term
            
            
            172
            
            
            176Other
                assets
            
            
            338
            
            
            302Total
                assets
            
            $
            59,697
            
            $
            59,214**Liabilities
                and stockholders’ equity:**Current
                liabilities:Accounts
                payable
            
            $
            718
            
            $
            1,819Accrued
                payroll and related obligations
            
            
            897
            
            
            980Accrued
                loss contingencies
            
            
            3,944
            
            
            3,898Income
                taxes payable
            
            
            951
            
            
            294Other
                accrued liabilities
            
            
            1,232
            
            
            1,581Total
                current liabilities
            
            
            7,742
            
            
            8,572Non-current
                employment obligations
            
            
            154
            
            
            160Deferred
                income taxes
            
            
            594
            
            
            648Commitments
                and contingencies
            
            
            —
            
            
            —Stockholders’
                equity:Common
                stock, $0.001 par value: 40,000,000 shares authorized; 14,407,032
                shares
                issued at January 31, 2007 and 14,371,547 shares issued at October
                31,
                2006
            
            
            14
            
            
            14Additional
                paid in capital
            
            
            51,182
            
            
            50,881Retained
                earnings
            
            
            8,107
            
            
            7,035Treasury
                stock, at cost: 1,855,325 shares in 2007 and 2006
            
            
            (8,096
            )
            
            (8,096
            )Total
                stockholders’ equity
            
            
            51,207
            
            
            49,834Total
                liabilities and stockholders’ equity
            
            $
            59,697
            
            $
            59,214





The
      accompanying notes are an integral part of these unaudited condensed
      consolidated financial statements.





3





**GAMETECH
      INTERNATIONAL, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF INCOME**


**(In
      thousands, except per share amounts)**


**(Unaudited)**





**Three
                Months**
              **Ended
                January 31,****2007**
            
            **2006**Net
                revenue
            
            $
            12,016
            
            $
            12,347Cost
                of revenue
            
            
            4,922
            
            
            4,651Gross
                profit
            
            
            7,094
            
            
            7,696Operating
                expenses:General
                and administrative
            
            
            1,972
            
            
            2,615Sales
                and marketing
            
            
            2,908
            
            
            2,720Research
                and development
            
            
            602
            
            
            1,053Loss
                contingencies
            
            
            46
            
            
            32Total
                operating expenses
            
            
            5,528
            
            
            6,420Income
                from operations
            
            
            1,566
            
            
            1,276Interest
                and other income (expenses), net
            
            
            155
            
            
            99Income
                before income taxes
            
            
            1,721
            
            
            1,375Provision
                for income taxes
            
            
            649
            
            
            536Net
                income
            
            $
            1,072
            
            $
            839Net
                income per share:Basic
            
            $
            0.09
            
            $
            0.07Diluted
            
            $
            0.08
            
            $
            0.07Shares
                used in calculating net income per share:Basic
            
            
            12,614
            
            
            11,914Diluted
            
            
            13,261
            
            
            12,120





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)**





**Three
                Months Ended January 31,****2007**
            
            **2006****Cash
                flows from operating activities:**Net
                income
            
            $
            1,072
            
            $
            839Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            2,676
            
            
            2,576Obsolescence
                and loss on disposal of bingo terminals and related
                equipment
            
            
            (85
            )
            
            68Loss
                on disposal of furniture and other equipment
            
            
            62
            
            
            2Stock
                compensation expense
            
            
            165
            
            
            —Deferred
                income taxes
            
            
            (88
            )
            
            (37
            )Interest
                on short-term investments
            
            
            (108
            )
            
            (16
            )Interest
                on restricted cash
            
            
            (7
            )
            
            (21
            )Other
                changes in operating assets and liabilities:Accounts
                receivable, net
            
            
            (126
            )
            
            (769
            )Deposits
            
            
            —
            
            
            1Refundable
                income taxes
            
            
            64
            
            
            573Restricted
                short-term investments
            
            
            —
            
            
            (35
            )Prepaid
                expenses and other current assets
            
            
            (220
            )
            
            (58
            )Accounts
                payable
            
            
            (1,593
            )
            
            916Accrued
                payroll and related obligations
            
            
            (83
            )
            
            94Accrued
                loss contingencies
            
            
            46
            
            
            32Income
                taxes payable
            
            
            657
            
            
            —Other
                accrued liabilities
            
            
            (349
            )
            
            (410
            )Non-current
                employment obligations
            
            
            (6
            )
            
