UNITED
STATES





SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form
10-K





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





For
the 52 weeks ended November 1, 2009





oTRANSITION 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 of
              incorporation
      or organization)
            
            (I.R.S.
      Employer
              Identification
      No.)





8850
      DOUBLE DIAMOND PKWY, RENO, NEVADA
            
            89521(Address
      of principal executive offices)
            
            (Zip
      Code)





(775) 850-6000


(Registrant’s
telephone number, including area code)





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





Title
      of each class
            
            Name
      of each exchange on which registeredCommon
      Stock, par value $.001 per share
              Rights
      to Purchase Series A Junior
              Participating
      Preferred Stock
            
            The
      NASDAQ Global Market
              The
      NASDAQ Global Market














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





None





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.    Yes o No x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the
Act.                       Yes o No x





Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.


Yes x No o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).  Yes o No o





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





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





Large
accelerated filer  o  Accelerated
filer  o
Non-accelerated filer  o Smaller reporting
company x





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


Yes o  
No  x





The
aggregate market value of common stock held by non-affiliates of the registrant
based on the closing price of the registrant’s common stock as reported on the
NASDAQ Global Market on May 3, 2009, which was the last business day of the
registrant’s most recently completed second fiscal quarter, was $13,119,878. For
purposes of this computation, all officers and directors of the registrant are
deemed to be affiliates.  Such determination should not be deemed to
be an admission that such officers and directors are, in fact, affiliates of the
registrant.





The
number of shares of common stock, $0.001 par value, outstanding as of
January 26, 2010, was 11,735,865 shares.





Documents
Incorporated By Reference





Portions
of the registrant’s definitive proxy statement for the 2010 Annual Meeting of
Stockholders are incorporated by reference into Part III of this
report.








GAMETECH
INTERNATIONAL, INC.





ANNUAL
REPORT ON FORM 10-K


52
WEEKS ENDED NOVEMBER 1, 2009





INDEX







PART
      IItem
      1.
              
              Business
              1Item
      1A.
              
              Risk
      Factors
              14Item
      1B.
              
              Unresolved
      Staff Comments
              21Item
      2.
              
              Properties
              21Item
      3.
              
              Legal
      Proceedings
              21Item
      4.
              
              Submission
      of Matters to a Vote of Security Holders
              23PART
      IIItem
      5.
              
              Market
      for Registrant’s Common Equity, Related Stockholder Matters, and Issuer
      Purchases of Equity Securities
              23Item
      6.
              
              Selected
      Financial Data
              25Item
      7.
              
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              26Item
      7A.
              
              Quantitative
      and Qualitative Disclosures About Market Risk
              40Item
      8.
              
              Financial
      Statements and Supplementary Data
              41Item
      9.
              
              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
              41Item
      9A.
              
              Controls
      and Procedures
              41Item
      9B.
              
              Other
      Information
              42PART
      IIIItem
      10.
              
              Directors
      and Executive Officers and Corporate Governance
              42Item
      11.
              
              Executive
      Compensation
              42Item
      12.
              
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
              42Item
      13.
              
              Certain
      Relationships and Related Transactions and Director
      Independence
              42Item
      14.
              
              Principal
      Accountants Fees and Services
              43PART
      IVItem
      15.
              
              Exhibits
      and Financial Statement Schedules
              43SIGNATURES
              45Index
      to Consolidated Financial Statements
              F-1


Statement
Regarding Forward-Looking Statements





The
statements contained in this report on Form 10-K that are not purely
historical are forward-looking statements within the meaning of applicable
securities laws. Forward-looking statements include statements regarding our
“expectations,” “anticipation,” “intentions,” “beliefs,” or “strategies”
regarding the future. Forward-looking statements also include statements
regarding revenue, margins, expenses, and earnings for fiscal 2010 and
thereafter; expansion of products or product development; expansion into new
domestic and international markets; potential acquisitions or strategic
alliances; and liquidity and anticipated cash needs and availability. All
forward-looking statements included in this report are based on information
available to us as of the filing date of this report, and we assume no
obligation to update any such forward-looking statements. Our actual results
could differ materially from the forward-looking statements. Important factors
that could cause actual results to differ materially from expectations reflected
in our forward-looking statements include those described in Item 1A, “Risk
Factors.”










PART I






Item
1.              Business







General





We
design, develop, and market interactive electronic bingo systems consisting of
portable, fixed based, and server-based player terminals and gaming systems,
video lottery terminals, slot machine equipment, and related
software.





We
currently have portable and server-based bingo systems that can be played
anywhere within a bingo hall and fixed-based systems with touch screen activated
monitors operating in charitable, Native American, commercial, and military
bingo halls.  Our portable and fixed-based bingo systems display
electronic bingo card images for each bingo game.  Our electronic
bingo terminals enable players to play substantially more bingo cards than they
can play on paper cards, typically leading to a greater spend per player and
higher profits per bingo session for the bingo operator.  We install
the electronic bingo systems, typically at no cost to the operator, and charge
either a fixed fee per use per terminal, a fixed weekly fee per terminal, or a
percentage of the revenue generated by each terminal.  We typically
enter into one to three-year contracts with bingo operators.  As part
of our bingo segment, we have developed a wireless server-based gaming
technology into a commercially viable product, the GameTech Elite(R), which was
successfully installed domestically in the third quarter of 2008 and installed
in Europe during the first quarter of fiscal 2009. The European configuration of
GameTech Elite(R) supports 450 wireless devices in a single location and
represents our largest installation of the GameTech Elite(R) system to date. In
addition to the GameTech Elite(R) server-based gaming system ("Elite"), we have
also spun off a particular configuration of GameTech Elite(R) for the
traditional bingo markets of the US as well as other international bingo
markets.  This product is known as GameTech Edge(TM), which
was developed in 2009 and was successfully installed in the summer of 2009
in a North American bingo hall.  GameTech Edge(TM) will be the premier
US product offering in 2010 with further enhancements, features and bingo
content planned for release.





We also
design, manufacture, and sell video lottery terminals (“VLTs”), slot machine
equipment, and related software (collectively referred to as “box
business”).  We entered the box business on March 28, 2007 with our
acquisition of substantially all of the assets of Summit Amusement &
Distributing, Ltd. (“Summit Gaming”) for $40.9 million in cash.  These
machines are typically sold to VLT route operators, Native American casinos,
bar/tavern gaming operators, and distributors on both a machine purchase and
revenue participation basis.  We also anticipate utilizing our box
division to develop new platforms to expand into new markets including Class II
and Class III gaming markets with existing and acquired gaming content from
third party software developers.





Our
company was incorporated in 1994 by executives previously involved in the bingo,
slot machine, lottery, and high-technology software and hardware industries to
pursue the belief that an advanced, interactive, electronic bingo system would
be well received by both bingo hall operators and players. We believe our
experienced management team, quality electronic bingo systems and VLT equipment,
and reputation for superior customer service and support enable us to compete
effectively in both the bingo and box industries.





We report
on a 52/53 week fiscal year which began with the period ending on the first
Sunday in November 2008.  Our fiscal year ending November 1, 2009
includes 52 weeks versus the fiscal year ending November 2, 2008 which had 53
weeks.  The fiscal year ending October 31, 2007 was on a twelve month
calendar basis.





Bingo is
a legal enterprise in 48 states (excluding Hawaii and Utah) and the District of
Columbia.  Electronic bingo has been legalized in approximately 87% of
those states.  Nonprofit organizations sponsor bingo games for
fundraising purposes, while Native American, commercial entities, and
government-sponsored entities operate bingo games for profit.  As of
November 1, 2009, we had systems in 33 of the states that allow electronic bingo
systems for use with charitable and commercial organizations.  Under
the Indian Gaming Regulatory Act, or IGRA, electronic bingo may be played on
Native American lands. We estimate that bingo is currently played on Native
American lands in 30 states.  As of November 1, 2009, we had terminals
in operation in Native American bingo halls in 16 of those states. Collectively,
as of November 1, 2009, we had electronic bingo systems in 40 states and three
foreign countries.  For fiscal 2009, 81.8% of our net revenue came
from our bingo equipment segment.


-1-


Box
equipment is legal in 15 states and Canada.  Box equipment includes
VLTs that are state authorized and monitored Class III gaming machines,
traditional Class III gaming machines, and related software, licensing, and
gaming content.  Our box equipment is operated in casinos,
bar/taverns, truck stops, and other gaming approved locations that vary from
state to state based upon jurisdictional legislation or
regulations.  We sell VLTs, related software and equipment primarily
in Louisiana, Montana, and South Dakota, as well as distribute traditional Class
III gaming machines in Native American casinos and several
states.  For fiscal 2009, 18.2% of our net revenue came from our box
equipment segment, 66.8% of which was from the sale of VLTs.





Our
website is located at www.gametech-inc.com. Through our website, we make
available free of charge our annual reports on Form 10-K, our proxy statements,
our quarterly reports on Form 10-Q, our current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) under the Securities Exchange Act. These reports are available as soon as
reasonably practicable after we electronically file them with the Securities and
Exchange Commission.





For
financial information about our operating segments see Note 16 to our
consolidated financial statements included in Item 8.





Business
Strategy





Our goal
is to be a leading provider of electronic bingo products and gaming machines in
the United States, on Native American lands, and internationally.  Key
elements of this strategy include the following:





Expand
Product Offerings and Emphasize Unique Gaming Content





We plan
to continue to expand our product offerings to provide bingo and gaming
operators with more choices and price points for our bingo equipment and gaming
machines.





Our wide
range of electronic bingo products allows bingo operators to offer players many
choices when establishing their purchases for bingo games.  Operators
are then better positioned to ensure they meet the needs of all levels of
customers.  We are continuing to focus our efforts on expanding our
product lines so bingo operators can offer players everything from low cost
terminals to higher priced player terminals with additional features, as well as
terminals that are capable of supporting a variety of different games, which
increase entertainment value.  Our current electronic bingo
system portfolio includes one server-based model with color displays, four
portable models, one with black and white displays and three with color
displays, two fixed-based color terminal models, and various back-office
management systems.





Our box
division manufacturers VLT and other gaming equipment and software that is sold
primarily in Louisiana, Montana, South Dakota, and Native American
markets.  These games are sold on a machine purchase basis as well as
a revenue participation basis.  The gaming content developed for these
games includes unique video poker and keno games that have allowed us to
generate significant market share in the markets where we compete.  We
believe revenue growth will be driven by increasing market share in existing
markets and expanding product placement into new markets.





Develop
New Applications





We
maintain an ongoing product development program focused on enhancing our
existing products and developing new products and additional applications for
our technology.




-2-


During
2009 we continued development of the GameTech Elite(R) server-based gaming
system (“Elite”).  This operating system will enable us to move into
Class II and Class III server-based markets which demand a higher level of
security and accountability.  The Elite system provides GameTech with
the ability to support traditional bingo applications as well as new cutting
edge server-based applications for casino and Native American gaming
markets.  The Elite system also addresses international product needs,
allowing GameTech to focus on different variations of the game of bingo in
European and Latin American markets.  The system was redesigned from
the ground up based on the experience from past products as well as emerging
technologies not available during the design of previous
products.





Expand
Internationally





We plan
to continue to expand our operations outside of the United States.  We
currently have an installed base of bingo terminals in Europe, Canada, and
Asia.  International revenue as a percentage of our total revenue was
7.2% in fiscal 2009, 9.0% in fiscal 2008, and 7.6% in fiscal 2007.  We
are currently pursuing additional expansion in Latin America, Europe, certain
provinces in Canada, and other locations.  In the United Kingdom, we
are working with major bingo operators to increase player acceptance levels and
place additional electronic bingo terminals in bingo halls and
casinos.  From time to time we also evaluate opportunities to expand
into other countries.





Develop
Strategic Alliances/Acquire Complementary Companies





We plan
to continue to review opportunities to grow through strategic alliances and
acquisitions that could extend our presence into new geographic markets, expand
our client and product base, add new products, and provide operating
synergies.





Products
- Bingo





We
provide bingo operators with a variety of electronic player terminals and
back-office management systems. The newest of these systems is known as GameTech
Edge(TM).  This operating system includes Point-of-Sale (POS)
functionality and player tracking for bingo operators that allows them to
consolidate to one system for selling bingo paper and electronics, while also
loading the appropriate sales information to electronic player terminals. The
GameTech Edge(TM) system provides bingo operators a verifier that confirms
whether a “BINGO” is legitimate and has been won on a bingo card (whether
electronic or paper) that was sold during the session.  In addition to
traditional electronic bingo applications and features, the GameTech Edge(TM)
system also offers new cutting edge features such as a virtual flash board,
Wi-Fi portable units, and various new raffle and bingo games.





We also
offer bingo operators a back-office management system known as AllTrak2(R).
AllTrak2(R) is typically integrated with our electronic bingo terminals to
provide bingo operators with a package of accounting and marketing software that
enhances their ability to manage the bingo hall. The AllTrak2(R) system is a
Windows-based, multi-purpose accounting system for bingo hall operators running
on standard PCs. AllTrak2(R) operates together with the Diamond(TM) system and
significantly enhances the user interface at POS terminals. In addition, the
systems provide inventory-tracking capabilities for bingo paper, complete sales
data and player tracking systems.





We design
our electronic bingo systems to provide maximum appeal to bingo players and hall
operators. The primary benefits to players of our bingo terminals include the
following:





·
            the
      ability to play up to 2,000 electronic bingo cards during one bingo game,
      depending on jurisdictional regulations, which is significantly more than
      can be played on paper;


·
            the
      ability to electronically and simultaneously mark the called numbers on
      all cards being played, thereby reducing player error in missing or
      mismarking a number; and


·
            the
      ability to alert the player upon attaining a “BINGO,” thereby reducing the
      chance a player misses winning a
prize.


-3-


Our
terminals are also designed to enhance the entertainment value of playing bingo.
Our terminals allow players to customize certain aspects of the user interface,
and our fixed-based terminals incorporate picture-in-picture video and audio
technology. In many markets, players can also play alternative games, such as
solitaire, for entertainment only during and in between bingo sessions. Our
portable terminals allow players to play bingo electronically while sitting in a
player’s preferred seat or moving around the bingo hall. The ease of using our
electronic bingo terminals makes playing bingo possible for players with
physical disabilities that may prevent them from playing bingo with traditional
paper cards, which normally involves marking multiple paper bingo cards by hand
with an ink dauber. We believe that these aspects of our electronic bingo
systems make them more appealing to players than paper cards.





We
currently market three types of electronic bingo products: portable, fixed-base,
and server based electronic bingo systems. Many bingo hall operators offer
players both portable and fixed-base terminals in order to satisfy varying
customer preferences and price levels.





Portable
Bingo Systems





Our
portable bingo systems operate similarly to our fixed-based systems. We
currently have four models of portable bingo terminals in commercial
use.  Our color portable terminals are the Tracker(R), the
Traveler(R), and the TED2C(R). Our black and white portable terminal is the
TED(R).  As numbers are input into the terminals, either manually or
by way of wireless communication, each bingo card being played is then
simultaneously marked. These terminals can mark up to 2,000 cards per game,
depending on the device. In a portable system, the file server, caller unit, and
sales units are similar to, and can be shared with, those of fixed-based
systems. The portable terminal can recognize any bingo game format that the
bingo operator wishes to play and alerts the player, both audibly and visually,
when “BINGO” has been achieved. Portable terminals are battery powered with
rechargeable battery packs. Portable terminals are recharged between bingo
sessions in charging crates, which handle 12 TED2C(R), 12 Traveler(R), 12
Tracker(R), and 25 TED(R) terminals, respectively.





The
Tracker(R) portable color terminal offers a low-cost color alternative to
players preferring the familiarity of our TED(R) terminal. Tracker(R) was
developed in 2006, with widespread installations in 2007 and 2008. The
Tracker(R) incorporates many of the favored features of our TED(R) terminal with
the added enhancement of a high-resolution color screen. The Tracker(R) terminal
can display up to 6 bingo cards at a time while monitoring the play of 600 cards
in a single game. The Tracker(R) interfaces with our AllTrak2(R), the Diamond(R)
POS system, or the new GameTech Edge (TM) system.





The
Traveler(R) is a portable player terminal introduced in 2003 that is designed to
cater to players who prefer a compact portable terminal with a color display and
wireless communications. The Traveler(R) can display up to 8 cards at one time
and monitors the play of up to 2,000 cards in a single game. The terminal
utilizes our crate loading methodology, eliminating the need to load a player’s
information into an individual terminal at the POS station. This easy-to-use
device operates using either the AllTrak2(R) back-office system, the Diamond(TM)
system, or the new GameTech Edge (TM) system.





The
TED2C(R) terminal, with its color screen and clear easy-to-see graphics, is
similar to our fixed-based bingo systems, and offers a superior player
experience. The TED2C(R) terminal can display up to 16 cards at one time and
plays up to 600 cards in one game. This easy-to-use device operates using either
the AllTrak2(R) back-office system or Diamond(TM) system.





The
TED(R) terminal is the lower-cost black and white portable terminal. The TED(R)
terminal can display up to 4 bingo cards at a time, monitors the play of up to
600 cards in a single game, functions from a proprietary motherboard, and
operates using either the Alltrak2(R) back-office system or the Diamond(TM)
system.


-4-


Fixed-Based
Bingo Systems





Our
fixed-based bingo systems consist of a local area network of microcomputers,
including the file server, the caller unit, the sales unit, and the player’s
terminal. All terminals in the fixed-based bingo system use microcomputer
hardware and can be operated with touch screen displays. Fixed-based terminals
can be played in automatic mode or in manual mode, which requires the players to
enter each number called. Players can switch between the two modes as they
choose if they are playing in a jurisdiction that allows for automatic daubing.
In either mode, up to 600 electronic bingo card images can be marked
simultaneously. A complete fixed-based bingo system consists of the
following:





File Server. The file server
runs the network. All bingo game data is processed and stored through this
unit.





Caller Unit. The caller unit,
which is located on the caller’s stand, allows the caller to communicate with
each player’s terminal by use of a touch screen. By simply touching the screen,
the caller enters ball numbers drawn, game number, game patterns, and wild
numbers. The caller unit connects with each player’s fixed-based terminal to
verify electronic bingo card images and enables the winning electronic bingo
card images and paper cards to be displayed on monitors within the bingo hall.
The caller unit typically contains a modem that allows us to access data
remotely, thereby enabling us to monitor the use of our terminals. Data from the
system is also available to assist bingo hall operators to manage their
halls.