            —Net
                cash provided by operating activities
            
            
            2,077
            
            
            3,755**Cash
                flows from investing activities:**Proceeds
                from sale of short-term investments
            
            
            7,660
            
            
            7,978Payments
                for purchase of short-term investments
            
            
            (7,669
            )
            
            (7,963
            )Capital
                expenditures for bingo equipment, furniture, and other
                equipment
            
            
            (2,706
            )
            
            (2,543
            )Payment
                for the acquisition of Summit Amusement & Distributing,
                Ltd
            
            
            (36
            )
            
            —Payments
                for acquisitions of intangible assets
            
            
            —
            
            
            (113
            )Net
                cash used in investing activities
            
            
            (2,751
            )
            
            (2,641
            )**Cash
                flows from financing activities:**Tax
                benefit from stock options exercised
            
            
            15
            
            
            —Proceeds
                from issuance of common stock
            
            
            120
            
            
            130Net
                cash provided by financing activities
            
            
            135
            
            
            130Net
                (decrease) increase in cash and cash equivalents
            
            
            (539
            )
            
            1,244Cash
                and cash equivalents at beginning of period
            
            
            5,411
            
            
            6,330Cash
                and cash equivalents at end of period
            
            $
            4,872
            
            $
            7,574**Supplemental
                Cash Flow Information:**Cash
                paid during the period for:Income
                taxes
            
            $
            2
            
            $
            —**Non-cash
                investing and financing activities:**Acquisition
                of fixed assets included in:Accounts
                payable
            
            $
            492
            
            $
            —





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**





**NOTE
      A. BASIS OF PRESENTATION**





The
      accompanying unaudited condensed consolidated financial statements and related
      disclosures as of January 31, 2007 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 of our financial
      position and interim results have been included. Operating results for the
      three-month period ended January 31, 2007 is not necessarily indicative of
      the
      results that may be expected for the current fiscal year or any other
      period.





The
      balance sheet at October 31, 2006 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, 2006 and any other
      of
      our filings with the Securities and Exchange Commission.





**USE
      OF ESTIMATES**





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States 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, loss contingencies, and stock based
      compensation are significant estimates made by us. Actual results could
      ultimately differ from those estimates.





**RECLASSIFICATIONS**





Certain
      prior period reclassifications have been made to conform to classifications
      in
      the current period.





**NOTE
      B. SIGNIFICANT ACCOUNTING POLICIES**





**REVENUE
      RECOGNITION**





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;
      (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 accounting principles
      generally accepted in the United States 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 allowances,
      represents our estimated net realizable value.





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.




6




**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
      provide reserves for excess or obsolete bingo terminals on hand not expected
      to
      be used. The reserves are based upon several factors, including estimated
      forecast of bingo terminal demand for placement into halls. The estimates of
      future bingo terminal demand may prove to be inaccurate, in which case we may
      have understated or overstated the provision required for excess 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.





**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 becomes available for
      general release.





The
      achievement of technological feasibility and the estimate of the 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
      are
      required to perform an annual goodwill impairment review, and 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. Goodwill is reviewed for possible impairment annually, or more
      frequently whenever events or changes in circumstances indicate that the
      carrying value may not be recoverable, such as a significant adverse change
      in
      legal factors or in the 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


**LEGAL
      CONTINGENCIES**





We
      are
      currently involved in various claims and legal proceedings (see Note D. 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 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 a reduction to net cash provided by operating activities
      with an offsetting increase in net cash provided by financing activities related
      to incremental tax benefits. 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
      three month period ended January 31, 2007, we recognized compensation expense
      of
      $165,000, which is included in the respective department expenses in the
      Condensed Consolidated Statement of Income and a related tax benefit of $57,000
      for a net cost of $108,000. For the three month period ended January 31, 2007
      diluted and basic earnings per share were reduced by $0.01 as a result of
      recognizing the share-based compensation expense, net of tax. There was no
      compensation expense recorded for the same period ending January 31,
      2006.





For
      the
      three month period ended January 31, 2007, the total compensation cost related
      to unvested stock-based awards granted to employees under our stock option
      plans
      but not yet recognized was $739,000. This cost will be amortized on a
      straight-line basis over the term per grant of one to four years and will be
      adjusted for subsequent changes in estimated forfeitures.