Sales Unit. The sales unit is
a point-of-sale terminal, typically located near the entrance of a bingo hall,
where all customer purchases are made. Using a touch screen, the cashier
activates player buy-in choices for the session and the unit automatically
calculates pricing and totals. The player receives a printed receipt itemized by
date, session, and quantity of electronic bingo card images
purchased.





Player Terminal. Each player
terminal consists of a separate computer and touch screen monitor. Each player’s
terminal is housed in a customized metal or wooden table with up to six
terminals per table. Players can cycle through all of their electronic bingo
card images while play is proceeding. The player’s terminal marks the numbers
called on each electronic bingo card image being played, either automatically or
after the player enters the number called. The terminal displays the player’s
three electronic bingo card images that are closest to a “BINGO.” The free space
at the center of any electronic bingo card image that is one number away from
“BINGO” flashes to notify the player. The terminal typically sounds an alert
alarm and the screen flashes when “BINGO” is achieved.





Server-Based
Electronic Bingo System





Our new
server-based electronic bingo system, GameTech Elite(R), was developed to
satisfy new emerging gaming opportunities.  The GameTech Elite(R) system
allows us to offer many different types of gaming from a central system. 
The games may be played using portable hand-held devices or on traditional slot
equipment modified to be connected to our gaming network.  The advantage of
a server-based electronic bingo system is that a customer is no longer limited
to a single game that may be played on a single device.  Rather, the system
can be configured to provide different games at different times during the
day.  There is also almost no limit to the types of games that can be
provided using the GameTech Elite(R) system.  We plan to continue to
develop new applications for GameTech Elite(R) to take advantage of future
gaming opportunities in the coming years.


-5-


Products
- Box





Video
Lottery Terminals


Our
product line of VLTs consists of a variety of configurations including single
screen upright and slant top machines as well as our new dual-screen Megaplex
series that is available in both upright and slant top versions.  VLTs
are electronic games of chance played on video terminals.  Visually
and internally they are similar, and sometimes identical, to slot
machines.  Most VLTs are video-based, overseen by state lottery
agencies, and can be monitored, controlled, and audited by a central computer
system.  By contrast, slot machines can be video- or reel-based, may
be overseen by other regulatory agencies, and may be independent of a central
control system. The boxes are typically configured with multi-game and
multi-denomination options to allow for greater flexibility in attracting a
variety of gaming customers as one machine may offer many different combinations
of games by varying denominations.





Slot
Equipment


We have
internally developed many unique game themes that include rich visual content as
well as unique game pay tables that are designed to attract customers seeking a
variety of gaming experiences.  We also have acquired externally
developed unique game content to complement our internally developed game
library.  We will continue to develop game content internally and
selectively acquire game content externally.  We anticipate that as we
expand our presence in Class III gaming markets, we will sell our machines and
charge a license fee for use of the game content.  For every machine
sold, this would provide the company with both a one-time machine sale and
recurring revenue stream from the licensing of our game
content.  Development of game content in the future will be a key
initiative as we look to expand our presence in the existing markets as well as
expand into the traditional Class III markets.





Product
and System Software Development





We
conduct an ongoing research and development program to enhance the features and
capabilities of our various product lines, to maintain a competitive advantage
in the marketplace, to extend our product line with new games and applications,
and to continually reduce the cost of both product development and product
manufacturing.





During
fiscal 2009, we spent approximately $5.4 million for company-sponsored research
and development activities compared with approximately $5.6 million during
fiscal 2008 and approximately $3.9 million during fiscal 2007.





Sales,
Marketing, and Distribution





Bingo.We strive
to work with only those third-party distributors who have the largest market
share in bingo supplies for their respective geographic areas. Most distributors
carry a complete range of bingo supplies, such as paper, ink daubers, and other
consumable products that bingo operations may require. Our distributors
typically work in defined geographic jurisdictions under one- to three-year
agreements with exclusivity provisions with us, where applicable. This
exclusivity allows us to align our mutual interests in the market and seek to
maintain or strengthen our market positions.





Our
internal sales force works to support our network of distributors as well as
service customers directly in certain markets. Our staff of sales personnel
consults with bingo operators to optimize the use of electronics in their games
and to improve their profitability.





Our
marketing strategy is to target bingo players and provide new game content and
concepts to appeal to a wider player base and to re-energize the bingo
market.  We will continue to offer superior support for bingo hall
operators by providing bingo systems with:





·
            installation
      by us at no cost to the bingo
operator;


·
            training
      sessions for the bingo staff;


·
            promotional
      sessions to introduce players to the
system;


·
            advertising
      and point-of-sale materials; and


·
            an
      ongoing service and maintenance
program.  -6-


We are
one of the few developers of server-based gaming systems with remotely linked
wireless hand-held gaming devices, such as the GameTech Elite(R)
system.  We offer not only bingo and linked bingo applications on our
system, but also server-based Class III gaming such as poker, keno, and video
reels.  We believe our server-based product line will continue to grow
with new content and new applications.





Box.Our box
equipment is sold through an internal sales force that sells directly to gaming
operators as well as distributors.  In California, Montana, West
Virginia, and South Dakota we primarily sell directly to gaming operators
through our internal sales force.  In Louisiana, as required by law,
we sell to one distributor who then sells the product to the gaming operators
throughout the state.  Our marketing strategy is to target both large
and small gaming operators and demonstrate the benefits of our box equipment
over our competitors’ product lines.





In 2008, we entered into an agreement with Rocky Mountain
Industries LLC of Montana, a leader in the Montana gaming market. The agreement
calls for an initial order of 500 gaming machines, with an option for the
customer to purchase an additional 500 machines. The contract specifies a new
cabinet style for the gaming machines and also calls for the Company to provide
custom development of five new games and certain rework of sixteen existing
games (“Initial Custom Games”). In October of 2008, the Company obtained
approval of the new cabinet from Montana Gaming Control Division. GameTech is
now in the final stages of developing the Initial Custom Games to the approved
specifications of the customer as called for in the agreement. We expect to
submit the Initial Custom Games for regulatory approval in Montana during early
Q2 of fiscal 2010. Delays in the completion of this product have been due to
finalizing the product requirements and specifications.The
agreement also contains a four year custom game development commitment with a
customer option for two additional years. We have received a $3.5 million
deposit related to this contract that is classified as deferred revenue on our
Consolidated Balance Sheet.


We
have also been approved in several California tribal territories for
Class III games.  We will continue to develop content and seek
approvals for the Class III market in California, Native American and Nevada
casinos.  To that end, we have continued to focus our efforts on
developing new content by our gaming development group, which was created last
year by combining our bingo and box research and development department and
hiring new talent.  This department has a strong industry background
and we believe will be able to help us produce new and competitive content in
the coming years.





Target
Markets





Bingo.We target
the thousands of charities licensed to operate bingo games in the United States
and Canada. We also target Native American bingo halls and commercial entities
in the United States and foreign markets. As of November 1, 2009, we had
terminals in over 482 locations serving over 642 bingo operators.  For
the 52 weeks ended November 1, 2009, portable terminals generated approximately
78% of our bingo revenue and fixed-based terminals generated approximately 22%
of our bingo revenue.





As of
November 1, 2009, we operated in 40 states and in the United Kingdom, Canada,
and Japan.  We are actively pursuing additional opportunities in other
states and countries, as well as increased activity in existing states and
countries.





Box.As of
November 1, 2009, we sold box equipment, parts, and related software in seven
states, with Louisiana, Montana, and South Dakota casino markets representing
99.1% of our overall box sales.  The box revenue stream and percentage
contribution in these major markets consists of the sale of new equipment (66%),
used equipment (1%), software upgrades (10%), and other parts
(23%).





Materials
and Supplies





We
purchase all bingo and box hardware components from various domestic and
international suppliers.  Our bingo and box components are assembled
and systems are configured or manufactured at our facility in Reno, Nevada, or
our facilities located in Billings, Montana. We require that our personnel and
suppliers be dedicated to high quality and high production
levels.


-7-


Intellectual
Property





We regard
our products as proprietary and rely on patent law, copyrights and trademarks to
protect our proprietary rights.  We have registered trademarks with
the U.S. Patent and Trademark Office for the following names: “AllTrak,”
“AllTrak2,” “Bingo Enhanced Tabs System,” “Blazing Quarters,” “Bowling for
Cash,” “Cadillac Bingo,” “Club 76,” “Crazy Pays,” “Crystal Ball,” “Decorating
for Dollars,” “Demolition Poker,” “Diamond Elite,” “Diamond TED,” “Elite
Series,” “Firestar,” “Gambler’s Edge Keno,” “Gambler’s Edge Poker,” “GameTech,”
“GameTech with design,” “GameTech Arizona Corporation,” “GameTech Mini,”
“GameTech Elite,” “High Country Montana Poker,” “Hot Flush,” “Jukebox Jungle,”
“Jokers Jackpot,” “Montana Choppers,” “MegaPlex,” “Miner’s Treasure,” “Montana
Poker II,” “Nevada Classic,” “Pay-N-Play,” “Pays All Poker,” “Penny Power,”
“Peter Jacobsen Challenge Keno,” “Player’s Zone,” “Poker Dogs,” “Raging Rubies,”
“Royal Pays,” “Royal Touch,” “Sands Of Time,” Spies,” “Spill Over,” “Sunken
Treasure,” “TED,” “TED2C,” “The Electronic Dauber,” “Tracker,” “Traveler,”
“Treasure Hunt Keno,” “Wild Biker,” and “Wild Widow Poker.”  We have
trademark applications pending with the U.S. Patent and Trademark Office for the
following names: “GameTech MaxVision,” and “GameTech Edge.”





We have
registered Canadian trademarks for the following names: “AllTrak,” “Diamond
Bingo,” “Diamond Elite,” “Diamond Plus Bingo,” “Diamond Pro,” “Diamond TED,”
“Diamond VIP,” “GameTech,” “GameTech with design,” “TED,” “TED2C,” and “The
Bingo Players Choice.”





We have
registered Mexican trademarks for the following names: “GameTech,” “GameTech
Mexico,” “Gringo Bingo,” “Latin 90,” “Tracker,” and “Traveler.”  We
have Mexican trademark applications pending for the following names: “Loteria
Loco.”





We have
registered Norwegian trademarks for the following names: “GameTech with design”
and “TED.”





We cannot
provide assurance that any of our domestic or foreign trademark applications
pending will be granted.





Competition





Bingo.The
electronic bingo industry is characterized by intense competition based on
various factors, including the ability to enhance bingo hall operations and to
generate incremental revenue for bingo hall operators through product appeal to
players, ease of use, serviceability, customer support and training,
distribution, name recognition, and price.  We compete primarily with
other companies providing electronic bingo terminals, including but not limited
to Applied Concepts, Arrow, Bettina Corp., California Concepts, EZ Bingo,
FortuNet, Inc., eQube, Pacific Gaming, Planet Bingo and Video
King.  In addition, we compete with other similar forms of
entertainment, including casino gaming, other forms of Class II gaming, and
lotteries.  Increased competition has resulted, and may continue to
result, in price reductions, reduced operating margins, reduced revenue, and
loss of market share, any of which could materially and adversely affect our
business, operating results, and financial condition.  Furthermore,
existing and new competitors may expand their operations in our existing or
potential new markets.  We have attempted to counter competitive
factors by providing superior service, new, innovative, and quality products and
software improvements.  We believe that the quality of our full array
of portable and fixed-based bingo systems, combined with superior service and
customer support, differentiate us from our competitors.





We
believe server-based gaming will be a significant technological development in
the gaming industry.  As a leader in the bingo industry, our newest
gaming system known as the GameTech Edge(TM) was further developed in 2009 and
will be the premier US product offering in 2010 with further enhancements,
features and bingo content planned for release. We compete primarily with other
companies providing electronic bingo terminals, as listed above.





Box.The box
industry is highly competitive and is driven primarily by the ability of
manufacturers to develop appealing video reel, video poker, and keno game
content as well as the ability to provide their customers with a stream of new
games to meet ever changing customer needs.  The development or
acquisition of new game content is critical to remaining competitive in the box
industry as our competitors continue to develop new game content.  By
providing our customers with a variety of game options and configurations, we
can differentiate our products and services from our competitors as well as
provide for a built-in loyalty base of customers as conversion and
upgrade sales can provide a steady stream of recurring revenue.  We
compete primarily with other box manufacturers including but not limited to IGT
and Spielo.


-8-


Government
Regulation





We are
subject to regulation and oversight by governmental authorities in virtually all
jurisdictions in which we conduct business. As of November 1, 2009, we held
approximately 94 licenses with various regulatory agencies. The regulatory
requirements vary from jurisdiction to jurisdiction. Governmental regulations
may require licenses, approvals, findings of suitability, or qualifications for
our company as well as for our products, officers, directors, certain personnel,
significant stockholders, or other associated parties. The term “significant
stockholder” typically refers to any beneficial owner of 10% or greater of our
capital stock. Any person who fails or refuses to comply with these regulatory
requirements could be subject to disciplinary or legal action, which could
adversely impact our company, including the loss of any existing license, the
ability to obtain a future license, and our ability to conduct business in one
or more jurisdictions. The licensing approval and finding of suitability
processes can be lengthy and expensive. On Native American lands, regulations
result from the laws of each tribe, the provisions of IGRA, and various
tribal-state compacts. Many jurisdictions have comprehensive licensing,
reporting, and operating requirements with respect to the manufacture,
development, assembly, support, distribution, sale, lease, use, and operation of
bingo and bingo-related products, including electronic bingo equipment. These
requirements have a direct impact on the conduct of our day-to-day operations.
In substantially all jurisdictions in which gaming is legal, the regulatory
authority imposes operating restrictions on gaming and on the form of business
relations we can have with the gaming operator entities. Generally, regulatory
authorities may deny applications for licenses, other approvals, or findings of
suitability for any cause they may deem reasonable. There can be no assurance
that our company or our hardware or software products, personnel, officers,
directors, significant stockholders, distributors, vendors, consultants, or
other associated parties will receive or be able to maintain any necessary
licenses, other approvals, or findings of suitability. The loss of a license or
a product approval in a particular jurisdiction may prohibit us from realizing
revenue in that jurisdiction and may adversely impact our license or product
placements and ability to realize revenue in other jurisdictions. Any change in
law or regulation by a jurisdiction, or an unfavorable interpretation of any law
or regulation, could adversely impact our ability to earn revenue.





Nevada Regulation and
Licensing





We have
unconditional licenses from the Nevada Gaming Commission (the “Commission”) as a
publicly traded corporation and we are licensed as (i) solely a manufacturer
(ii) or solely a distributor (iii) or both as a manufacturer and distributor of
gaming devices, (iv) an operator of a mobile gaming system, and (v) an operator
of an inter-casino linked system. Additionally, our officers and directors are
suitable to hold such positions in the Company. The foregoing licenses, findings
of suitability, and related approvals are limited only by the annual renewal
process set forth by the Nevada Gaming Commission for all license
holders.





As a
corporation registered with and licensed by the Commission, our company and its
officers, directors, and shareholders are subject to Nevada law relating to the
regulation and control of the gaming industry. The manufacture and distribution
in Nevada of gaming devices and associated equipment and the operation of mobile
gaming systems and inter-casino linked systems are subject to the provisions of
the Nevada Gaming Control Act and the related regulations of the Commission, and
the Nevada State Gaming Control Board (the “Gaming Board”).





The laws,
regulations and supervisory procedures of the Nevada gaming authorities are
based upon declarations of public policy which are concerned with, among other
things:





1.
            the
      prevention of unsavory or unsuitable persons from having a direct or
      indirect involvement with gaming at any time or in any
      capacity;


2.
            the
      establishment and maintenance of responsible accounting practices and
      procedures;


3.
            the
      maintenance of effective controls over the financial practices of
      licensees, including the establishment of minimum procedures for internal
      fiscal affairs and the safeguarding of assets and revenues, providing
      reliable record keeping and requiring the filing of periodic reports with
      the Nevada gaming authorities;


4.
            the
      prevention of cheating and fraudulent practices;
  and


5.
            providing
      a source of state and local revenues through taxation and licensing
      fees.


-9-


Any
change in such laws, regulations and procedures could have an adverse effect on
our gaming related operations.





The
Nevada gaming authorities may investigate any individual who has a material
relationship to, or material involvement with us in order to determine whether
such individual is suitable or should be licensed as a business associate of a
gaming licensee. Officers, directors and certain key employees of ours must file
applications with the Nevada gaming authorities and may be required to be
licensed or found suitable by the Nevada gaming authorities. Officers, directors
and key employees of ours who are actively and directly involved in the
manufacturing or distribution activities of the company, or involved in the
operations of any mobile gaming system or inter-casino linked system operated by
us, may be required to be licensed or found suitable by the Nevada gaming
authorities. The Nevada gaming authorities may deny any application for
licensing for any cause which they deem reasonable. A finding of suitability is
comparable to licensing, and both require submission of detailed personal and
financial information followed by a thorough investigation. The applicant for
licensing or a finding of suitability must pay all costs of the investigation.
Changes in licensed positions must be reported to the Nevada gaming authorities
and, in addition to their authority to deny an application for a finding of
suitability or licensing, the Nevada gaming authorities have jurisdiction to
disapprove a change in corporate position.





If the
Nevada gaming authorities were to find an officer, director or key employee
unsuitable for licensing or unsuitable to continue having a relationship with
us, we would have to sever all relationships with such person. In addition, the
Nevada Commission may require us to terminate the employment of any person who
refuses to file appropriate applications. Determinations of suitability or of
questions pertaining to licensing are not subject to judicial review in
Nevada.





We are
required to submit detailed financial and operating reports to the Nevada
Commission. Substantially all material loans, leases, sales of securities and
similar financing transactions by us are to be reported and, in some cases,
approved by the Nevada Commission.





If it
were determined that any Nevada gaming laws were violated by us or by any
officer, director, or a key employee of ours, the licenses and approvals held by
us could be limited, conditioned, suspended or revoked, subject to compliance
with certain statutory and regulatory procedures. In addition, we and the
persons involved could be subject to substantial fines for each separate
violation of the Nevada gaming laws at the discretion of the Commission.
Limitation, conditioning or suspension of any license, finding of suitability,
or related approval could (and revocation of any license would) materially
adversely affect our manufacturing and distributing operations in the State of
Nevada.





Any
beneficial holder of our voting securities, regardless of the number of shares
owned, may be required to file an application, be investigated, and have his
suitability as a beneficial holder of our voting securities be determined by the
Commission if the Commission has reason to believe that such ownership would
otherwise be inconsistent with the declared policies of the State of Nevada. The
applicant must pay all costs of investigation incurred by the Nevada gaming
authorities in conducting any such investigation.


-10-


Nevada
gaming laws require any person who acquires more than 5% of our voting
securities to report the acquisition to the Commission. Further, Nevada gaming
laws require that beneficial owners of more than 10% of our voting securities
must apply to the Commission for a finding of suitability within thirty days
after the Chairman of the Gaming Board mails written notice requiring such
filing. Under certain circumstances, an “institutional investor,” as defined by
Nevada gaming law, which acquires more than 10%, but not more than 15%, of the
Company’s voting securities may apply to the Commission for a waiver of such
finding of suitability if such institutional investor holds the voting
securities for investment purposes only. An institutional investor shall not be
deemed to hold voting securities for investment purposes unless the voting
securities were acquired and are held in the ordinary course of business as an
institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of our board of directors,
any change in our corporate charter, bylaws, management, policies or operations,
or any of our gaming affiliates, or any other action which the Commission finds
to be inconsistent with holding our voting securities for investment purposes
only. Activities which are deemed to be consistent with holding voting
securities for investment purposes only include:





1.
            voting
      on all matters voted on by
stockholders;


2.
            making
      financial and other inquiries of management of the type normally made by
      securities analysts for informational purposes and not to cause a change
      in management, policies or operations;
and


3.
            other
      activities as the Nevada Commission may determine to be consistent with
      such investment intent.





If the
beneficial holder of voting securities who must be found suitable is a
corporation, partnership, limited partnership, limited liability company or
trust, it must submit detailed business and financial information including a
list of beneficial owners. The applicant is required to pay all costs of
investigation.





Any
person who fails or refuses to apply for a finding of suitability or a license
within thirty days after being ordered to do so by the Commission or the
Chairman of the Gaming Board, may be found unsuitable. The same restrictions
apply to a record owner if the record owner, after request, fails to identify
the beneficial owner. Any stockholder found unsuitable and who holds, directly
or indirectly, any beneficial ownership of the voting securities of a registered
publicly traded corporation beyond such period of time as may be prescribed by
the Commission may be guilty of a criminal offense. We could be subject to
disciplinary action if, after receiving notice that a person is unsuitable to be
a stockholder or to have any other relationship with us, we:





1.
            pay
      that person any dividend or interest upon voting securities of
      ours;


2.
            allow
      that person to exercise, directly or indirectly, any voting right
      conferred through securities held by that
  person;


3.
            pay
      remuneration in any form to that person for services rendered or
      otherwise; or


4.
            fail
      to pursue all lawful efforts to require such unsuitable person to
      relinquish his voting securities for cash at fair market
      value.





The
Commission, in its discretion, may require any lender to us or the holder of any
debt security of ours to file applications, be investigated and be found
suitable as a lender to us or to own our debt security. Nevada law provides that
if the Commission determines that a person is unsuitable to own a debt security
of a registered publicly traded corporation or licensed company, the corporation
can be sanctioned, including the loss of its approvals, if it takes certain
actions without having first obtained the approval of the Commission. If a
person or entity that is a lender to us is found unsuitable, the loan
transaction must be ended in a manner acceptable to the Commission. In any event
where a person or entity is found unsuitable to be a lender to or the holder of
a debt security issued by us, it is unsuitable for us to do any of the
following:





1.
            pay
      to the unsuitable person any dividend, interest, or any distribution
      whatsoever;


2.
            recognize
      any voting right by such unsuitable person in connection with such
      securities;


3.
            pay
      the unsuitable person remuneration in any form;
  or


4.
            make
      any payment to the unsuitable person by way of principal, redemption,
      conversion, exchange, liquidation, or similar transaction, except as
      permitted by the Commission.





We are
required to maintain a current stock ledger in Nevada, which may be examined by
the Nevada gaming authorities at any time. If any securities are held in trust
by an agent or by a nominee, the record holder may be required to disclose the
identity of the beneficial owner to the Nevada gaming authorities. A failure to
make such disclosure
may be grounds for finding the record holder unsuitable. We are also required to
render maximum assistance in determining the identity of the beneficial owner.
The Commission has the power to require our stock certificates to bear a legend
indicating that the securities are subject to the Nevada gaming
laws.


-11-


Changes
in control of us through merger, consolidation, stock or asset acquisitions,
management or consulting agreements, or any act or conduct by a person whereby
he obtains control, may not occur without the prior approval of the Commission.
Entities seeking to acquire control of a registered publicly traded corporation
must satisfy a variety of stringent standards prior to assuming control of a
registered publicly traded corporation. The Commission may also require
controlling stockholders, officers, directors and other persons having a
material relationship or involvement with the entity proposing to acquire
control to be investigated and licensed as part of the approval process relating
to the transaction.





The
Nevada legislature has declared that some corporate acquisitions opposed by
management, repurchases of voting securities and corporate defense tactics
affecting Nevada gaming licensees, and registered publicly traded corporations
that are affiliated with those operations, may be injurious to stable and
productive corporate gaming. The Commission has established a regulatory scheme
to ameliorate the potentially adverse effect of these business practices upon
Nevada’s gaming industry and to further Nevada’s policy to:





1.
            assure
      the financial stability of corporate gaming operators and their
      affiliates;


2.
            preserve
      the beneficial aspects of conducting business in the corporate form;
      and


3.
            promote
      a neutral environment for the orderly governance of corporate
      affairs.





Approvals
are, in certain circumstances, required from the Commission before we can make
exceptional repurchases of voting securities above the current market price
thereof and before a corporate acquisition opposed by management can be
consummated. Nevada gaming laws also require prior approval of a plan of
recapitalization proposed by our board of directors in response to a tender
offer made directly to the registered publicly traded corporation’s stockholders
for the purposes of acquiring control of the registered publicly traded
corporation.





Nevada
licensees that hold licenses as a manufacturer and distributor, and as an
operator of a mobile gaming system and inter-casino linked system, are required
to pay annual license renewal fees to the State of Nevada.





Any
person who is licensed, required to be licensed, registered, required to be
registered, or who is under common control with such persons (collectively
referred to as “Licensees”), and who proposes to become involved in the
operation of a gaming venture outside of Nevada is required to deposit with the
Gaming Board, and thereafter maintain, a revolving fund in the amount of $10,000
to pay the expenses of investigation by the Gaming Board of his or her
participation in such foreign gaming. The revolving fund is subject to increase
or decrease at the discretion of the Commission. Thereafter, licensees are
required to comply with certain reporting requirements imposed by the Nevada
gaming laws. A licensee is also subject to disciplinary action by the Commission
if he knowingly violates any laws of the foreign jurisdiction pertaining to
gaming matters, fails to conduct a foreign gaming operation in accordance with
the standards of honesty and integrity required of Nevada gaming operations,
engages in activities that are harmful to the State of Nevada or its ability to
collect gaming taxes and fees, or employs a person in the foreign operations who
has been denied a license or finding of suitability in Nevada on grounds of
personal unsuitability.





Native
American Regulation





Gaming on
Native American lands, including the terms and conditions under which gaming
equipment can be sold or leased to Native American tribes, is or may be subject
to licensing and regulation under IGRA and other laws of the federal government,
the tribes, and the host state, where applicable. Under IGRA, gaming activities
are classified as Class I, II, or III. Class I gaming includes social
games played solely for prizes of minimal value, or traditional forms of Native
American gaming engaged in as part of, or in connection with, Native American
ceremonies or celebrations. Class II gaming includes bingo and other card
games authorized or not explicitly prohibited and played within the host state,
but does not include banking card games, such as baccarat or blackjack.
Class III gaming includes all forms of gaming that are not Class I or
Class II, including slot machines, casino style games or any other games
not prohibited by the host state. A Native American tribe typically conducts
Class II gaming under IGRA without having entered into a written compact
with its host state if the host state permits similar forms of
gaming,


but must
enter into a separate written compact with the state in order to conduct
Class III gaming activities. Under IGRA, tribes are required to regulate
all gaming under ordinances approved by the Chairman of the National Indian
Gaming Commission, or NIGC. These ordinances may impose standards and technical
requirements on gaming hardware and software, and may impose registration,
licensing, and background check requirements on gaming equipment manufacturers
and suppliers and their personnel, officers, directors, stockholders,
distributors, vendors, and consultants. The NIGC has undertaken an effort to
provide further clarity with respect to game classification and technical
standards, and this effort continues. The NIGC’s final work product may have a
material adverse effect on our business, results of operations, and financial
condition.


-12-


Federal
Regulation





The
Federal Gambling Devices Act of 1962, also called the Johnson Act, generally
makes it unlawful for a person to manufacture, deliver, or receive gaming
machines, gaming machine-type devices, and components across state lines or to
operate gaming machines unless that person has first registered with the U.S.
Department of Justice. We are registered with the Department of Justice. In
addition, the Johnson Act imposes various record keeping, annual registration,
equipment registration, and equipment identification requirements. Violation of
the Revised Johnson Act may result in seizure and forfeiture of the equipment as
well as other penalties. Any change in law or regulation, or an unfavorable
interpretation of any law or regulation, could adversely impact our ability to
earn revenue or could require us to substantially modify our products or
operations at significant expense.





Regulation
of Electronic Bingo Systems





Our
electronic bingo products, including our portable, fixed-based terminals, and
server-based gaming, encounter greater regulation than bingo played with paper
cards. Applicable federal, state, Native American, and local regulations and
enforcement vary significantly by jurisdiction.





Electronic
bingo in charitable halls is less widely permitted than bingo played with paper
cards, primarily because many state laws and regulations were enacted before
electronic bingo was introduced. We believe that electronic bingo is currently
permitted in at least 42 of the 50 states. Because many state laws and
regulations are silent or ambiguous with respect to electronic bingo, changes in
regulatory interpretations or enforcement personnel could impact the continued
operation of electronic bingo in some of these states. In addition, some
regulatory authorities require the demonstration, testing, approval, or
modification of electronic bingo systems prior to placement.





Systems
Security Requirements





The
integrity and security of electronic bingo systems, mobile gaming systems, and
other gaming products are closely scrutinized by certain jurisdictions in which
we operate. Changes in the technical requirements for approved electronic bingo
systems in various charitable, Native American, commercial, and military
jurisdictions could prohibit us from operating in those jurisdictions or could
require us to substantially modify our products at significant
expense.





Application
of Future or Additional Regulatory Requirements





We intend
to seek the necessary licenses, approvals, and findings of suitability for our
company, our products, or our personnel in jurisdictions in which we anticipate
significant bingo or other gaming activities. However, these licenses,
approvals, or findings of suitability may not be obtained timely, if at all,
and, if obtained, may be subsequently revoked, suspended, conditioned, or not
renewed. In addition, we may not be able to obtain the necessary approvals for
our future products. If a regulatory authority in a jurisdiction requires a
license, approval, or finding of suitability and our company, stockholders,
distributors, vendors, or consultants fail to seek or do not receive the
necessary license or finding of suitability, we may be prohibited from
distributing our products for use in the jurisdiction or may be required to
develop or distribute our products through other licensed entities, which could
result in a reduced profit to us.


-13-


Employees





As of
January 29, 2010, we had approximately 190 full-time employees. We are not
subject to collective bargaining agreements with our employees, and we believe
that our relations with our employees are good.




Item
1A.                      Risk
Factors





The
following factors, in addition to those discussed elsewhere in this report,
should be carefully considered in evaluating our company and our
business.





Our
business is vulnerable to changing economic conditions and current unfavorable
economic conditions have and could continue to negatively impact the play levels
of our bingo and box equipment, our product sales, and our ability to collect
outstanding receivables from our customers.





Existing
unfavorable domestic and international general economic conditions reduce
disposable income of bingo and casino patrons and result in fewer
patrons.  This decline in disposable income likely results in reduced
play levels on our bingo and box equipment, causing our cash flows and revenues
from our recurring revenue products to decline.  Current unfavorable
economic conditions have also resulted in a tightening in credit markets,
decreased liquidity in many financial markets, and resulted in significant
volatility in the credit and equity markets.  A decline in the
relative health of the gaming industry and the difficulty or inability of our
customers to obtain adequate levels of capital to finance their ongoing
operations would reduce their resources available to purchase our products and
services, which would adversely affect our revenues.  Current
unfavorable economic conditions could impact the ability of our customers to
make timely payments to us.  If that were to occur, we may incur
additional provisions for bad debt.





Failure
to comply with Nevada regulations could have a material adverse effect on our
operations.





We have
unconditional licenses from the Nevada Gaming Commission (the “Commission”) as a
publicly traded corporation and we are licensed (i) solely a manufacturer (ii)
or solely a distributor (iii) or both as a manufacturer and distributor of
gaming devices (iv) an operator of a mobile gaming system, and (v) an operator
of an inter-casino linked system. Additionally, our officers and directors are
suitable to hold such positions in the Company. The foregoing licenses, findings
of suitability, and related approvals are subject to an annual renewal process
set forth by the Nevada Gaming Commission for all license holders. Under Nevada
gaming law all directors, officers and 10% or greater shareholders of companies
seeking registration and licensing by the Commission are required to file a
licensing application and receive a finding of suitability at the discretion of
the Commission on the recommendation of the Gaming Board.  Our
equipment is subject to evaluation and approval by the state of Nevada prior to
product placement or installation. Each of our products that are in distribution
in Nevada have been submitted to and approved by the state of Nevada. If we are
ever denied a renewal of our Nevada licenses, we may not be able to place our
electronic bingo systems or slot machines with Nevada customers and, depending
upon the reason for the denial, may be required to relocate our operations
outside the state, which may have a material adverse effect or our business,
results of operations, and financial condition.





If
our electronic bingo units were classified as Class III bingo systems
under the Indian Gaming Regulatory Act, we may not be able to obtain the
necessary approvals to operate our business, or we may have to modify our
systems to remain classified as Class II bingo systems.





Our
operations in Native American gaming halls, which generated approximately 16% of
our bingo revenue during fiscal 2009, are subject to Native American and federal
regulation under IGRA, which established the National Indian Gaming Commission,
or NIGC.  The NIGC has the authority to adopt rules and regulations to
enforce certain aspects of IGRA and to protect Native American
interests.  Under IGRA, electronic bingo devices similar to ours have
previously been determined by the NIGC to be Class II products that are
subject solely to Native American regulation as approved by the
NIGC.  We believe our electronic bingo systems meet all of the
requirements of a Class II game.  We cannot provide assurance
that the NIGC will not enact future regulations or reinterpret existing
regulations in such a manner so as to limit the authority of tribes to
self-regulate Class II gaming or to change the definition of Class II
gaming in such a manner that our electronic bingo systems are classified as a
Class III game under IGRA.  If classified as Class III
games, our electronic bingo systems could become subject to federal
and state regulation through the Johnson Act and through tribal-state compacts
required for Class III games played on Native American lands.  In
that event, or in the event other federal laws are enacted or interpreted
differently that would subject our operations on Native American lands to state
regulation, we may not be able to modify our electronic bingo systems to be
classified as Class II games, or we may not obtain the necessary state
approval and licenses to continue our operations in Native American gaming
halls.  Any such event could have a material adverse effect on our
business, results of operations, and financial condition. Any modifications of
our electronic bingo systems would also have the additional risk that such
modifications would not appeal to customers or be acceptable to the Native
American tribes.


-14-


Our
compliance with several governmental and other regulations is costly and
subjects our company to significant risks.





We must
maintain the existing licenses and approvals necessary to operate in our
existing markets and obtain the necessary licenses, approvals, findings of
suitability, and product approvals in all additional jurisdictions in which we
intend to distribute our products.  The licensing and approval
processes can involve extensive investigation into our company and our products,
officers, directors, certain personnel, significant stockholders, and other
associated parties, all of which can require significant expenditures of time
and resources.  We must also comply with applicable regulations for
our activities in any international jurisdiction into which we conduct
business.  We may not receive licensing or other required approvals in
a timely manner in the jurisdictions in which we are currently seeking such
approval.  The regulations relating to company and product licensing
are subject to statutory amendment and/or change in interpretation, and other
jurisdictions, including the federal government, may elect to regulate or tax
bingo, box or other gaming products.  We cannot predict the nature of
any such changes or the impact that such changes would have on our
business.  The loss of a license in a particular jurisdiction may
prohibit us from generating revenue in that jurisdiction, may prohibit us from
installing or maintaining our terminals in other jurisdictions, and may have a
material adverse effect on our business, results of operations, and financial
condition.





Business
combinations and investments present risk, and we may not be able to realize the
financial and strategic goals that were contemplated at the time of the
transaction, which could materially affect our financial results.





We have
invested in strategic initiatives that we believe will expand our geographic
reach, product lines, and/or customer base.  We may encounter
difficulties in the assimilation of acquired operations, technologies and/or
products, or an acquisition may prove to be less valuable than the price we
paid. Any of these events or circumstances may require us to record substantial
impairment charges on goodwill and other intangible assets, resulting in a
negative impact on our operating results.





Moreover,
as we continue the process of evaluating our business in conjunction with an
assessment of the Company’s long-term strategic goals, we will also further
evaluate past and potential investments to determine if and how they will fit
into our organizational structure going forward. If an event or change occurs in
affiliate relationships or agreements associated with business combinations, we
may be required to reassess cash flows, recoverability, useful lives, and fair
value measurements, which may result in material impairment
charges.





If
deterioration of the economy continues, this could cause additional financial
and stock market declines, which could lead to reduced earnings and could result
in future goodwill impairments .