On
      November 10, 2005, the FASB issued Staff Position No. SFAS 123(R)-3, *Transition
      Election Related to Accounting for Tax Effects of*  *Share-Based
      Payment Awards.* We
      have
      elected to adopt the alternative transition method provided in this FASB Staff
      Position for calculating the tax effects of share-based compensation pursuant
      to
      SFAS No. 123(R). The alternative transition method includes a simplified method
      to establish the beginning balance of the additional paid-in capital pool
      related to the tax effects of employee share-based compensation, which is
      available to absorb tax deficiencies recognized subsequent to the adoption
      of
      SFAS No. 123(R).





Under
      SFAS No. 123(R) stock-based compensation cost is measured at the grant date,
      based on the estimated fair value of the award, and is recognized over the
      stated vesting period. We continue to utilize the Black-Scholes option-pricing
      model to estimate the fair value of employee stock-based compensation at the
      date of grant, which requires the use of accounting judgment and financial
      estimates. The expected life of the options used in this calculation is the
      period of time the options are expected to be outstanding, and is determined
      by
      the simplified method outlined in Staff Accounting Bulletin 107 which states,
      “The midpoint of the average vesting period and contractual life is an
      acceptable expected life assumption.” Expected stock volatility is based on the
      historic volatility of the stock for a period equal to the length of time we
      have been public. Expected option exercises, the period of time the options
      are
      held, forfeitures, employee terminations and other criteria are based on
      previous experiences. The risk-free rates for periods within the contractual
      life of the options are based on United States Treasury Note rates in effect
      at
      the time of the grant for the period equal to the expected life. Application
      of
      alternative assumptions could produce significantly different estimates of
      the
      fair value of stock-based compensation and consequently, the related amounts
      recognized in the Condensed Consolidated Statements of Income.




8




These
      amounts were determined using the Black-Scholes option-pricing model, which
      values options based on the stock price at the grant date, the expected life
      of
      the option, the estimated volatility of the stock, the expected dividend
      payments, and the risk-free interest rate over the expected life of the option.
      The assumptions used in the Black-Scholes model were as
      follows:


**Three
                Months**
              **Ended
                January 31,****2007**Risk-free
                interest rate
            4.66%Dividend
                yield
            —Volatility
                factor
            62.2%Expected
                life (in years)
            7.0





**RECENT
      ACCOUNTING PRONOUNCEMENTS**





In
      June
      2006, FASB issued FIN No. 48, *Accounting
      for Uncertainty in Income Taxes.* FIN
      No.
      48 is an interpretation of SFAS No. 109, *Accounting
      for Income Taxes* .
      FIN No.
      48 prescribes a recognition threshold and measurement attribute for the
      financial statement recognition and measurement of a tax position taken or
      expected to be taken in an enterprise’s tax return. This interpretation also
      provides guidance on the derecognition, classification, interest and penalties,
      accounting in interim periods, disclosure, and transition of tax positions.
      The
      recognition threshold and measurement attribute is part of a two-step tax
      position evaluation process prescribed in FIN No. 48. FIN No. 48 is effective
      after the beginning of an entity’s first fiscal year that begins after December
      15, 2006. We are assessing the potential impact of FIN No. 48 on our financial
      position, results of operation, and cash flow.





In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* (“SFAS
      157”), which defines fair value, establishes a framework for measuring fair
      value in GAAP, and expands disclosures about fair value measurements. SFAS
      157
      does not require any new fair value measurements, but provides guidance on
      how
      to measure fair value by providing a fair value hierarchy used to classify
      the
      source of the information. This statement is effective beginning in October
      2008. We are evaluating whether adoption of this statement will result in a
      change to our fair value measurements.





In
      September 2006, the Securities and Exchange Commission released Staff Accounting
      Bulletin No. 108, *Quantifying
      Financial Statement Misstatements* (“SAB 108”). SAB 108 gives guidance on how errors, built up over time
      in the balance sheet, should be considered from a materiality perspective and
      corrected. SAB 108 provides interpretive guidance on how the effects of the
      carryover or reversal of prior year misstatements should be considered in
      quantifying a current year misstatement. SAB 108 represents the SEC Staff’s
      views on the proper interpretation of existing rules and as such has no
      effective date. We are assessing the potential impact of SAB No. 108
      on our financial position, results of operation, and cash flows.





**NOTE
      C. 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 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 treats the proceeds from the exercise of all warrants and options
      as used to reacquire stock at market value.





9


(In
      thousands, except per share amounts)





**Three
                Months Ended**
              **January
                31,****2007**
            
            **2006**Net
                income, as reported
            
            $
            1,072
            
            $
            839Weighted
                average number of shares outstanding
            
            
            12,614
            
            
            11,914Incremental
                shares from the assumed exercise of dilutive stock options
            
            
            647
            
            
            206Dilutive
                weighted shares
            
            
            13,261
            
            
            12,120Net
                income per share:Basic
            
            $
            0.09
            
            $
            0.07Diluted
            
            $
            0.08
            
            $
            0.07





**NOTE
      D. 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
      $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 January 31, 2007. 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 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 stays 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 is accounted for
      as
      restricted short-term investments on our consolidated balance sheets. We cannot
      provide assurance that we will succeed in setting the judgments aside on appeal.
      The court has set April 19, 2007 for the hearing of oral arguments for the
      appeal. For the year ended October 31, 2004, we recorded an estimated loss
      contingency in the Trend litigation of $3.6 million, which was estimated based
      on the amounts of the judgment described above. We recorded an additional loss
      contingency of $72,000 in the third quarter of fiscal 2005 to account for the
      increased total award to Trend for legal fees and expenses and costs of
      $909,000. In addition, loss contingencies of $46,000 and $32,000 were recorded
      in the three-month period ended January 31, 2007 and 2006, respectively, to
      account for interest accrued on the Trend judgment. We feel the amount recorded
      is appropriate as of January 31, 2007.





On
      March
      2, 2004, the jury rendered a verdict in our favor awarding compensatory and
      punitive damages against Trend Gaming, LLC, a Kentucky LLC (“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 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.
      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 give no assurances whether we will
      be
      able to collect any award from the defendants.




10




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, and financial
      condition.





**NOTE
      E. CREDIT AGREEMENT**





Effective
      April 3, 2006, 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,
      2007. 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,
      requires that specified financial balances and ratios be maintained, requires
      profitability to be maintained on a quarterly basis, and restricts the
      incurrence of additional indebtedness and payment of dividends. At January
      31,
      2007, there was no outstanding balance under the line-of-credit and we were
      in
      compliance with all terms and covenants of the agreement.





**NOTE
      F. INCOME TAXES**





We
      recorded our income tax provision at an effective rate of 37.7% for the
      three-months ended January 31, 2007, compared with 39.0% for the three-months
      ended January 31, 2006. 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.





**NOTE
      G. RESTRICTED SHORT TERM INVESTMENTS**





Restricted
      short-term investments at January 31, 2007 and October 31, 2006 consisted of
      bank certificates of deposit used to collateralize irrevocable standby letters
      of credit pledged to the court to secure certain previous judgments against
      us
      pending results of our appeals. The certificates of deposit are in the amounts
      of $3.4 million and $1.1 million and are at interest rates of 3.88% and 4.51%,
      respectively, and mature April 6, 2007 and August 10, 2007, respectively. (See
      Note D. Legal Proceedings.)





**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, 2006 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 in our Annual Report on Form 10-K for the year
      ended October 31, 2006. 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 touchscreen-activated monitors. For
      our
      three most recent fiscal years ended October 31, 2006, 2005, and 2004, our
      portable terminals generated approximately 80%, 77%, and 74% of our revenue,
      respectively, while, during those same years, our fixed-base terminals generated
      the balance of our revenue. For the three months ended January 31, 2007,
      portable systems accounted for 81% of our revenue and fixed-base systems
      accounted for 19% of our revenue. As of January 31, 2007, we had systems in
      service in 39 states and in seven nondomestic countries.




11




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 is affected by player acceptance of electronic
      bingo as an addition or an alternative to paper bingo, and our ability to expand
      operations into new markets and our ability to increase our market share.
      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
      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 allowance; (b) general and administrative,
      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.





In
      August
      2006, we entered into an agreement to acquire substantially all of the assets
      of
      Summit Amusement & Distributing, Ltd. (“Summit”) for $37 million in cash
      payable at closing, subject to adjustment, up or down, based on Summit’s working
      capital as of the closing date, and a contingent payment of up to $2 million
      if
      Summit achieves certain Earnings Before Interest, Taxes, Depreciation and
      Amortization goals for 2006. Summit is a leading developer and manufacturer
      of
      entertainment driven gaming devices, including primarily video lottery terminal
      equipment and related software.





**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 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.





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***





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;
      (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 accounting principles
      generally accepted in the United States 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.




12




***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
      provide reserves for excess or obsolete bingo terminals on hand not expected
      to
      be used. The reserves are based upon several factors, including estimated
      forecast of bingo terminal demand for placement into halls. The estimates of
      future bingo terminal demand may prove to be inaccurate, in which case we may
      have understated or overstated the provision required for excess or obsolete
      bingo terminals. Although we attempt to assure the accuracy of our 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.