In the
fourth quarter of fiscal year 2009, we recorded a goodwill impairment charge of
$15.7 million related to our acquisition of Summit, representing all of the
remaining goodwill for our box division.  This was based on a combination
of factors, including the current economic environment, decreased revenues,
particularly in the box segment.  As of November 1, 2009, the remaining
goodwill amounted to $10.2 million, all of which is the bingo division. Factors
we consider important that could trigger an impairment review include
significant underperformance relative to historical or projected future
operating results, significant changes in the manner of the use of our assets or
the strategy for our overall business and significant negative industry or
economic trends.  If current economic conditions worsen causing
decreased revenues and increased costs we may have further goodwill
impairments.  For additional information see Item 7 “Impairment of Long –lived Assets,
Goodwill and Intangible Assets”.


-15-


If
we fail to maintain effective internal controls over financial reporting or
remediate any future material weakness in our internal control over financial
reporting, we may be unable to accurately report our financial results or
prevent fraud, which could have a material adverse effect on our financial
results and our stock price.





Our
internal controls over financial reporting are designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles.  Effective internal controls over financial
reporting are necessary for us to provide reliable reports and prevent
fraud.





We
believe that a control system, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met.  Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been
detected.  We cannot guarantee that we will not identify significant
deficiencies and/or material weaknesses in our internal controls in the future,
and our failure to maintain effective internal controls over financial reporting
in accordance with Section 404 of the Sarbanes-Oxley Act could have a material
adverse effect on our business and stock price.





Our outstanding
credit facility subjects us to financial covenants which may limit our
flexibility.





Servicing
our Credit Facility requires a significant amount of cash, and our ability to
generate the required cash depends on our ability to successfully manage our
business and upon other factors some of which are beyond our
control.  The agreement governing the debt contains substantial
affirmative and restrictive covenants, including the maintenance of certain
financial ratios.  A breach of any of our obligations under the debt
agreement can result in a default allowing the Lenders to elect to declare all
amounts outstanding together with accrued interest to be immediately due and
payable.  The financial covenants include a cash flow leverage ratio,
fixed charge coverage ratio, working capital requirement and liquidity
requirement. The non-financial covenants include restrictions on asset
divestitures; liens; transactions with related parties; limitations on
additional indebtedness; mergers, acquisitions and consolidations; cash
dividends; redemptions of stock; and change of control. As of November 1, 2009,
the outstanding balance on our term loan was $27.4 million and we were in
compliance with all the covenants as amended.  For additional
information see Note 4 “Credit
Agreements and Acquisition of Real Property” to our Consolidated
Financial Statements contained herein.





We
must continue to meet NASDAQ Global Market continued listing requirements or we
risk delisting.





Our
common stock is listed on the NASDAQ Global Market.  In order to maintain
that listing, we are required to satisfy minimum financial and other continued
listing requirements, including, without limitation, maintaining a $1.00 per
share minimum closing bid price for our common stock.





If the
closing bid price of our common stock is below $1.00 for 30 consecutive business
days, we could receive notice from NASDAQ stating that the minimum bid price of
our common stock is below continued listing standards.  To regain
compliance, our common stock would need to close at $1.00 or more for any 10
consecutive business days during the 180 calendar days following our receipt of
the notice.  If we are unable to regain compliance within 180 calendar
days, NASDAQ would determine whether we meet the initial listing criteria for
the NASDAQ Capital Market other than the bid price requirement.  If we met
such criteria, we would be afforded an additional 180 calendar days to regain
compliance with the minimum bid price rule.





Given
current economic conditions and the volatility of our stock price, there is no
guarantee that we will be in compliance with the NASDAQ Global Market’s minimum
bid requirement when the suspension is lifted.  If we are unable to meet
the minimum bid, or if we fail to satisfy any other continued listing standard
under the NASDAQ Global Market rules, NASDAQ may commence delisting proceedings
against us. If we were to be delisted, the market liquidity of our common stock
would likely be adversely affected and the market price of our common stock
would likely decrease.  In addition, our stockholders’ ability to trade or
obtain quotations on our shares could be severely limited because of lower
trading volumes and transaction delays.  These factors could contribute to
lower prices and larger spreads in the bid and ask price of our common
stock.   -16-


Our
success depends on our ability to respond to rapid market changes and product
enhancements.





Our
products utilize hardware components developed primarily for the personal
computer industry, which is characterized by rapid technological change and
product enhancements.  Should any of our current or potential
competitors succeed in developing a better electronic bingo system or box, those
competitors could be in a position to outperform us in our ability to exploit
developments in microprocessor, video technology, or other multimedia
technology.  The emergence of an electronic bingo system or box that
is superior to ours in any respect could substantially diminish our revenue and
limit our ability to grow.  Any failure of our company to respond to
rapid market changes and product enhancements could have a material adverse
effect on our business, results of operations, and financial
condition.





We
must retain and extend our existing relationships with customers and secure new
customers.





We derive
all of our revenue and cash flow from our portfolio of contracts to lease
electronic bingo products to customers as well as from our relationships with
established customers in our box markets.  Our bingo lease contracts
are primarily for terms ranging from one to three years and not all contracts
preclude customers from using electronic bingo products of our
competitors.  Upon the expiration of a contract, a customer may decide
to use a competitive bidding process to award a new contract.  We may
be unsuccessful in winning the new contract or be forced to reduce the pricing
structure in the new contract.  Our box customers have multiple
choices of suppliers of gaming equipment, and we may be unable to attract and
retain customers in those markets.  Our inability to attract new and
retain existing box customers at terms acceptable to us, could, depending on the
circumstances, have a material adverse effect on our business, results of
operations, and financial condition.





We
depend on our relationships with our distributors.





We derive
a significant portion of our revenue from customers serviced through
distributors in both the bingo and box business.  Our bingo
distributors place our products with our customers and often maintain the
primary relationship with the bingo halls.  Generally, we, or our
distributors enter into one- to three-year agreements with customers for the use
of our systems and terminals.  We rely on our distributors exclusively
in the states in which the law requires us to place our systems and terminals
through qualified distributors.  The loss of our relationship with one
or more of our distributors may require us to develop our internal sales force
or engage new distributors to place our systems and terminals, which could be
time consuming and expensive.  The loss of one or more of our
significant distributors may have a material adverse effect on our business,
results of operations, and financial condition.  As of November 1,
2009, there was one distributor that represented approximately 42% of the
consolidated accounts receivable balance, and approximately 87% of the box
accounts receivable balance.





We
rely on the Louisiana, Texas, and Mississippi markets for a significant portion
of our revenue.





The
concentration of our revenue in the Louisiana, Texas, and Mississippi markets
heightens our exposure to regulatory changes or market changes that may prevent
or impede us from doing business in those states.  The Louisiana
market generated 75.6% of box revenue and 16.3% of consolidated revenue; the
Texas market generated 15.3% of bingo revenue and 12.5% of consolidated
revenue, while the Mississippi market generated 7.7% of bingo revenue and 6.3%
of consolidated revenue. Furthermore, the loss of or inability of our company to
find suitable distributors in Texas and Louisiana, where state law requires
electronic bingo devices and systems to be placed through qualified
distributors, could cause a material adverse effect on our business, results of
operations, and financial condition.





The
electronic bingo and box gaming industries are extremely
competitive.





The
electronic bingo industry is characterized by intense competition based on,
among other things, the ability to enhance the operations of and to generate
incremental sales for bingo operators through product appeal to players, ease of
use, ease of serviceability, customer support and training, distribution, name
recognition, and price.  Increased competition may result in price
reductions, reduced operating margins, conversion of terminals from lease to
sale, and loss of market share.  We believe server-based gaming will
be the next significant technological development in the gaming
industry.  The continuing development of server-based gaming will require
additional resources that could be allocated to other areas, and the failure to
effectively bring server-based gaming to market could have a negative impact on
our financial condition.  All of these factors could materially and
adversely affect our business, operating results and financial
condition.  The box industry is also characterized by intense
competition that is based upon the ability to develop new gaming content that
will appeal to a variety of gaming customers.  Increased competition
may result in a need to increase game development activity, price reductions,
providing extended payment terms, or increased commissions to
distributors.


-17-


Additionally,
many of our competitors do not face the same level of public company costs and
administrative costs that we face.  Furthermore, existing and new
competitors may expand their operations in our existing or potential new
markets.  In addition, our electronic bingo business competes with
other similar forms of entertainment, including casino gaming and
lotteries.  In Native American casinos, competition for space on the
casino and bingo room floor is very intense.  All forms of gaming
compete for square footage at Native American casinos.  We can make no
assurances that Native American casinos currently leasing our equipment will not
significantly limit the play of bingo or eliminate it
entirely.  Additionally, as we expand into new Class II and Class III
markets we will face intense competition from existing competitors who have many
years of established track records in those markets.  We can make no
assurances that we can successfully penetrate these markets with our newly
developed Class II and Class III gaming machines.





Investors
may not be able to exercise control over our company as a result of our
Chairman’s ownership.





Our
Chairman of the Board, Richard Fedor, beneficially owns approximately 17% of our
outstanding common stock.  As a result, the Chairman of our company
can significantly influence the management and affairs of our company and all
matters requiring stockholder approval, including the election of directors and
approval of significant corporate transactions.  This concentration of
ownership could have the effect of delaying or preventing a change in control of
our company, even when such change of control is in the best interests of
stockholders.  This concentration of ownership might also adversely
affect the market price of the common stock and the voting and other rights of
the Company’s other stockholders.





We
must be able to attract and retain skilled employees.





Our
success depends largely on recruiting and retaining talented
employees.  The market for qualified executives and highly skilled,
technical workers is intensely competitive.  The loss of key employees
or an inability to hire a sufficient number of technical staff could have a
material adverse effect on our business, financial condition, and results of
operations.





Acquisitions
could divert management’s time and attention, dilute the voting power of
existing stockholders, and have a material adverse effect on our
business.





As part
of our growth strategy, we may acquire complementary businesses and
assets.  Acquisitions that we may make in the future could result in
the diversion of time and personnel from our existing business.  We
also may issue shares of common stock or other securities in connection with
acquisitions, which could result in the dilution of the voting power of existing
stockholders and could dilute earnings per share.  Any acquisitions
would be accompanied by other risks commonly encountered in such transactions,
including the following:





·
            difficulties
      integrating the products, operations, and personnel of acquired
      companies;


·
            the
      additional financial resources required to fund the operations of acquired
      companies;


·
            the
      potential disruption of our
business;


·
            our
      ability to maximize our financial and strategic position by the
      incorporation of acquired technology or businesses with our product
      offerings;


·
            the
      difficulty of maintaining uniform standards, controls, procedures, and
      policies;


·
            the
      potential loss of key employees of acquired
  companies;


·
            the
      impairment of employee and customer relationships as a result of changes
      in management;


·
            significant
      expenditures to consummate acquisitions;
and


·
            difficulties
      in meeting applicable regulatory requirements, including obtaining
      necessary licenses.


-18-


As a part
of our acquisition strategy, we may engage in discussions with various
businesses regarding their potential acquisition. In connection with these
discussions, we may exchange confidential operational and financial information
with each potential acquired business and each of us may conduct due diligence
inquiries and consider the structure, terms, and conditions of the potential
acquisition. In certain cases, the parties may agree not to discuss a potential
acquisition with any other party for a specific period of time, may grant us
certain rights in the event the acquisition is not completed, and may agree to
take other actions designed to enhance the possibility of the acquisition.
Potential acquisition discussions may take place over a long period of time, may
involve difficult business integration and other issues, and may require
solutions for numerous family relationships, management succession, and related
matters. As a result of these and other factors, potential acquisitions that
from time to time appear likely to occur may not result in binding legal
agreements and may not be consummated. Our acquisition agreements may contain
purchase price adjustments, rights of setoff, and other remedies in the event
that certain unforeseen liabilities or issues arise in connection with an
acquisition. These remedies, however, may not be sufficient to compensate us in
the event that any unforeseen liabilities or other issues arise.





Our
failure to effectively manage our growth could impair our business.





Our
growth plans may require full use of our current financial, managerial, and
other resources as well as substantial expansion of those resources. In order to
manage effectively any significant future growth, we may have to perform various
tasks, including the following:





·
            expand
      our facilities and equipment and further enhance our operational,
      financial, and management systems;


·
            design,
      develop, produce, and receive products from third-party suppliers on a
      timely basis;


·
            develop
      new and maintain existing distribution channels in order to maximize
      revenue and profit margins;


·
            effectively
      manage regulatory risks in various
  jurisdictions;


·
            successfully
      hire, train, retain, and motivate additional employees;
  and


·
            integrate
      successfully the operations of any acquired businesses with our
      operations.





We plan
to expand within our existing markets and into foreign and domestic bingo and
lottery terminal markets in which we have no previous operating experience. We
may not be able to maintain profitability or manage successfully the aggressive
expansion of our existing and planned business. Our failure to manage growth
effectively could have a material adverse effect on our business, results of
operations, and financial condition.





Economic
factors beyond our control may adversely affect our investments and we may incur
additional impairment charges to our investment portfolio.





As of
November 1, 2009, we had $3.9 million of principal invested in Auction Rate
Securities (“ARS”), representing interests in collateralized debt obligations
supported by pools of residential and commercial mortgages or credit cards,
insurance securitizations and other structured credits, including corporate
bonds. Some of the underlying collateral for the ARS held by us consists of
sub-prime mortgages.  With the liquidity issues experienced in global
credit and capital markets, the ARS held by us at November 1, 2009 have
experienced multiple failed auctions as the amount of securities submitted for
sale exceeded the amount of purchase orders.





We
recorded a pre-tax impairment charge of approximately $3.3 million during fiscal
2008 reflecting the portion of ARS holdings that was an other-than-temporary
decline in value.  The estimated market value of our ARS holdings at
November 1, 2009, was $0.6 million.  During the first quarter of
fiscal 2010, we received a tender offer for one of our eight ARS, which we were
able to sell, providing $0.5 million in cash.





The
credit and capital markets could continue to deteriorate in 2010. If
uncertainties in these markets deteriorate further or we experience any
additional rating downgrades on any investments in our portfolio (including
ARS), we may incur additional impairment charges to our investment portfolio,
which could negatively affect our financial condition, cash flow and reported
earnings.


-19-


Sales
of additional shares of common stock, or the potential for such sales, could
have a depressive effect on the market price of our common stock.





As of
January 26, 2010, we had 11,735,865 outstanding shares of common stock.
Approximately 9.5 million of such shares are eligible for resale in the public
market without restriction or further registration. The remaining approximately
2.2 million shares of common stock outstanding are held by affiliates of our
company and may be sold without registration only in compliance with the volume
and other limitations of Rule 144. Sales of substantial amounts of common stock
by stockholders in the public market, or even the potential for such sales, are
likely to adversely affect the market price of the common stock and could impair
our ability to raise capital by selling equity securities. Moreover, the shares
of common stock issuable upon the exercise of 1,032,450 outstanding options and
issuable upon the vesting of 177,165 outstanding restricted stock shares will be
freely tradable without restriction unless acquired by affiliates of our
company. The issuance of such freely tradable shares will result in additional
outstanding shares of common stock and will create additional potential for
sales of additional shares of common stock in the public market.





We
have limited protection of our intellectual property.





We regard
our products as proprietary and rely primarily on a combination of patent law,
copyrights, trademarks, trade secret laws, licensing agreements, and employee
and third-party non-disclosure agreements to protect our proprietary rights.
Defense of intellectual property rights can be difficult and costly, and we may
not be able to protect our technology from misappropriation by competitors or
others. In addition, the protections offered by trademark, copyright, and trade
secret laws may not prevent a competitor from designing electronic bingo systems
or box gaming content that have the appearance and functionality that closely
resemble our systems.





As the
number of electronic bingo terminals and boxes increase and the functionality of
these products further overlaps, we may become subject to infringement claims,
with or without merit. Intellectual property-related claims or litigation can be
costly and can result in a significant diversion of management’s attention. Any
settlement of such claims or adverse determinations in such litigation could
also have a material adverse impact on our business, results of operations, and
financial condition.





Our
Stockholders’ Rights Plan may adversely affect existing
stockholders.





Our
Stockholders’ Rights Plan may have the effect of deterring, delaying, or
preventing a change in control that might otherwise be in the best interests of
our stockholders. Under the Rights Plan, we issued a dividend of one Preferred
Share Purchase Right for each share of our common stock held by stockholders of
record as of the close of business on March 17, 2003.





In
general, subject to certain limited exceptions, the stock purchase rights become
exercisable when a person or group acquires 15% or more of our common stock or a
tender offer or exchange offer for 15% or more of our common stock is announced
or commenced. After any such event, our other stockholders may purchase
additional shares of our common stock at 50% of the then-current market price.
The rights will cause substantial dilution to a person or group that attempts to
acquire us on terms not approved by our board of directors. The rights may be
redeemed by us at $0.01 per stock purchase right at any time before any person
or group acquires 15% or more of our outstanding common stock. The rights should
not interfere with any merger or other business combination approved by our
board of directors. The rights expire on March 17, 2013.





New products require regulatory
approval and may be subject to complexand dynamic revenue recognition
standards, which could materially affect our financial
results.





As we
introduce new products and transactions become increasingly complex, additional
analysis and judgment is required to account for and recognize revenues in
accordance with generally accepted accounting principles. Transactions may
include multiple element arrangements and/or software components and applicable
accounting principles or regulatory product approval delays could change the
timing of revenue recognition and could adversely affect our financial results
for any given period. Fluctuations may occur in our deferred revenues and
reflect our continued shift toward more multiple element contracts that include
systems and software.


-20-


Current
environmental laws and regulations, or those enacted in the future, could result
in additional liabilities and costs.





The
manufacturing of our products may require the use of materials that are subject
to a variety of environmental, health and safety laws and regulations.
Compliance with these laws could increase our costs and impact the availability
of components required to manufacture our products. Violation of these laws may
subject us to significant fines, penalties or disposal costs, which could
negatively impact our results of operations, financial position or cash
flows.




Item
1B.                      Unresolved
Staff Comments





None.




Item
2.              Properties




On August
22, 2008, we purchased real property in southeast Reno, Nevada.  The
real property consists of approximately 5 acres with a building of approximately
100,000 square feet that is used as our new headquarters and for manufacturing
operations.  We have invested in additional improvements to the
interior of the building to add office space, and provide for the manufacturing
and assembly needs of bingo and box equipment.  Please see Note 4
“Credit Agreements and
Acquisition of Real Property” to our Consolidated Financial Statements
contained herein for further discussion of the financing for this
purchase.  The loan we obtained to finance the purchase is secured by
all of the assets of GameTech International Inc. and all of its wholly-owned
subsidiaries, to include a first mortgage on this real property.





We
operate two regional facilities for our bingo operations: an 8,080 square-foot
site in Broadview Heights, Ohio, and a 1,790 square-foot site in Southlake,
Texas. The Ohio lease expires May 31, 2010, and the Texas lease expires December
31, 2010. We also lease two facilities in Billings, Montana for our box
operations: a 16,000 square-foot site which expires August 31, 2010 and a 3,180
square-foot site which is month-to month.  We expect to decrease our
square footage in Montana as more of our box operations move to our headquarters
in Reno, Nevada.  Due to the large capacity of our new headquarters,
it is our intention to consolidate all the business opportunities that we can to
Reno, Nevada. As a result of that, we will evaluate each lease as it comes up
for renewal and may reduce our leases. We lease several other facilities, none
of which are material to our operations. We believe that our facilities will be
adequate for our needs for the foreseeable future.




Item
3.              Legal
Proceedings




GameTech
International, Inc. v. Trend Gaming Systems, LLC. 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
(involving a distribution agreement in Texas), seeking a declaratory judgment
that we were 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 thousand 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 “Deposited
Funds”). The sums in those accounts now total approximately $657 thousand. 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 thousand deposit with the court as a bond, which was presented as
restricted cash on our consolidated balance sheets in fiscal years prior to 2009
but is now presented in deposits in our consolidated balance sheets. The
accounts receivable from Trend were fully reserved. During the quarter ended
April 30, 2008, we wrote off all receivables and related reserves. Trial in this
matter commenced October 4, 2004. On November 1, 2004, the jury returned a
verdict in favor of Trend against us in the amount of $3.5 million in
compensatory damages. The jury also awarded us $735 thousand 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 on
the Deposited Funds, pending resolution of the issues on appeal. The court
setoff the jury awards and entered an amended judgment for Trend on March 12,
2005, in the amount of $2.8 million, plus interest on that sum at the rate of
3.31% per annum beginning March 30, 2005.


-21-


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





On May
16, 2007, the United States Court of Appeals for the Ninth Circuit issued its
ruling in our favor upholding each of the items we appealed, reversing the trial
court’s rulings and remanding the matter back to the trial court for a new
trial. As a result of this decision, the supersedeas bonds we posted prior to
filing the appeal were released by the lower court as of August 18, 2007. Upon
receipt of the released supersedeas bonds from the court we terminated the
supporting insurance policies and had the letters of credit released giving us
access to the certificates of deposit, which had served as the cash security for
the supersedeas bonds.





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





A new
trial in this matter commenced October 19, 2009, in the United States District
Court for the District of Arizona.  On November 12, 2009, the jury
returned a verdict in our favor and against Trend in the amount of $821 thousand
in compensatory damages.  On November 17, 2009, the court entered a
judgment affirming the jury’s verdict in this matter.  On January 7,
2010 the court entered a first amended final judgment interesting favor of
GameTech and against Trend in the amount of $821 thousand together with accrued
prejudgment interest in the amount of $589 thousand.  The court ruled
that GameTech is entitled to post-judgment interest on the principal judgment
award of $821 thousand at a rate of .47% until paid by Trend.  On
November 24, 2009, we filed a post-trial motion with the court seeking an order
directing the release of the Deposited Funds in partial satisfaction of the
jury’s compensatory damages award entered against Trend.  On December
7, 2009, we filed a second post-trial motion seeking an order to exonerate the
Cash Bond that was posted with the court.  Both of these post-trial
motions are currently pending before the court.  As of November 1,
2009, GameTech had a high probability of prevailing in this
proceeding.  As a result, the loss contingencies totaling $4.0 million
that had been recorded in fiscal 2004, 2005, and 2007 were
reversed.





GameTech
International, Inc. v. Trend Gaming, LLC. On March 2, 2004, a jury rendered a
verdict in our favor and against Trend Gaming, LLC, a Kentucky LLC (“Trend
Gaming”) (involving a prior distribution agreement in Virginia) awarding
compensatory and punitive damages in the total amount of approximately $1.5
million. The jury also returned a verdict against Steven W. and Rhonda
Hieronymus awarding compensatory and punitive damages of $1.0 million. The court
reduced compensatory damages against Trend Gaming to $1.1 million. The court
affirmed $150 thousand in punitive damages against Trend Gaming and awarded us
fees and costs of suit against Trend Gaming in the amount of $650 thousand.
Compensatory damages against Mr. and Mrs. Hieronymus have been reduced to $762
thousand but the punitive damage award against them in the amount of $150
thousand remains unchanged. Of the total compensatory damages of $1.1 million
awarded to us, $762 thousand represents compensation for lost profits. We can
only collect such damages from one of the defendants to avoid a double recovery.
Defendants appealed the judgment against them. On March 5, 2007, the Appellate
Court entered its ruling affirming
the judgment of the lower court in our favor. On June 16, 2008, the Ninth
Circuit Court of Appeals awarded attorney fees in the amount of $139 thousand in
favor of GameTech and jointly and severally against Trend Gaming L.L.C., Steven
W. Hieronymus, and the marital estate of Steven W. Hieronymus and Rhonda
Hieronymus. 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.


-22-


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




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




None




PART
II









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







Our
common stock is listed on the NASDAQ Global Market under the symbol “GMTC.” The
following table sets forth high and low sales prices of our common stock for the
period indicated as reported on the NASDAQ Global Market during each quarter
from November 1, 2007:





High
              
              
              Low53
      Weeks Ended November 2, 2008First
      Quarter
              
              $
              8.63
              
              
              $
              5.33Second
      Quarter
              
              $
              7.19
              
              
              $
              4.95Third
      Quarter
              
              $
              6.21
              
              
              $
              3.75Fourth
      Quarter
              
              $
              4.49
              
              
              $
              2.0152
      weeks November 1, 2009First
      Quarter
              
              $
              2.90
              
              
              $
              0.95Second
      Quarter
              
              $
              1.50
              
              
              $
              0.50Third
      Quarter
              
              $
              2.14
              
              
              $
              1.21Fourth
      Quarter
              
              $
              2.08
              
              
              $
              1.30





On
January 27, 2010, the last reported sales price of our common stock was $1.46
per share. On January 27, 2010, there were 129 record holders of our common
stock.





Performance
Graph





The
following graph reflects the cumulative total return (change in stock price plus
reinvested dividends) of a $100 investment in our common stock for the five-year
period for our fiscal years ended October 31, 2005 through 2007, 53 weeks ended
November 2, 2008 and 52 weeks ended November 1, 2009 in comparison to the NASDAQ
Composite Index and the Gaming Activities peer group.  This peer group
consists of American Vantage Companies (AVCS), American Wagering Inc (BETM),
Archon Corp. (ARHN), Bally Technologies Inc (BYI), Bingo Com Limited (BNGO),
Call Now Inc (CLNW), Canterbury Park Holding Corp. (CPHC), Churchill Downs Inc
(CHDN) Cryptologic Limited (CRY), Dover Downs Gaming & Entertainment (DDE),
Florida Gaming Corp. (FGMG), Gate TO Wire Solutions Inc (GWIR), Interactive
Systems Worldwide Inc (ISWI), Ladbrokes PLC (LAD), Lakes Entertainment Inc
(LACO), Littlefield Corp. (LTFD), Magna Entertainment Corp. (MECAQ), Money
Centers Of America Inc (MCAM), MTR Gaming Group Inc (MNTG), Multimedia Games Inc
(MGAM), Pacificnet Inc


(PACT),
Pinnacle Entertainment Inc (PNK), Pokertek Inc (PTEK), Progressive Gaming
International Corp. (PGICQ), Tabcorp Holdings Limited (TAH), The9 Limited
(NCTY), Trans World Corp. (TWOC), and Youbet.com Inc (UBET).  The
comparisons are not intended to forecast or be indicative of possible future
performance of our common stock.


-23-


2009 10-k JPEG graph







10/31/04
              
              
              10/31/05
              
              
              10/31/06
              
              
              10/31/07
              
              
              11/2/08
              
              
              11/1/09GameTech
      International, Inc.
              
              
              100.00
              
              
              
              100.78
              
              
              
              251.32
              
              
              
              219.49
              
              
              
              59.61
              
              
              
              33.59NASDAQ
      Composite
              
              
              100.00
              
              
              
              107.75
              
              
              
              122.18
              
              
              
              146.93
              
              
              
              86.70
              
              
              
              104.97Gaming
      Activities Industry
              
              
              100.00
              
              
              
              119.83
              
              
              
              118.24
              
              
              
              136.03
              
              
              
              49.30
              
              
              
              64.62


-24-


Dividend
Policy





During
2009 and 2008, the Company did not declare or pay any dividends.  Any
payment of dividends in the future will be reviewed by our Board of Directors
and will depend upon, among other factors, our earnings, financial condition,
capital requirements, level of indebtedness, contractual restrictions with
respect to the payment of dividends, and other considerations that our Board of
Directors deems relevant. Under our current credit facility, any payment of cash
dividends requires prior bank approval.




Item
6.              Selected
Financial Data




The
selected consolidated statement of operations data for the 52 weeks ended
November 1, 2009, 53 weeks ended November 2, 2008 and 12 months ended
October 31, 2007 and the selected consolidated balance sheet data set forth
below as of November 1, 2009 and November 2, 2008, have been derived from our
consolidated financial statements, which have been audited by Grant Thornton
LLP, independent registered public accounting firm, included elsewhere herein.
The selected consolidated statement of operations data for the years ended
October 31, 2006 and 2005 and the selected consolidated balance sheet data
set forth below at October 31, 2007, 2006, and 2005 have been derived from
our audited consolidated financial statements not included herein. The selected
financial data set forth below should be read in conjunction with the Financial
Statements and Notes thereto and with “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” appearing elsewhere in this
report. All amounts are in thousands except per share information.




52
      Weeks Ended
              
              
              53
      Weeks Ended
              
              
              Twelve
      Months Ended
              
              
              Twelve
      Months Ended
              
              
              Twelve
      Months EndedNovember
      1, 2009
              
              
              November
      2, 2008
              
              
              October
      31, 2007
              
              
              October
      31, 2006
              
              
              October
      31, 2005Net
      revenue
              
              $
              47,794
              
              
              $
              55,447
              
              
              $
              58,805
              
              
              $
              49,289
              
              
              $
              49,651Cost
      of revenue
              
              
              19,952
              
              
              
              25,365
              
              
              
              26,542
              
              
              
              19,929
              
              
              
              20,304Gross
      profit
              
              
              27,842
              
              
              
              30,082
              
              
              
              32,263
              
              
              
              29,360
              
              
              
              29,347Operating
      expenses:General
      and administrative
              
              
              10,493
              
              
              
              11,017
              
              
              
              9,538
              
              
              
              8,303
              
              
              
              11,406Sales
      and marketing
              
              
              11,037
              
              
              
              10,519
              
              
              
              10,519
              
              
              
              11,041
              
              
              
              11,952Research
      and development
              
              
              5,401
              
              
              
              5,591
              
              
              
              3,865
              
              
              
              2,885
              
              
              
              4,058Goodwill
      impairment
              
              
              15,716
              
              
              
              10,780
              
              
              
              -
              
              
              
              -
              
              
              
              -Intangible
      Impairment
              
              
              2,660
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Gain
      on sale of assets
              
              
              -
              
              
              
              -
              
              
              
              (656
              )
              
              
              -
              
              
              
              -(Gain)
      Loss contingencies
              
              
              (4,022
              )
              
              
              -
              
              
              
              124
              
              
              
              133
              
              
              
              137Total
      operating expenses
              
              
              41,285
              
              
              
              37,907
              
              
              
              23,390
              
              
              
              22,362
              
              
              
              27,553Income
      (loss) from operations
              
              
              (13,443
              )
              
              
              (7,825
              )
              
              
              8,873
              
              
              
              6,998
              
              
              
              1,794Interest
      expense
              
              
              (3,046
              )
              
              
              (4,624
              )
              
              
              (2,342
              )
              
              
              (10
              )
              
              
              (13
              )Impairment
      of investments
              
              
              -
              
              
              
              (3,306
              )
              
              
              -
              
              
              
              -
              
              
              
              -Other
      income (expense), net
              
              
              7
              
              
              
              181
              
              
              
              807
              
              
              
              356
              
              
              
              89Income
      (loss) before income taxes
              
              
              (16,482
              )
              
              
              (15,574
              )
              
              
              7,338
              
              
              
              7,344
              
              
              
              1,870Provision
      (benefit) for income taxes
              
              
              (5,980
              )
              
              
              (4,411
              )
              
              
              2,667
              
              
              
              2,961
              
              
              
              534Net
      Income (loss)
              
              $
              (10,502
              )
              
              $
              (11,163
              )
              
              $
              4,671
              
              
              $
              4,383
              
              
              $
              1,336Net
      income (loss) per share:Basic
              
              $
              (0.90
              )
              
              $
              (0.92
              )
              
              $
              0.37
              
              
              $
              0.36
              
              
              $
              0.11Diluted
              
              $
              (0.90
              )
              
              $
              (0.92
              )
              
              $
              0.36
              
              
              $
              0.34
              
              
              $
              0.11Shares
      used in calculating net income (loss) per share:Basic
              
              
              11,714
              
              
              
              12,190
              
              
              
              12,566
              
              
              
              12,181
              
              
              
              11,868Diluted
              
              
              11,714
              
              
              
              12,190
              
              
              
              12,991
              
              
              
              12,757
              
              
              
              11,960Cash
      dividends per common share
              
              $
              0.00
              
              
              $
              0.00
              
              
              $
              0.00
              
              
              $
              0.00
              
              
              $
              0.03
    Fiscal
      Years Ended(In
      thousands, except per share amounts)Balance
      Sheet Data:
              
              November
      1, 2009
              
              
              November
      2, 2008
              
              
              October
      31, 2007
              
              
              October
      31, 2006
              
              
              October
      31, 2005(Note
      1)
              
              (Note
      2)Cash,
      cash equivalents and short-term investments
              
              $
              3,337
              
              
              $
              6,076
              
              
              $
              11,393
              
              
              $
              12,819
              
              
              $
              6,833Restricted
      Cash
              
              
              -
              
              
              
              3,158
              
              
              
              502
              
              
              
              4,515
              
              
              
              4,581Working
      Capital
              
              
              7,618
              
              
              
              9,123
              
              
              
              13,954
              
              
              
              15,412
              
              
              
              10,824Total
      Assets
              
              
              66,663
              
              
              
              89,495
              
              
              
              93,882
              
              
              
              59,214
              
              
              
              51,130Total
      Debt
              
              
              27,524
              
              
              
              37,161
              
              
              
              29,759
              
              
              
              -
              
              
              
              -Total
      stockholders’ equity
              
              $
              29,340
              
              
              $
              39,410
              
              
              $
              54,479
              
              
              $
              49,834
              
              
              $
              41,889
   -25-


1.
            The
      decrease in total assets in 2009 was primarily due to the impairment
      charge related to goodwill of $15.7 million associated with our
      acquisition of Summit and the impairment charge of $2.7 million related to
      our Summit intangibles.  Additionally, the decrease in total
      assets and debt in 2009 was primarily due to a paydown of $5.0 million of
      the principal long term debt, as well as quarterly principal payments on
      our current Credit Facility

                of  $4.5
      million.  Our restricted cash decreased due to funding the
      construction of improvements to our new headquarters in February
      2009.  For additional information see Note 1 “Business and
      Summary of significant Accounting Policies” and Note 4 “Credit Agreements
      and Acquisition of Real Property” to our Consolidated Financial Statements
      contained herein.


2.
            The
      decrease in total assets in 2008 was primarily due to the impairment
      charge related to goodwill of $10.8 million associated with our
      acquisition of Summit and the impairment charge of $3.3 million related to
      our investments in auction rate securities, offset by the purchase of real
      property for our Reno headquarters.   The increase in
      restricted investments in 2008 was due to proceeds from our new credit
      agreement that are restricted for funding the construction of improvements
      to the real property mentioned above. The increase in the total debt in
      2008 was due to our incurrence of long-term debt to finance the purchase
      of real property for our Reno headquarters.  For additional
      information, see Note 4 “Credit Agreements and Acquisition of Real
      Property” to our Consolidated Financial Statements contained
      herein.





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




The
following discussion should be read in conjunction with our consolidated
financial statements and notes thereto included elsewhere in this report. The
following discussion contains certain forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from the
expectations reflected in these forward-looking statements as a result of the
factors set forth in this report, including those set forth under Item 1A, “Risk
Factors.”





Overview





We
design, develop, and market bingo systems (which includes server-based wireless
gaming systems), VLT’s, slot machines and related software.  VLT’s,
slot machines and related software are collectively referred to as “box
business”. We entered the box business in March 2007 with our acquisition of
Summit Gaming for $40.9 million in cash. For the 52 weeks ended November 1,
2009, the 53 weeks ended November 2, 2008, and the fiscal years ended October
31, 2007, our portable bingo terminals, fixed-based bingo terminals, and box
businesses made the following contributions to revenue:




52
      Weeks Ended
              
              
              53
      Weeks Ended
              
              
              Twelve
      Months EndedRevenue
      Contribution
              
              November
      1, 2009
              
              
              November
      2, 2008
              
              
              October
      31, 2007Portable
      Bingo Terminals
              
              
              64
              %
              
              
              63
              %
              
              
              64
              %Fixed
      Base Bingo Terminals
              
              
              18
              %
              
              
              16
              %
              
              
              16
              %Box
      Equipment
              
              
              18
              %
              
              
              21
              %
              
              
              20
              %





As of
November 1, 2009, we had bingo systems in service in 40 states, various Native
American locations and the United Kingdom, Canada, and Japan.  We had
box sales in 13 states and various Native American locations.  We are
marketing new server-based wireless gaming systems where users play a range of
games including bingo, video poker, keno and other slot machine
games.  The GameTech Elite(R) server-based gaming system was installed
domestically in the third quarter of 2008 and in Europe during the first quarter
of fiscal 2009.  The European configuration supports wireless bingo
and fast action gaming for the European bingo market.  In addition to
the GameTech Elite(R) Server Based system, we have also spun off a particular
configuration of GameTech Elite(R) for the traditional Bingo markets of the US
as well as other International Bingo markets.  This product is known
as GameTech Edge(TM), which was further developed in 2009 and was successfully
installed in the summer of 2009 in a North American bingo
hall.  GameTech Edge(TM) will be the premier US product offering in
2010 with further enhancements, features and bingo content planned for
release.