***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 becomes 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.





***Accounts
      Receivable and Allowance for Doubtful Accounts***





Our
      receivables are recorded when revenue is recognized in accordance with our
      revenue recognition policy and represent claims against third parties that
      may
      be settled in cash. The carrying value of our receivables, net of allowance
      for
      doubtful accounts represents their estimated net realizable value.





We
      have
      established an allowance for uncollectible accounts based primarily on
      management’s evaluation of the customer’s financial condition, past collection
      history and aging of accounts receivable balances. 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 by a distributor 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 customers and distributors for credit
      worthiness, economic trends, changes in customer payment terms, and historical
      collection experience when evaluating the adequacy of our allowance for doubtful
      accounts. We also reserve a percentage of accounts receivable based on aging
      categories. In determining these percentages, we review historical write-offs
      of
      receivables, payment trends, and other available information. While such
      estimates have been within our expectations and the provisions established,
      a
      change in the financial condition of specific customers or in overall trends
      experienced may result in future adjustments of estimates of collectibility
      of
      our receivables.





13


***Goodwill***





We
      are
      required to perform an annual goodwill impairment review, and 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. Goodwill is reviewed for possible impairment annually, or more
      frequently whenever events or changes in circumstances indicate that the
      carrying value may not be recoverable, such as a significant adverse change
      in
      legal factors or in the 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.





***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 pending claims
      and litigation and may revise these estimates. Such revisions in the estimates
      of the potential liabilities could have a material impact on our results of
      operations, and financial condition.





**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 net revenue:





**Three
                Months Ended January 31,****2007**
            
            **2006****(Unaudited)**
            
            **(Unaudited)**Net
                revenue
            
            $
            12,016
            
            
            100.0
            %
            $
            12,347
            
            
            100.0
            %Cost
                of revenue
            
            
            4,922
            
            
            41.0
            %
            
            4,651
            
            
            37.7
            %Gross
                profit
            
            
            7,094
            
            
            59.0
            %
            
            7,696
            
            
            62.3
            %Operating
                expenses:General
                and administrative
            
            
            1,972
            
            
            16.4
            %
            
            2,615
            
            
            21.2
            %Sales
                and marketing
            
            
            2,908
            
            
            24.2
            %
            
            2,720
            
            
            22.0
            %Research
                and development
            
            
            602
            
            
            5.0
            %
            
            1,053
            
            
            8.5
            %Loss
                contingencies
            
            
            46
            
            
            0.4
            %
            
            32
            
            
            0.3
            %Total
                operating expenses
            
            
            5,528
            
            
            46.0
            %
            
            6,420
            
            
            52.0
            %Income
                from operations
            
            
            1,566
            
            
            13.0
            %
            
            1,276
            
            
            10.3
            %Interest
                and other income (expense), net
            
            
            155
            
            
            1.3
            %
            
            99
            
            
            0.8
            %Income
                before provision for income taxes
            
            
            1,721
            
            
            14.3
            %
            
            1,375
            
            
            11.1
            %Provision
                for income taxes
            
            
            649
            
            
            5.4
            %
            
            536
            
            
            4.3
            %Net
                income
            
            $
            1,072
            
            
            8.9
            %
            $
            839
            
            
            6.8
            %





Income
      from operations for the three months ended January 31, 2007 increased to $1.6
      million from $1.3 million for the comparable period in 2006. The increase in
      income from operations in the quarter ended January 31, 2007 is attributable
      to
      savings realized in general and administrative expenses due to reduced outside
      legal fees and reduced accounting fees, and to a decrease in research and
      development expenses resulting from reductions in personnel and employee related
      costs, including employee severance costs, in the comparable period in 2006.
      Savings were offset by an increase in cost of revenue due to increased
      depreciation from more recent capital expenditures on new terminals.




14




*Net
      revenue*





Net
      revenue for the three months ended January 31, 2007 decreased to $12.0 million
      from $12.3 million in the comparable quarter in 2006. The decrease in net
      revenue for the three months ended January 31, 2007 is a result of several
      factors including increased regional competition and pricing pressures,
      continued migration of commercial accounts to more profitable slot machine
      style
      gaming over bingo, hall closures and the elimination of certain unprofitable
      accounts. These unfavorable changes were offset in part by increased revenue
      in
      Michigan and other key states, increased expansion in Canada and the United
      Kingdom, and the continued popularity and rollout of our Traveler
      terminals.