-26-


We
generate revenue by placing electronic bingo systems in bingo halls under
contracts based on (1) a fixed fee per use per session; (2) a fixed
weekly fee per terminal; or (3) a percentage of the revenue generated by
each terminal. Revenue growth for our bingo systems is affected by player
acceptance of electronic bingo as an addition or an alternative
to paper bingo.  Additionally, our revenue growth is dependent on our
ability to expand operations into new markets and our ability to increase our
market share in our current markets. Fixed-based 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. For the 52 weeks ending November 1, 2009 and 53
weeks ended November 2, 2008, costs of $42 thousand and $53 thousand were
capitalized, respectively, and amortization occurs over the expected term of the
contract. We record depreciation of bingo equipment over either a three- or
five-year estimated useful life using the straight-line method of
depreciation.





Our box
business generates revenue from the sale of boxes (new and used), software
conversion kits, content fees, license fees, participation fees, parts, and
services. For the 52 weeks ending November 1, 2009 and 53 weeks ended November
2, 2008, 94.6% and 95.6%, respectively, of our box business sales were derived
from the sale of new and used equipment, conversion kits, and
parts.  In some instances, we recognize recurring participation
revenue in lieu of a one-time machine sale. Increasing market share in existing
markets and expanding product placement into new markets drives revenue
growth.





Our bingo
and box expenses consist primarily of cost of revenue, general and
administrative expense, sales and marketing expense, and research and
development expense.  Cost of revenue consists of expenses associated
with technical and operational support of the bingo systems in bingo halls,
depreciation and amortization of bingo terminals, cost of sales related to
equipment sold, and repair/refurbishment/disposal costs of bingo terminals and
related support equipment.  General and administrative costs consist
of expenses associated with management of our company and the related support;
including finance and accounting, legal, compliance, information systems, human
resources, allowance for doubtful accounts receivable, and amortization of
intangible assets acquired from the Summit acquisition.  Sales and
marketing expenses consist primarily of commissions paid to distributors for
promoting and supporting our products, and compensation paid to our internal
sales force to manage existing customers, to generate new customers, and sell
additional and upgraded equipment.  Research and development costs
consist of company-sponsored activities to provide customers with new or
enhanced games or game themes for our VLT and slot machines, improved bingo
terminals, and to develop and test new wireless server-based
systems.





Fiscal
2009 Highlights





During
the 52 weeks ended November 1, 2009, we incurred a net loss of $10.5 million,
compared to a net loss of $11.2 million for the 53 weeks ended November 2, 2008
as a result of various factors, including primarily the following:





·
            $15.7
      million goodwill and $2.7 million intangible impairment charge in
      2009;


·
            $7.7
      million or 13.8% decrease in revenue primarily due to a declining economy
      and increased regional competition;


·
            decreased
      total cost of revenue of $5.4 million primarily due to a decrease in
      depreciation related primarily to certain assets becoming fully
      depreciated, and a decrease in cost of goods sold related directly to
      decreased revenue,


·
            $4.0
      million reversal of loss contingencies related to the Trend
      trial;


·
            net
      interest expense decrease of $1.6
million





During
the 52 weeks ending November 1, 2009, our capital expenditures decreased
approximately 46.2%, or $6.0 million to $7.0 million, compared to $13.0 million
during fiscal 2008, primarily related to the purchase of real property for our
new headquarters in southeast Reno, Nevada in fiscal year 2008.


-27-


Fiscal
Year





We report
on a 52/53 week fiscal year which began with the period ending on the first
Sunday in November for 2008.  Fiscal year ending November 1, 2009
includes 52 weeks versus the fiscal year ending November 2, 2008 which had 53
weeks.  The fiscal year ending October 31, 2007 was on a twelve-month
calendar basis.





Recently
Issued Accounting Standards





In
December 2007, the FASB issued new standards for business combinations as
codified in ASC 805-10. The objective of the new standard is to improve the
relevance, representational faithfulness and comparability of the information
that a reporting entity provides in its financial reports about a business
combination and its effects. It establishes principles and requirements for the
acquirer to recognize and measure the identifiable assets acquired, the
liabilities assumed, any non-controlling interest in the acquiree, the goodwill
acquired or a gain from a bargain purchase. It also provides disclosure
requirements to enable users of the financial statements to evaluate the nature
and financial effects of the business combination. The new standard applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. We are evaluating the impact, if any, that the adoption of
ASC 805-10 will have on our consolidated financial statements.





In
December 2007, the Securities and Exchange Commission issued Staff Accounting
Bulletin  (“SAB") No. 110 to permit entities, under certain
circumstances, to continue to use the “simplified” method, in developing
estimates of expected term of “plain-vanilla” share options in accordance with
ASC 718-10 Share-Based Payment. SAB No. 110 amended SAB No. 107 to permit the
use of the “simplified” method beyond December 31, 2007. We continue to use the
“simplified” method and will do so until more detailed relevant information
about exercise behavior becomes readily available.





In May
2009, the FASB issued new standards on subsequent events as codified in ASC
855-10. The new standard establishes general standards for accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are available to be issued. More specifically, the new
standard sets forth the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition in the financial statements, identifies the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements and the
disclosures that should be made about events or transactions that occur after
the balance sheet date. The new standard is effective for fiscal years and
interim periods ending after June 15, 2009. We have adopted this standard during
2009 and it did not have a material impact on our consolidated financial
statements. We have evaluated subsequent events through January 29, 2010, the
date this report on Form 10-K was filed with the U.S. Securities and Exchange
Commission. We made no significant changes to our consolidated financial
statements as a result of our subsequent events evaluation.





In June
2009, the FASB issued Accounting Standards Codification ASC 105-10, which
establishes the Codification as the source of authoritative accounting guidance
to be applied in the preparation of financial statements in conformity with
generally accepted accounting principles (“GAAP”). The Codification, which
changes the referencing of financial standards, became effective for interim and
annual periods ending on or after September 15, 2009. The codification is now
the single official source of authoritative U.S. GAAP (other than guidance
issued by the Securities and Exchange Commission), superseding existing FASB,
American Institute of Certified Public Accountants, Emerging Issues Task Force
and related literature. Only one level of authoritative U.S. GAAP now exists.
All other literature is considered non-authoritative. The Codification does not
change U.S. GAAP. We adopted the Codification during our fiscal year ended
November 1, 2009.





Critical
Accounting Policies and Estimates





Management’s
Discussion and Analysis of Financial Condition and Results of Operations discuss
our 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 allowance for doubtful accounts,
obsolescence, impairment of goodwill, impairment of investments, loss
contingencies, provision for income taxes, and stock-based compensation. 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.





-28-


We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements.





Revenue
Recognition





We
recognize revenue when the following criteria are met:


·
            Persuasive
      evidence of an arrangement between us and our customer
    exists,


·
            Delivery
      has occurred, bingo terminals are available or ready for play, or services
      have been rendered,


·
            The
      price is fixed or determinable, and


·
            Collectability
      is reasonably assured.





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





Bingo
Equipment


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





Box
Equipment


Our
product sales revenues are generated from the sale of VLT’s, conversion kits,
content fees, license fees, participation fees, equipment and services. In some
instances, we recognize recurring participation revenue in lieu of a one-time
machine sale. Revenues are recorded in accordance with FASB ASC 985-605-25
Software Revenue Recognition and are reported net of discounts, sales taxes and
other taxes of a similar nature. Revenues related to contracted production are
recognized as the related work is delivered. We recognize license fee revenues
over the term of the associated agreement unless the fee is in exchange for
products delivered or services performed that represent the culmination of a
separate earnings process. Amounts received prior to completing the earnings
process are deferred until revenue recognition criteria are
met.  Although our current sales credit terms are predominately
30 days, we will match the market in order to be competitive.





Deferred
Revenue





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


-29-


Reserve
for Bingo Terminal Obsolescence





We
provide reserves for obsolete bingo terminals on hand that we do not expect to
be used. We also provide reserves for slow moving components of our box
equipment and bingo terminals by using factors such as historical data and
future demand to determine the reserve. Although we attempt to assure the
accuracy of our estimated future demands, any significant unanticipated changes
in demand or technological developments could have a significant impact on the
value of our 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 FASB ASC 985-20 – Costs of Software to be Sold, Leased, or
Marketed. FASB ASC 985-20 provides for the capitalization of computer software
that is to be used as an integral part of a product or process to be sold or
leased, after technological feasibility has been established for the software
and all research and development activities for the other components of the
product or process have been completed. We capitalize qualified costs of
software developed for new products 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, typically three to five years,
beginning when the product is available for general release.  The
achievement of technological feasibility and the estimate of a products’
economic life require management’s judgment. Any changes in key assumptions,
market conditions or other circumstances could result in an impairment of the
capitalized asset and a charge to our operating results.





Allowance
for Doubtful Accounts





Bingo
Equipment


We
estimate the possible losses resulting from non-payment of outstanding accounts
receivable arising from the lease of our bingo units.  Our customer
base consists primarily of entities operating in charitable, Native American,
and commercial bingo halls located throughout the United States, Canada, United
Kingdom, and Japan.  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
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 category.  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 collectability of our receivables.





Box
Equipment


We
estimate the possible losses resulting from non-payment of outstanding accounts
receivables arising from the sale of boxes and related equipment. Our customer
base consists of distributors and casinos located in various states and Native
American locations. 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.





Impairment
of Long-lived Assets, Goodwill and Intangible Assets





We review
long-lived assets whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable in accordance with FASB ASC
360-10-35-15 – Impairment or Disposal of Long- Lived
Assets.  Recoverability of long-lived assets are measured by a
comparison of the carrying amount of the asset to future net cash flows expected
to be generated by the asset undiscounted and without interest.  If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets.


-30-


We review
goodwill for impairment whenever events or circumstances indicate the carrying
value may not be recoverable in accordance with FASB ASC 350 –
Intangibles-Goodwill and Other, but at a minimum we do a formal valuation
of goodwill and other long-lived assets annually at the beginning of our fourth
fiscal quarter.  We perform the impairment analysis of goodwill at a
reporting unit level by comparing the fair value of a reporting unit with its
carrying value, including goodwill.  If the fair value is less than
the carrying value, the impairment to be recognized is measured by the amount by
which the carrying amount of the goodwill exceeds the fair value of the
reporting unit goodwill.





In fiscal
2007, we acquired the assets of Summit Gaming and added $26.5 million to
goodwill, which included trade names of $1.6 million.  In addition, we
acquired $7.7 million in identifiable intangible assets which is amortized over
5 to 10 years. We assessed the value of our goodwill as of July 31, 2007 (our
annual review date) and concluded that goodwill was not impaired.  We
performed our 2008 annual impairment testing of goodwill and intangibles as of
July 31, 2008. Based on a combination of factors, including the current economic
environment and decreased revenues, we recorded noncash goodwill impairment
associated with our acquisition of Summit of $10.8 million in the fourth quarter
of fiscal 2008.  We performed our 2009 annual impairment testing of
goodwill and intangibles as of August 2, 2009. Based on a combination of
factors, including the current economic environment, decreased revenues,
and delays in the release of new products to market, we recorded noncash
goodwill impairment associated with our acquisition of Summit of $15.7 million
in the fourth quarter of fiscal 2009.  Based on our analysis and
discounted future cash flows, no impairment occurred on our Bingo
segment.





For
fiscal year 2009, we recorded $2.7 million for the impairment of the obsolete
gaming library related to the Summit acquisition.  There was no
impairment charge for long-lived assets for fiscal 2008 and 2007.





The
annual evaluation of goodwill and other non-amortizing intangible assets
requires the use of estimates about future operating results of each reporting
unit to determine their estimated fair value.  Changes in forecasted
operations can materially affect these estimates.  Once an impairment
of goodwill or other intangible assets has been recorded, it cannot be
reversed.





Share-based
Compensation





We
account for share-based compensation in accordance with FASB ASC 718 –
Compensation-Stock Compensation. Under the fair value recognition provisions, we
estimate share-based compensation at the award grant date and recognize expense
over the service period. Option valuation models require the input of highly
subjective assumptions, and changes in the assumptions used can materially
affect the fair value estimate. Judgment is required in estimating stock
volatility, forfeiture rates, expected dividends, and expected terms that
options remain outstanding. See Note 6 of our Consolidated Financial Statements
for additional information regarding the adoption of FASB ASC 718.





Legal
Contingencies





We are
currently involved in various legal claims and legal proceedings. Periodically,
we review the status of each significant matter and assess our potential
financial exposure. If the potential loss from any claim or legal proceeding is
considered probable and the amount can be estimated, we accrue a liability for
the estimated loss. Significant judgment is required in both the determination
of probability and the determination as to whether an exposure can be reasonably
estimated.





Because
of uncertainties related to these matters, 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 our estimates. Such revisions in the estimates of the potential
liabilities could have a material impact on our results of operations and
financial condition.





As of
November 1, 2009, GameTech had a high probability of prevailing in the Trend
proceeding.  As a result, the loss contingencies totaling $4.0 million
that had been recorded in fiscal 2004, 2005, and 2007 were
reversed.


-31-


Income
Taxes





We are
subject to income taxes in US federal, state, local, and foreign jurisdictions.
Determination of the appropriate amount and classification of income taxes
depends on several factors, including estimates of the timing and probability of
realization of deferred income taxes, reserves for uncertain tax positions, and
income tax payment timing.





We record
deferred tax assets and liabilities based on temporary differences between the
financial reporting and tax basis of assets and liabilities, applying enacted
tax rates expected to be in effect for the year in which the differences are
expected to reverse. The ability to realize the deferred tax assets is evaluated
through the forecasting of taxable income in each jurisdiction, using historical
and projected future operating results, the reversal of existing temporary
differences, and the availability of tax planning strategies. Net deferred tax
assets totaled $13.5 million at November 1, 2009 and $6.4 million at November 2,
2008.





Valuation
allowances are recorded to reduce deferred tax assets when it is more likely
than not that a tax benefit will not be realized. Changes in tax laws, enacted
tax rates, geographic mix, or estimated annual taxable income could change our
valuation of deferred tax assets and liabilities, which in turn impacts our tax
provision. We carefully monitor many factors, including the impact of current
economic conditions, in our valuation of deferred tax assets. During fiscal
2009, we did not record any additional valuation allowances, primarily due to
the probability of realizing these assets over the next 12 years. At November 1,
2009, our total valuation allowance of $1.2 million related to investment
write-downs not expected to be fully realized because we cannot conclude that it
is more likely than not that we will earn income of the specific character
required to utilize these assets before they expire.





In the
ordinary course of business, there are many transactions and calculations for
which the ultimate tax determination is uncertain. At the beginning of fiscal
2008, we adopted new accounting guidance which required the recognition of
uncertain tax positions taken or expected to be taken in a tax return, when it
is “more likely than not” to be sustained upon examination. This assessment
further presumes that tax authorities evaluate the technical merits of
transactions individually with full knowledge of all facts and circumstances
surrounding the issue. Changes in facts or information as well as the expiration
of statutes of limitations and/or settlements with tax jurisdictions may result
in material adjustments to these estimates in the future.





We
account for income taxes based on the estimated effective annual income tax
rates.  The provision differs from income taxes currently payable
because certain items of income and expense are recognized in different periods
for financial statement purposes than for tax return purposes. See Notes 1 and 7
for additional information about our income taxes.


-32-


Results
of Operations





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




52
      Weeks Ended November 1, 2009 and 53 Weeks Ended November 2, 2008(In
      Thousands)Bingo
      Equipment
              
              
              Box
      Equipment52
      Weeks
              
              
              53
      Weeks
              
              
              %
      Change
              
              
              52
      Weeks
              
              
              53
      Weeks
              
              
              %
      ChangeEnded
              
              
              Ended
              
              
              Favorable/
              
              
              Ended
              
              
              Ended
              
              
              Favorable/11/1/2009
              
              
              11/2/2008
              
              
              (Unfavorable)
              
              
              11/1/2009
              
              
              11/2/2008
              
              
              (Unfavorable)Net
      Revenue
              
              $
              39,104
              
              
              $
              43,964
              
              
              
              -11.1
              %
              
              $
              8,690
              
              
              $
              11,483
              
              
              
              -24.3
              %Cost
      of Revenue
              
              
              14,709
              
              
              
              19,103
              
              
              
              23.0
              %
              
              
              5,243
              
              
              
              6,262
              
              
              
              16.3
              %Gross
      Profit
              
              $
              24,395
              
              
              $
              24,861
              
              
              
              -1.9
              %
              
              $
              3,447
              
              
              $
              5,221
              
              
              
              -34.0
              %Operating
      Expenses:General
      and administrative
              
              
              6,528
              
              
              
              7,637
              
              
              
              14.5
              %
              
              
              3,965
              
              
              
              3,380
              
              
              
              -17.3
              %Sales
      and marketing
              
              
              9,722
              
              
              
              10,007
              
              
              
              2.8
              %
              
              
              1,315
              
              
              
              512
              
              
              
              -156.8
              %Research
      and development
              
              
              3,030
              
              
              
              3,044
              
              
              
              0.5
              %
              
              
              2,371
              
              
              
              2,547
              
              
              
              6.9
              %Goodwill
      Impairment
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              15,716
              
              
              
              10,780
              
              
              
              -45.8
              %Intangible
      Impairment
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,660
              
              
              
              -
              
              
              
              -Loss
      (Gain) Contingencies
              
              
              (4,022
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
      operating expenses
              
              
              15,258
              
              
              
              20,688
              
              
              
              26.2
              %
              
              
              26,027
              
              
              
              17,219
              
              
              
              -51.2
              %Income
      (Loss) from operations
              
              $
              9,137
              
              
              $
              4,173
              
              
              
              119.0
              %
              
              $
              (22,580
              )
              
              $
              (11,998
              )
              
              
              88.2
              %Interest
      expense
              
              
              (402
              )
              
              
              (267
              )
              
              
              -50.6
              %
              
              
              (2,644
              )
              
              
              (4,357
              )
              
              
              39.3
              %Impairment
      of investments
              
              
              -
              
              
              
              (3,306
              )
              
              
              100.0
              %
              
              
              -
              
              
              
              -
              
              
              
              -Other
      income (expense), net
              
              
              (5
              )
              
              
              160
              
              
              
              -103.1
              %
              
              
              11
              
              
              
              21
              
              
              
              -47.6
              %Income
      (loss) before income taxes
              
              $
              8,730
              
              
              $
              760
              
              
              
              1048.7
              %
              
              $
              (25,213
              )
              
              $
              (16,334
              )
              
              
              -54.4
              %Provision
      (benefit) for income taxes
              
              
              3,171
              
              
              
              211
              
              
              
              -1402.8
              %
              
              
              (9,152
              )
              
              
              (4,622
              )
              
              
              98.0
              %Net
      income (loss)
              
              $
              5,559
              
              
              $
              549
              
              
              
              912.6
              %
              
              $
              (16,061
              )
              
              $
              (11,712
              )
              
              
              -37.1
              %


We
allocate costs between our segments based on general overhead allocations as
well as specific allocations based on actual time and amount spent on each
segment.





Net
Revenue





Bingo net
revenue for the 52 weeks ended November 1, 2009 decreased 11.1% to $39.1 million
from $44.0 million compared to the 53 weeks ended November 2, 2008. The decrease
is primarily due to hall closures and price adjustments from both adverse
economic conditions and competition, which was partially offset by an increase
in business from new products.  Box net revenues decreased $2.8
million for the 52 weeks ended November 1, 2009, or 24.3% to $8.7 million from
$11.5 million compared to the 53 weeks ended November 2,
2008.   The decrease is primarily due to delays in releasing new
products as we collaborate with regulators to obtain approvals on new software
programs and other features in certain markets.





Cost
of Revenue





Bingo
cost of revenue for the 52 weeks ended November 1, 2009 decreased 23.0% to $14.7
million, or 37.6% of net revenue, from $19.1 million, or 43.5% of net revenue,
compared to the 53 weeks ended November 2, 2008. This decrease is primarily due
to $2.2 million less bingo equipment depreciation over the comparable period in
2008, mainly from certain Travelers becoming fully depreciated in 2009, a $1.5
million decrease in service labor due to aligning expenses to business levels, a
$0.4 million decrease in the cost of disposals, slow-moving and obsolete
materials as a result of the write-off of units and/or parts on older product
lines as customers migrate to the newer product lines, and a $0.4 million
decrease in amortization.





Box
business cost of revenue decreased 16.3% to $5.2 million, or 60.3% of net
revenue for the 52 weeks ended November 1, 2009 from $6.3 million, or 54.5% of
net revenue compared to the 53 weeks ended November 2, 2008.  The
decrease in cost of revenue is in part related to the decline in net revenue, a
higher mix of software sales in 2008 which have lower product costs, and a
higher than normal write-down of obsolete inventory in 2008.





Gross
Profit





Bingo
gross profit decreased 1.9% to $24.4 million for the 52 weeks ended November 1,
2009, from $24.9 million for the 53 weeks ended November 2, 2008. Bingo gross
margin increased to 62.4% of net revenue for the 52 weeks ended
November 1, 2009 from 56.5% of net revenue for the 53 weeks ended November 2,
2008.  The 5.9 percentage point increase in bingo gross margin is
related to reduced labor and travel costs in service and operations plus other
cost of revenue decreases as described above.


-33-


Box gross
profit decreased 34.0% to $3.4 million for the 52 weeks ended November 1, 2009,
from $5.2 million for the 53 weeks ended November 2, 2008. Box gross margin
decreased 5.8 percentage points to 39.7% of net revenue for the 52 weeks ended
November 1, 2009, from 45.5% of net revenue for the 53 weeks ended November 2,
2008.  The decrease in box gross margin is primarily due to a mix of
lower margin sales in 2009 to Louisiana, which is a distributor-based
jurisdiction, compounded by a high mix of software sales in 2008 which are
higher margin.





Operating
Expenses





Bingo
general and administrative costs decreased 14.5% to $6.5 million for the 52
weeks ended November 1, 2009, from $7.6 million for the 53 weeks ended November
2, 2008. The decrease is primarily due to lower facility costs as we consolidate
operations into our corporate headquarters, lower equipment testing costs due to
higher capitalization, lower outside accounting fees, offset in part by
increased legal fees related to the Trend trial.  Box general and
administrative costs increased 17.3% or $0.6 million to $4.0 million for the 52
weeks ended November 1, 2009 compared to $3.4 million for the 53 weeks ended
November 2, 2008 primarily due to increase in depreciation for the new corporate
headquarters.





Bingo
sales and marketing expenses decreased 2.8% to $9.7 million for the 52 weeks
ended November 1, 2009, from $10.0 million for the 53 weeks ended November 2,
2008.  This decrease is due to the decrease in distributor commissions
directly related to the decline in bingo revenue.  Box sales and
marketing expenses increased 156.8% to $1.3 million from $0.5 million for the 52
weeks ended November 1, 2009, compared to the 53 weeks ended November 2, 2008
primarily due to $0.6 million in increased promotion costs as we invest and
partner with our distributor to promote revenue growth in
Louisiana.





Bingo
research and development expenses remained flat at $3.0 million for the 52 weeks
ended November 1, 2009, compared to the 53 weeks ended November 2,
2008.  Box research and development expenses decreased $0.1 million to
$2.4 million for the 52 weeks ended November 1, 2009, from $2.5 million for the
53 weeks ended November 2, 2008.





For the
52 weeks ended November 1, 2009, we recorded a goodwill impairment charge of
$15.7 million related to our acquisition of Summit compared to a charge of $10.8
million for the 53 weeks ended November 2, 2008.  See Goodwill
Impairment section below.





For the
52 weeks ended November 1, 2009, we recorded an impairment charge of $2.7
million for an obsolete gaming library related to our acquisition of Summit
compared to no charge for the 53 weeks ended November 2, 2008.





Interest
Expense





Interest
expense of $3.0 million for the 52 weeks ended November 1, 2009 decreased $1.6
million over the 53 weeks ended November 2, 2008. The decrease is primarily due
to a $1.2 million charge in 2008 for a prepayment penalty and write-off of debt
acquisition costs associated with our previous credit facility, as well as a
lower effective annual borrowing rate of 6.79% for 2009 compared to 9.0% for
2008.  The interest rate swap expense was $0.7 million for fiscal 2008
and 2009. For more information related to our swap agreement see Note 1
“Interest Rate Swap Contract”.


-34-


Impairment
of Investments





At
November 1, 2009, we held auction rate securities (“ARS”) with an aggregate
purchase price of approximately $3.9 million. In the fourth quarter of 2008,
management determined that the estimated losses in these securities were
other-than-temporary and recorded an aggregate pre-tax impairment charge of
approximately $3.3 million for the 53 weeks ended November 2,
2008.  At November 1, 2009, the fair value of the ARS were evaluated
and the carrying value approximated the fair value.





With the
liquidity issues experienced in global credit and capital markets, the ARS held
by us at November 1, 2009 experienced multiple failed auctions as the amount of
securities submitted for sale exceeded the amount of purchase
orders.  The eight ARS in our investment portfolio (having an
aggregate purchase price of approximately $3.9 million) were classified as Level
III (as defined by GAAP) as no direct market inputs to make a pricing
determination were available.  A discounted cash flow analysis was
used to determine the estimated fair value of these securities.  Based
largely upon the credit risks of the issuers and the lack of an active trading
market in these securities, risk-adjusted discount rates were applied to
determine the estimated fair value of our Level III ARS.  Seven of the
eight ARS in our investment portfolio continue to pay interest according to
their stated terms.





During
the first quarter of fiscal 2010, we received a tender offer for one of the
eight ARS and were able to sell them, providing $534 thousand in
cash.  Accordingly, we reclassified the $105 thousand net carrying
value of this ARS from long term to short term investments as of November 1,
2009.  The balance remaining in the long term investments at November
1, 2009 was $461 thousand.





Goodwill
Impairment





In fiscal
2007, we acquired the assets of Summit Gaming and added $26.5 million to
goodwill, which included trade names of $1.6 million.  In addition, we
acquired $7.7 million in identifiable intangible assets which will be amortized
over 5 to 10 years. We conduct our annual goodwill impairment analysis during
the fourth quarter of each fiscal year, measured as of the last day of the third
quarter.  We performed our 2008 annual impairment testing of goodwill
and intangibles as of July 31, 2008 and recorded a noncash goodwill impairment
associated with our acquisition of Summit of $10.8 million in the fourth quarter
of fiscal 2008.  Based on a combination of factors, including the
current economic environment, decreased revenues and increased costs,
particularly of the box segment, we recorded a noncash goodwill impairment
associated with our acquisition of Summit of $15.7 million in the fourth quarter
of fiscal 2009. The annual evaluation of goodwill and other non-amortizing
intangible assets requires the use of estimates about future operating results
of each reporting unit to determine their estimated fair
value.  Changes in forecasted operations can materially affect these
estimates.  Once an impairment of goodwill or other intangible assets
has been recorded, it cannot be reversed.  The Company also recorded a
$2.7 million intangible impairment in the fourth quarter of fiscal 2009 for the
impairment of an obsolete gaming library related to the Summit
acquisition.





Loss
Contingencies





As of
November 1, 2009, GameTech had a high probability of prevailing in the Trend
proceeding.  As a result, the loss contingencies totaling $4.0 million
that had been recorded in fiscal 2004, 2005, and 2007 were
reversed.





Income
Taxes





We
recorded our income tax provision at an effective rate of (36.3%) for the 52
weeks ended November 1, 2009, compared with (28.3%) for the 53 weeks ended
November 2, 2008. The actual effective tax rate is different from the expected
federal rate of 34%, reflecting certain permanent differences between financial
accounting and tax accounting, and state and foreign tax
provisions.


-35-


53
Weeks Ended November 2, 2008 compared with the 12 Months Ended October 31,
2007




53
      Weeks Ended November 2, 2008 and 12 Months Ended October 31,
2007(In
      Thousands)Bingo
      Equipment
              
              
              Box
      Equipment53
      Weeks
              
              
              12
      Months
              
              
              %
      Change
              
              
              53
      Weeks
              
              
              12
      Months
              
              
              %
      ChangeEnded
              
              
              Ended
              
              
              Favorable/
              
              
              Ended
              
              
              Ended
              
              
              Favorable/11/2/2008
              
              
              10/31/2007
              
              
              (Unfavorable)
              
              
              11/2/2008
              
              
              10/31/2007
              
              
              (Unfavorable)Net
      Revenue
              
              $
              43,964
              
              
              $
              47,114
              
              
              
              -6.7
              %
              
              $
              11,483
              
              
              $
              11,691
              
              
              
              -1.8
              %Cost
      of Revenue
              
              
              19,103
              
              
              
              19,683
              
              
              
              2.9
              %
              
              
              6,262
              
              
              
              6,859
              
              
              
              8.7
              %Gross
      Profit
              
              $
              24,861
              
              
              $
              27,431
              
              
              
              -9.4
              %
              
              $
              5,221
              
              
              $
              4,832
              
              
              
              8.1
              %Operating
      Expenses:General
      and administrative
              
              
              7,637
              
              
              
              7,920
              
              
              
              3.6
              %
              
              
              3,380
              
              
              
              1,618
              
              
              
              -108.9
              %Sales
      and marketing
              
              
              10,007
              
              
              
              10,028
              
              
              
              0.2
              %
              
              
              512
              
              
              
              491
              
              
              
              -4.3
              %Research
      and development
              
              
              3,044
              
              
              
              2,837
              
              
              
              -7.3
              %
              
              
              2,547
              
              
              
              1,028
              
              
              
              -147.8
              %Goodwill
      Impairment
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              10,780
              
              
              
              -
              
              
              
              -Gain
      on sale of assets
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (656
              )
              
              
              100.0
              %Loss
      Contingencies
              
              
              -
              
              
              
              124
              
              
              
              100.0
              %
              
              
              -
              
              
              
              -
              
              
              
              -Total
      operating expenses
              
              
              20,688
              
              
              
              20,909
              
              
              
              1.1
              %
              
              
              17,219
              
              
              
              2,481
              
              
              
              -594.0
              %Income
      from operations
              
              $
              4,173
              
              
              $
              6,522
              
              
              
              -36.0
              %
              
              $
              (11,998
              )
              
              $
              2,351
              
              
              
              -610.3
              %Interest
      expense
              
              
              (267
              )
              
              
              (125
              )
              
              
              -113.6
              %
              
              
              (4,357
              )
              
              
              (2,217
              )
              
              
              -96.5
              %Impairment
      of investments
              
              
              (3,306
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Other
      income (expense), net
              
              
              160
              
              
              
              780
              
              
              
              79.5
              %
              
              
              21
              
              
              
              27
              
              
              
              -22.2
              %Income
      (loss) before income taxes
              
              $
              760
              
              
              $
              7,177
              
              
              
              -89.4
              %
              
              $
              (16,334
              )
              
              $
              161
              
              
              
              -10245.3
              %Provision
      (benefit) for income taxes
              
              
              211
              
              
              
              2,667
              
              
              
              92.1
              %
              
              
              (4,622
              )
              
              
              -
              
              
              
              -Net
      income (loss)
              
              $
              549
              
              
              $
              4,510
              
              
              
              -87.8
              %
              
              $
              (11,712
              )
              
              $
              161
              
              
              
              -7374.5
              %
  We
acquired substantially all of the assets of Summit on March 28,
2007.  Summit net revenues are included in the box business segment
above, and fiscal 2008 reflects 53 weeks of activity compared to only seven
months of activity for the comparable period presented above for
2007.





Net
Revenue





Bingo net
revenue for the 53 weeks ended November 2, 2008 decreased 6.7% to $44.0 million
from $47.1 million compared to the 12 months ended October 31, 2007. The
decrease is the result of several factors, including the soft economy, increased
regional competition, pricing pressures, and continued migration of commercial
accounts to slot machine style gaming.  Box net revenues decreased
$208,000 for the 53 weeks ended November 2, 2008, or 1.8% to $11.5 million from
$11.7 million compared to the 7 months ended October 31,
2007.   The continued softness in the Louisiana market affected
VLT sales, as did delays in obtaining approvals on gaming products in
Montana.  Financial results for the Box segment may continue to be
volatile from quarter to quarter until we have broadened our revenue base by
expanding into more VLT markets, and by penetrating into the Class III slot
machine markets, such as California and Nevada.





Cost
of Revenue





Bingo
cost of revenue for the 53 weeks ended November 2, 2008 decreased 2.9% to $19.1
million, or 43.5% of net revenue, from $19.7 million, or 41.8% of net revenue,
compared to the 12 months ended October 31, 2007. This decrease is primarily due
to $1.5 million less bingo equipment depreciation over the comparable period in
2007, mainly from certain Travelers becoming fully depreciated in 2007, offset
in part by a $0.9 million increase in the cost of disposals, slow-moving and
obsolete materials as a result of the write-off of units and/or parts on older
product lines as customers migrate to the newer product lines.




Box
business cost of revenue decreased 8.7% to $6.3 million, or 54.5% of net revenue
for the 53 weeks ended November 2, 2008 from $6.9 million, or 58.7% of net
revenue compared to the 7 months ended October 31, 2007.  The decrease
in cost of revenue is primarily related to the decline in sales and the mix of
products sold.


-36-


Gross
Profit





Bingo
gross profit for the 53 weeks ended November 2, 2008 decreased 9.4% to $24.9
million, or 56.5% of net revenue, from $27.4 million or 58.2% of net revenue
compared to the 12 months ended October 31, 2007. The decrease in gross profit
margin is primarily due to the revenue decline as described above.




Box gross
profit increased 8.1% to $5.2 million, or 45.5% of net revenue for the 53 weeks
ended November 2, 2008, from $4.8 million or 41.3% of net revenue compared to
the 7 months ended October 31, 2007.  The increase is due to an
increase in sales of higher margin equipment and software.





Operating
Expenses





Bingo
general and administrative costs decreased 3.6% to $7.6 million for the 53 weeks
ended November 2, 2008, from $7.9 million for the 12 months ended October 31,
2007. The decrease is primarily due to lower outside legal fees as the activity
on major lawsuits, such as the Trend case, has declined since
2007.  Box general and administrative costs increased 108.9% or $1.8
million to $3.4 million for the 53 weeks ended November 2, 2008 from $1.6
million for the 7 months ended October 31, 2007 primarily due to a full fiscal
year of expenses. Amortization of the identifiable intangible assets purchased
in the Summit Gaming acquisition increased $0.5 million due to the inclusion of
53 weeks reported for 2008 compared to 7 months reported for the fiscal year
ended October 31, 2007.




Bingo
sales and marketing expenses remained flat for the 53 weeks ended November 2,
2008, compared to the 12 months ended October 31, 2007. A decrease in
distributor commissions directly related to the decline in revenue, and a
decrease in advertising fees due to Canadian legislative changes, was offset by
an increase in employee costs related to additional
positions.   Box sales and marketing expenses remained flat for
the 53 weeks ended November 2, 2008, compared to the 7 months ended October 31,
2007.




Bingo
research and development expenses increased by $0.2 million to $3.0 million, for
the 53 weeks ended November 2, 2008, from $2.8 million compared to the 12 months
ended October 31, 2007. The increase is primarily due to higher employee costs
as a result of increased travel costs related to the GameTech Elite(R) testing
in the UK.  Box research and development expenses increased $1.5
million to $2.5 million for the 53 weeks ended November 2, 2008, from $1.0
million for the 7 months ended October 31, 2007.  The increase in the
box segment is primarily due to a full fiscal year of expenses in 2008, costs
expended for developing new product lines, such as the California Keno game
which was approved in August 2008, new hardware design and software development
for a major VLT contract, and increased licensing fees as we expand our
distributorship to new markets.




For the
53 weeks ended November 2, 2008, we recorded a goodwill impairment charge of
$10.8 million related to our acquisition of Summit compared to no goodwill
impairment charge for the 12 months ended October 31, 2007.  For more
information on goodwill impairment please see the section below.





There
were no gains on the sale of assets for box for the 53 weeks ended November 2,
2008 compared to $0.7 million related to the 7 months ended October 31,
2007.