*Cost
      of Revenue*





Total
      cost of revenue increased 5.8% to $4.9 million, or 41.0% of net revenue in
      the
      three months ended January 31, 2007 from $4.7 million, or 37.7% of net revenue,
      for the comparable quarter in 2006. Bingo equipment depreciation and
      amortization of related intangibles increased by approximately $156,000 over
      the
      comparable quarter in 2006, primarily due to our investment in Traveler portable
      color terminals. Additionally, service expense increased $107,000, principally
      due to employee related costs.





*Gross
      Profit*





Gross
      profit decreased 7.8% to $7.1 million, or 59.0% of net revenue in the three
      months ended January 31, 2007 from $7.7 million, or 62.3% of net revenue, for
      the comparable quarter in 2006.





*Operating
      Expenses*





Total
      operating expenses decreased 13.9% to $5.5 million, or 46.0% of net revenue
      in
      the three months ended January 31, 2007 from $6.4 million, or 52.0% of net
      revenue, for the comparable quarter in 2006. Operating expenses include general
      and administrative, sales and marketing, including distributor commissions,
      research and development, and loss contingencies.





General
      and administrative costs decreased 24.6% to $2.0 million, or 16.4% of net
      revenue, in the three months ended January 31, 2007 from $2.6 million, or 21.2%
      of net revenue, for the comparable quarter in 2006. The decrease is primarily
      due to reduced outside legal expenses for the three-month period ended January
      31, 2007 as a result of the resolution of certain matters and the timing of
      matters under appeal. During the first quarter of fiscal 2007, there was no
      bonus accrual compared to $217,000 for the comparable quarter in 2006. Bonus
      accrual expenses will be made at the discretion of the board and dependent
      on
      our overall financial results.





Sales
      and
      marketing expenses increased 6.9% to $2.9 million, or 24.2% of net revenue,
      in
      the three months ended January 31, 2007 from $2.7 million, or 22.0% of net
      revenue, for the comparable quarter in 2006. The increase is primarily due
      to
      stock option expense. Distributor commissions were flat at $1.7 million, or
      14.5% of net revenue, in the three-months ended January 31, 2007 and the
      comparable quarter in 2006.





Research
      and development expenses decreased 42.8% to $602,000, or 5.0% of net revenue,
      in
      the three months ended January 31, 2007 from $1.1 million, or 8.5% of net
      revenue, for the comparable quarter in 2006. The decrease for the three-month
      period ended January 31, 2007 was accomplished with reductions in personnel
      and
      employee related costs, and reduced, but more focused, project costs as compared
      to the comparable quarter in 2006. During the first quarter of fiscal 2007,
      there were no payroll costs capitalized under FASB Statement No. 86. For the
      comparable period in 2006, $88,000 of payroll costs were capitalized related
      to
      research and development and quality assurance.





Loss
      contingencies, representing interest accrued on a legal judgment, totaled
      $46,000, or 0.4% of net revenue, in the three months ended January 31, 2007.
      Loss contingencies of $32,000 were recorded for the comparable three-month
      period in 2006.





*Provision
      for Income Taxes*





Provision
      for income taxes approximated $649,000 for the three months ended January 31,
      2007 compared with $536,000 for the comparable period in fiscal 2006. The actual
      effective tax rate of 37.7% for the three months ended January 31, 2007 is
      different from the expected federal rate of 34%, due to certain permanent
      differences between financial accounting and tax accounting, and state and
      foreign tax provisions.





15


**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. As of January 31, 2007 and October 31, 2006, we had a working capital
      balance of $16.1 million and $15.4 million, respectively. As of January 31,
      2007, our principal sources of liquidity included cash and short-term
      investments of $12.4 million, and the revolving credit facility of $2.5 million,
      which had no borrowed balance as of that date. In April 2006, we renewed our
      revolving line-of-credit through April 2, 2007 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, LIBOR plus 2.0%. 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, quarterly profitability be maintained, and includes
      restrictions on the incurrence of additional indebtedness and payment of
      dividends. We were in compliance with the terms and covenants of the revolving
      credit facility as of January 31, 2007. Current assets and current liabilities
      include a restricted short-term investment of $4.5 million and an accrued
      liability of $3.9 million in connection with litigation judgments.





Operating
      activities provided $2.1 million of cash for the three-month period ended
      January 31, 2007 compared with $3.8 million for the three-month period ended
      January 31, 2006. The $2.1 million consisted primarily of our net income of
      $1.1
      million adjusted by $2.6 million from depreciation, amortization, obsolescence
      provisions, and loss on disposal of bingo terminals and related equipment
      provisions and $1.6 million provided by net changes in other operating assets
      and liabilities. During the three-month period ended January 31, 2006, the
      $3.8
      million consisted primarily of our net income of $839,000 adjusted by
      $2.6 million from depreciation, amortization, obsolescence provisions, and
      loss on disposal of bingo terminals and related equipment provisions and
      $272,000 provided by net changes in other operating assets and
      liabilities.





We
      used
      approximately $2.8 million of cash in investing activities for the three-month
      period ended January 31, 2007 compared with $2.6 million of cash for the
      three-month period ended January 31, 2006. The $2.8 million consisted of capital
      expenditures substantially all of which was expended on bingo terminals and
      associated support equipment. During the three-month period ending January
      31,
      2006, the $2.6 million used in investing activities consisted of
      $2.5 million of capital expenditures substantially all of which was
      expended on bingo terminals and associated support equipment and the purchase
      and development of software and other intangible assets of
      $113,000.





Financing
      activities provided $135,000 of net cash for the three-month period ended
      January 31, 2007 compared with $130,000 for the three-month period ended January
      31, 2006. The $135,000 provided for the three-month period ended January 31,
      2007 was from proceeds of $120,000 from stock option exercises and $15,000
      in
      tax benefits from stock options exercised. The $130,000 provided for the prior
      three-month period ended January 31, 2006 was from the proceeds of stock option
      exercises.





Our
      revolving credit facility agreement restricts our ability to incur additional
      indebtedness. 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 were unable to raise
      additional capital if needed, 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.





We
      believe that cash flows from operations and cash, cash equivalents, and
      short-term investments will be sufficient to support our operations, provide
      for
      budgeted capital expenditures, and meet liquidity requirements through the
      remainder of fiscal 2007. We will need to raise the capital required to complete
      the acquisition of Summit. We anticipate financing the acquisition with a $10
      million revolving line of credit, which would replace our existing line of
      credit, and a $30 million term loan. If we are unable to obtain the required
      financing and Summit has met all of our conditions to closing, we would be
      required to pay Summit a $1 million termination fee. 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.




16




**Purchase
      Commitments**





From
      time
      to time, we enter into commitments with our vendors to purchase bingo terminals
      and support equipment at fixed prices and/or guaranteed quantities. During
      the
      fiscal year ended October 31, 2006, we entered into seven agreements with the
      same vendor to provide an additional $5.4 million in Traveler terminals and
      $1.1
      million in Tracker parts. As of January 31, 2007, approximately $14,000 of
      the
      Traveler commitment was remaining and $22,000 of the Tracker commitment was
      remaining. During the three-month period ending January 31, 2007, we entered
      into two additional agreements for $1.2 million in Tracker parts. All
      of
      this commitment was outstanding as of January 31, 2007 and all purchases are
      expected to occur by the end of the third quarter of fiscal 2007.





**ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK.**





**Market
      Risks**





We
      maintain an investment portfolio of approximately $7.5 million in investment
      grade corporate issues, and in investment grade auction rate securities. 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.





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 2.0%, 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. The
      line-of-credit expires on April 2, 2007. 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 $2.5 million balance outstanding as of January 31, 2007, the rate
      of
      interest calculated using the prime rate option would be 8.25%. Our monthly
      interest payment, if the rate stayed constant, would be $17,188. If the prime
      rate rose to 13.0%, which assumes an unusually large increase, our monthly
      payment would be $27,083. 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 $19,271 or $21,354, respectively. We do not believe the risk resulting from
      such fluctuations is material or that the payment required would have a material
      effect on cash flow.





**ITEM
      4. CONTROLS AND PROCEDURES.**





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 January 31, 2007. Based on this evaluation, our Chief Executive Officer
      and Chief Financial Officer have 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 reports filed or
      submitted 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, and other than as disclosed in our Annual Report
      on Form 10-K, 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.




In
      our
      Form 10-K for the fiscal year ended October 31, 2006, we previously reported
      a
      significant deficiency in our internal control process related to the tax
      provision.  The weakness is in the process of being remedied, but not all
      of the remedial steps had been completed as of January 31, 2007.




17





**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 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 in our Annual Report on Form 10-K for the year
      ended October 31, 2006. 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 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
      $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 January 31, 2007. 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 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 stays 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 is accounted for
      as
      restricted short-term investments on our consolidated balance sheets. We cannot
      provide assurance that we will succeed in setting the judgments aside on appeal.
      The court has set April 19, 2007 for the hearing of oral arguments for the
      appeal. For the year ended October 31, 2004, we recorded an estimated loss
      contingency in the Trend litigation of $3.6 million, which was estimated based
      on the amounts of the judgment described above. We recorded an additional loss
      contingency of $72,000 in the third quarter of fiscal 2005 to account for the
      increased total award to Trend for legal fees and expenses and costs of
      $909,000. In addition, loss contingencies of $46,000 and $32,000 were recorded
      in the three-month period ended January 31, 2007 and 2006, respectively, to
      account for interest accrued on the Trend judgment. We feel the amount recorded
      is appropriate as of January 31, 2007.





On
      March
      2, 2004, the jury rendered a verdict in our favor awarding compensatory and
      punitive damages against Trend Gaming, LLC, a Kentucky LLC (“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 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.
      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 give no assurances whether we will
      be
      able to collect any award from the defendants.




18




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, and financial
      condition.





**ITEM
      1A. RISK FACTORS**





****** No
      material changes have been made in the disclosure of risk factors from those
      set
      forth in our Annual Report on Form 10-K for the year ended October 31,
      2006.





**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**





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)3.3
            Certificate
                of Designation of Series A Junior Participating Preferred Stock of
                the
                Registrant (3)3.4
            Second
                Amended and Restated Bylaws of the Registrant (4)4.1
            GameTech
                International, Inc. Registration Rights
                Agreement (5)4.3
            Rights
                Agreement, dated as of March 7, 2003, between GameTech International,
                Inc.
                and Mellon Investor Services, LLC, as rights agent (6)4.4
            Specimen
                Common Stock Certificate (7)31.1
            Certification
                of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a),
                promulgated by the Securities Exchange Act of 1934, as
                amended31.2
            Certification
                of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a),
                promulgated by the Securities Exchange Act of 1934, as
                amended32.1
            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
                200232.2
            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


___________




19




(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 2.1 and 10.1 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 3.3 and 4.4 to the Registrant’s Quarterly Report
                on Form 10-Q for the quarterly period ended January 31, 2003 as filed
                with
                the Commission on or about March 17,
                2003.


(4)
            Incorporated
                by reference to Exhibit 3.4 to the Registrant’s Quarterly Report on Form
                10-Q for the quarterly period ended January 31, 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 4.3 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 Exhibits 3.3 and 4.4 to the Registrant’s Quarterly Report
                on Form 10-Q for the quarterly period ended January 31, 2003 as filed
                with
                the Commission on or about March 17,
                2003.





20


**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
            
            March
                14, 2007Jay
                M. Meilstrup
            
            (Principal
              Executive)/s/
                Tracy C. Pearson
            
            Chief
                Financial Officer, Treasurer, and Secretary
            
            March
                14, 2007Tracy
                C. Pearson
            
            (Principal
                Financial Officer)/s/
                Ann D. McKenzie
            
            Corporate
                Controller
            
            March
                14, 2007Ann
                D. McKenzie
            
            (Principal
                Accounting Officer)





21


**EXHIBIT
      INDEX**





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)3.3
            Certificate
                of Designation of Series A Junior Participating Preferred Stock of
                the
                Registrant (3)3.4
            Second
                Amended and Restated Bylaws of the Registrant (4)4.1
            GameTech
                International, Inc. Registration Rights
                Agreement (5)4.3
            Rights
                Agreement, dated as of March 7, 2003, between GameTech International,
                Inc.
                and Mellon Investor Services, LLC, as rights agent (6)4.4
            Specimen
                Common Stock Certificate (7)31.1
            Certification
                of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a),
                promulgated by the Securities Exchange Act of 1934, as
                amended31.2
            Certification
                of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a),
                promulgated by the Securities Exchange Act of 1934, as
                amended32.1
            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
                200232.2
            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 2.1 and 10.1 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 3.3 and 4.4 to the Registrant’s Quarterly Report
                on Form 10-Q for the quarterly period ended January 31, 2003 as filed
                with
                the Commission on or about March 17,
                2003.


(4)
            Incorporated
                by reference to Exhibit 3.4 to the Registrant’s Quarterly Report on Form
                10-Q for the quarterly period ended January 31, 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 4.3 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 Exhibits 3.3 and 4.4 to the Registrant’s Quarterly Report
                on Form 10-Q for the quarterly period ended January 31, 2003 as filed
                with
                the Commission on or about March 17,
                2003.





22