There
were no loss legal contingencies recorded for the 53 weeks ended November 2,
2008, compared to $124,000 for the 12 months ended October 31,
2007.





Interest
Expense





Interest
expense of $4.6 million for the 53 weeks ended November 2, 2008 increased $2.3
million over the 12 months ended October 31, 2007. The increase is due to
interest paid on debt incurred to purchase Summit, debt incurred to purchase our
new corporate headquarters in Reno, Nevada, a prepayment penalty of $0.4 million
as a result of refinancing our credit facility, $0.7 million as a result of our
swap agreement valuation, and $0.8 million due to the write-off of debt
acquisition costs associated with our prior credit facility.   -37-


Impairment
of Investments




At
November 2, 2008, we held auction rate securities (“ARS”) with an aggregate
purchase price of approximately $3.9 million. With the liquidity issues
experienced in global credit and capital markets, the ARS held by us at November
2, 2008 experienced multiple failed auctions as the amount of securities
submitted for sale exceeded the amount of purchase orders.  We
determined the estimated fair value of these securities as of November 2, 2008
utilizing the standards set forth in FASB ASC 820.  Of the eight ARS
in our investment portfolio, three of them (having an aggregate purchase price
of approximately $1.6 million) consisted of Level II securities (as defined by
FASB ASC 820).  For these securities, fair value was measured using
the average sale price of recent observable transactions in the same
securities.  The five remaining ARS in our investment portfolio
(having an aggregate purchase price of approximately $2.3 million) were
classified as Level III (as defined by FASB ASC 820) as no direct market inputs
to make a pricing determination were available.  A discounted cash
flow analysis was used to determine the estimated fair value of these
securities.  Based largely upon the credit risks of the issuers and
the lack of an active trading market in these securities, risk-adjusted discount
rates were applied to determine the estimated fair value of our Level III
ARS.  Management determined that the estimated losses in these
securities were other-than-temporary and recorded an aggregate pre-tax
impairment charge of approximately $3.3 million for the 53 weeks ended November
2, 2008.





Goodwill
Impairment




In fiscal
2007, we acquired the assets of Summit Gaming and added $26.5 million to
goodwill, which included trade names of $1.6 million.  In addition, we
acquired $7.7 million in identifiable intangible assets which will be amortized
over 5 to 10 years. We conduct our annual goodwill impairment analysis during
the fourth quarter of each fiscal year, measured as of July 31.  We
assessed the value of its goodwill as of July 31 of 2006 and 2007 (our annual
review date) and concluded that goodwill was not impaired.  We
performed our 2008 annual impairment testing of goodwill and intangibles as of
July 31, 2008. Based on a combination of factors, including the current economic
environment, decreased revenues and increased costs, particularly of the box
segment, we recorded a noncash goodwill impairment associated with our
acquisition of Summit of $10.8 million in the fourth quarter of fiscal 2008. The
annual evaluation of goodwill and other non-amortizing intangible assets
requires the use of estimates about future operating results of each reporting
unit to determine their estimated fair value.  Changes in forecasted
operations can materially affect these estimates.  Once an impairment
of goodwill or other intangible assets has been recorded, it cannot be
reversed.




Income
Taxes




We
recorded our income tax provision at an effective rate of (28.3%) for the 53
weeks ended November 2, 2008, compared with 36.3% for the twelve months ended
October 31, 2007. The change in effective rate is primarily due to the goodwill
impairment recognized in the fourth quarter of the 53 weeks ended November 2,
2008.  The actual effective tax rate is different from the expected
federal rate of 34%, reflecting certain permanent differences between financial
accounting and tax accounting, and state and foreign tax
provisions.





Liquidity
and Capital Resources





We have
funded our operations to date primarily through cash from operations and debt
financing activities. This capital is for operations, research and development,
capital expenditures of equipment and associated support equipment, and
software. As of November 1, 2009, and November 2, 2008, we had a working capital
balance of $7.6 million and $9.1 million, respectively. The decrease in working
capital in 2009 was primarily due to a paydown of $5.0 million of the principal
long term debt.  As of November 1, 2009, our principal sources of
liquidity included cash and cash equivalents of $3.3 million and a $2.0 million
revolving credit facility with no amounts drawn.  On December 31,
2009, we borrowed $750 thousand of the $2.0 million revolving credit
facility.





Operating
activities provided $11.3 million of cash for the 52 weeks ended November 1,
2009 compared with $9.0 million for fiscal year 2008. The $11.3 million
consisted of a net loss of $10.5 million, adjusted positively by $8.3 million
for depreciation, amortization, obsolescence provisions, and loss on disposal of
equipment, $15.7 million loss on impairment of goodwill, $2.7 million impairment
of an obsolete gaming library related to the Summit acquisition, $1.6 million
provided by tax refunds, less a $4.0 million reversal of our loss contingencies,
less $7.1


-38-


million
increase in deferred taxes, plus $2.1 million in reduced inventory levels and
$2.6 million provided by other net changes in operating assets and liabilities.
During fiscal year 2008, the $9.0 million consisted of a net loss of $11.2
million, adjusted positively by $11.1 million for depreciation, amortization,
obsolescence provisions, and loss on disposal of equipment, $3.3 million from
the impairment of investments, $10.8 million loss on impairment on goodwill,
less $4.7 million increase in inventory plus a $2.7 million increase in deferred
revenue, and $1.1 million provided by other net changes in operating assets and
liabilities.





We used
approximately $4.4 million of cash in investing activities during fiscal
2009 compared to $9.5 million of cash used during fiscal 2008. During
fiscal 2009, the $4.4 million consisted of $6.8 million used for
capital expenditures, plus $2.6 million provided from restricted cash
for funding construction on our new headquarters, less $0.2 million for the
acquisition of intangibles.  During fiscal 2008, the $9.5 million
consisted of $7.2 million of expenditures for the acquisition of our new
headquarters, $3.8 million of capital expenditures, an increase of $2.6
million of restricted cash for funding our construction on new headquarters,
$0.1 million for payment on a royalty, and a net inflow of $4.2 million from
short-term investments.





Financing
activities used $9.6 million during fiscal 2009 compared to $2.9 million
provided during fiscal 2008. The $9.6 million used during fiscal 2009 included
payments on long-term debt of approximately $4.6 million, and a $5.0 million
principal pay down on long-term debt. The $2.9 million provided during fiscal
2008 included the issuance of $38.0 million in long-term debt under our new
credit facility offset by the concurrent repayment of long-term debt consisting
of $18.7 million for the term loan and $7.4 million for the revolver loan under
our prior facility. Also included were payments on long-term debt of
approximately $4.6 million, a $0.3 million payment for debt acquisition costs,
and the repurchase of our common stock for approximately $4.1
million.





In March
2007, we acquired substantially all of the assets of Summit Gaming for $40.9
million in cash. We financed the acquisition primarily with a credit facility
consisting of a term loan of $30.0 million and a revolving line of credit with a
limit of $10.0 million. On August 22, 2008, we terminated this credit facility
and prepaid all amounts outstanding as part of the requirements of our new
credit facility. We incurred a pre-payment penalty of $0.4 million on the
pre-payment of the term loan facility.  We also wrote-off $0.8 million
of debt acquisition costs related to our prior credit
facility.




Our
current credit facility provided a total of $40.0 million of financing, $38.0
million of which is in the form of a term loan and $2.0 million of which is in
the form of a revolving line of credit.  Proceeds from the current
credit facility were used to refinance our prior credit facility, acquire real
property, and for general corporate purposes.  The term loan matures
on August 28, 2013 with monthly interest payments based upon one-month LIBOR
rate plus 2.80% and quarterly principal payments of approximately $1.1 million
until the loan is repaid in full.  The revolver matures on August 31,
2010, with monthly interest-only payments due on the last day of each month with
an interest rate of either (i) the higher of the Agent's prime rate or the
Federal Funds rate plus 0.50% (a "Base Rate Loan) minus 0.25%, or (ii) 1, 2, 3,
6, or 12-month LIBOR rate plus 2.0%. With respect to the term loan, the Company
entered into an interest rate swap agreement which exchanged the variable
one-month LIBOR rate for a fixed LIBOR rate of 3.99% per annum effective August
22, 2008 through the maturity of the loan.





We
believe that cash flows from operations, cash, cash equivalents, and amounts
available under our current credit facility will be sufficient to support our
operations, provide for budgeted capital expenditures, and meet liquidity
requirements through the remainder of fiscal 2010. Our long-term liquidity
requirements depend on many factors, including the rate at which we expand our
business and whether we do so internally or through acquisitions. In addition,
we may pursue strategic opportunities that could require us to fund our portion
of operating expenses of such ventures and may require us to advance additional
amounts should any partners in such ventures be unable to meet unanticipated
capital requirements or similar funding events. To the extent that the funds
generated from the sources described above are insufficient to fund our
activities in the long term, we may be required to raise additional funds
through public or private financing. No assurance can be given that the
additional financing will be available or that, if it is available, it will be
on terms acceptable to us.  In the event we were unable to raise
additional capital if needed, further measures would be necessary, including the
delay or reduction of our operations, research and development and other
activities. Certain of these measures may require consent or approvals,
including our lenders under the current credit facility, certain regulatory
bodies, and others, and there are no assurances such consent or approvals could
be obtained. Management does not believe that these limitations will adversely
affect our operations or our ability to acquire necessary capital
equipment.  For additional information, see Note 4
“Credit Agreements and
Acquisition of Real Property” to our Consolidated Financial Statements
contained herein.


-39-


Contractual
Obligations





The
following table presents information on contractual obligations held as of
November 1, 2009:




Payments
      Due by Period(in
      thousands):Total
              
              
              Less
      than 1 year
              
              
              1
      - 2 years
              
              
              3
      - 5 years
              
              
              More
      than 5 yearsLong-Term
      Debt Obligations:Term
      Loan Facility
              
              $
              27,413
              
              
              $
              4,471
              
              
              $
              8,942
              
              
              $
              14,000
              
              
              $
              -Estimated
      Interest Payments
              
              
              5,050
              
              
              
              1,747
              
              
              
              2,587
              
              
              
              716
              
              
              
              -Other
      Notes Payable
              
              
              112
              
              
              
              50
              
              
              
              62
              
              
              
              -
              
              
              
              -Operating
      Leases
              
              
              212
              
              
              
              177
              
              
              
              31
              
              
              
              4
              
              
              
              -Total
              
              $
              32,787
              
              
              $
              6,445
              
              
              $
              11,622
              
              
              $
              14,720
              
              
              $
              -


Purchase
Commitments





From time
to time, we enter into commitments with our vendors to purchase box parts, bingo
terminals and support equipment at fixed prices and/or guaranteed quantities.
During the 53 weeks ended November 2, 2008, we entered into an agreement with a
vendor for $3.4 million to purchase box hardware for a sale expected to deliver
in early 2009.  As of November 1, 2009 all of this commitment was
fulfilled.  We also entered into a construction agreement in September
2008 with a general contractor for $2.7 million for improvements to our new
corporate headquarters which was funded by proceeds from our current credit
facility.  As of November 1, 2009, this commitment was
fulfilled.  Various other additional purchase commitments were made in the
ordinary course of business throughout fiscal 2009, of which $0.2 million was
outstanding as of November 1, 2009.





In
December 2009, we also entered into an agreement for $1.5 million to license the
design and right to manufacture and sell a portable hand-held gaming
platform.  As of January 29, 2010, $150 thousand of this commitment was
fulfilled.  This agreement requires a $600 thousand payment in February
2010 and three quarterly payments of $250 thousand to be paid by the end of
November 2010.





Off
Balance Sheet Arrangements





None.




Item
7A.                      Quantitative
and Qualitative Disclosures About Market Risk




At
November 1, 2009, we held auction rate securities (“ARS”) with an aggregate
purchase price of approximately $3.9 million. With the liquidity issues
experienced in global credit and capital markets, the ARS held by us at November
1, 2009 have experienced multiple failed auctions as the amount of securities
submitted for sale exceeded the amount of purchase orders.  Based on
the fair value of the investments and an analysis of other-than temporary
impairment factors, we recorded a pre-tax impairment charge of approximately
$3.3 million during the 53 weeks ended November 2, 2008.  If
uncertainties in the credit and capital markets deteriorate further or we
experience any additional rating downgrades on any of our ARS, we may incur up
to an additional $0.6 million impairment charge related to our ARS (representing
the aggregate fair value of our ARS at November 1, 2009), which could negatively
affect our financial condition, cash flow and reported
earnings.  During the first quarter of fiscal 2010, we received a
tender offer for one of the eight ARS and were able to sell them, providing $0.5
million in cash.





On August
22, 2008, we terminated our previous credit facility. Concurrently, we entered
into a Senior Secured Credit Facility (the “Current Credit Facility”) with U.S.
Bank N.A. as lender, lead arranger and administrative agent, and Bank of the
West as lender (collectively “Lenders”) that provides up to $40.0 million of
financing for our company, $38.0 million of which is represented by a term loan
note and $2 million of which is a Senior Secured Revolving Credit Facility. U.S.
Bank N.A. will hold up to $25.0 million of the Current Credit Facility and Bank
of the West
will hold up to $15.0 million. During
the fourth quarter of fiscal 2009, the Company anticipated a collateral
shortfall was probable, which would have triggered a mandatory prepayment of
approximately $1.9 million.  To avoid triggering a collateral
shortfall and to reduce the outstanding balance under the term loan, the Company
voluntarily prepaid $5 million from existing cash resources.  As a
result of both the voluntary prepayment and scheduled mandatory quarterly
principal payment, the outstanding balance under our term loan was reduced from
$33.5 million at August 2, 2009 to $27.4 million at November 1,
2009.


-40-


The term
loan requires monthly interest payments which began on September 30, 2008, and
quarterly principal payments of approximately $1.1 million which began on
October 31, 2008, until its maturity on August 28, 2013, when the balance will
be due in full. The interest rate for the term loan varies based upon the
one-month LIBOR rate plus 2.80%.  With respect to the term loan, we
also entered into an interest rate swap agreement with U.S. Bank
N.A., which exchanged the variable one-month LIBOR rate of the term loan
for a fixed LIBOR rate of 3.99% per annum effective August 22, 2008,
through the maturity of the term loan. The average interest rate is
6.79%.  Because the interest rate on the term loan is fixed under a
LIBOR swap agreement, increases in interest rates will not affect our cash flow.
However, if we find it necessary to accelerate the amortization of the term
loan, we could be required to pay early breakage fees on the LIBOR contracts in
the event that interest rates decrease. Assuming the $27.4 million balance
outstanding as of November 1, 2009, and the effective rate of interest rate of
6.79%, our breakage fee on the full outstanding balance if LIBOR declined by 50
basis points would be approximately $0.5 million, and an increase of 100 basis
points would result in a breakage fee of approximately $1.1 million. We do not
anticipate the need to accelerate that amortization of the term loan at any time
for the remainder of fiscal 2010.




Item
8.              Financial
Statements and Supplementary Data




The
consolidated financial statements and supplementary data are as set forth in the
“Index To Consolidated Financial Statements” on page F-1.




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




Not
applicable.




Item
9A.                      Controls
and Procedures




Evaluation
of Disclosure Controls and Procedures





We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC rules and forms, including, without
limitation, controls and procedures designed to ensure that such information is
accumulated and communicated to our management, including our Chief Executive
Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow
timely decisions regarding required disclosure.





We have
evaluated, with the participation of our Chief Executive Officer and Chief
Financial Officer, the effectiveness of our disclosure controls and procedures
as of November 1, 2009. Based on this evaluation, our Chief Executive Officer
and Chief Financial Officer have concluded that our disclosure controls and
procedures are effective as of November 1, 2009 to ensure that the information
required to be disclosed by us in the reports we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms, including that
such information is accumulated and communicated to our management, including
our Chief Executive Officer and Chief Financial Officer, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.





Internal Control
over Financial Reporting





Management’s
Report on Internal Control Over Financial Reporting


Internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) refers to the process designed by, or under the
supervision of, our CEO and CFO, and effected by our board of directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles.  Management
is responsible for establishing and maintaining adequate internal control over
our financial reporting.


-41-
  We have
evaluated the effectiveness of our internal control over financial reporting as
of November 1, 2009.  This evaluation was performed using the Internal Control – Integrated
Frameworkdeveloped by the Committee of Sponsoring Organizations of the
Treadway Commission.  Based on such evaluation, management has
concluded that, as of such date, our internal control over financial reporting
was effective.





This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities Exchange Commission that permit the Company to provide only
management’s report in this annual report.





Changes
in Internal Control over Financial Reporting





There
have been no changes in our internal control over financial reporting during the
fourth quarter ended November 1, 2009, that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.




Item
9B.                      Other
Information




Not
applicable.




PART
III









Item
10.                      Directors
and Executive Officers and Corporate Governance




The
information required by this item is incorporated by reference to the definitive
proxy statement to be filed pursuant to Regulation 14A of the Exchange Act for
our 2010 Annual Meeting of Stockholders.




Item
11.                      Executive
Compensation




The
information required by this item is incorporated by reference to the definitive
proxy statement to be filed pursuant to Regulation 14A of the Exchange Act for
our 2010 Annual Meeting of Stockholders.




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




The
information required by this item is incorporated by reference to the definitive
proxy statement to be filed pursuant to Regulation 14A of the Exchange Act for
our 2010 Annual Meeting of Stockholders.




Item
13.                      Certain
Relationships and Related Transactions and Director Independence




The
information required by this item is incorporated by reference to the definitive
proxy statement to be filed pursuant to Regulation 14A of the Exchange Act for
our 2010 Annual Meeting of Stockholders.   -42-
  Item
14.                      Principal
Accountants Fees and Services





The
information required by this item is incorporated by reference to the definitive
proxy statement to be filed pursuant to Regulation 14A of the Exchange Act for
our 2010 Annual Meeting of Stockholders.







PART
IV







Item
15.                      Exhibits
and Financial Statement Schedules




(a)
  Financial Statements
and Financial Statement Schedules





(1)
            Consolidated
      Financial Statements.


Consolidated
Financial Statements are listed in the Index to Consolidated Financial
Statements on page F-1 of this report.





(2)
            Consolidated
      Financial Statement Schedules.


No
financial statement schedules are included because they are not applicable, are
not required, or because required information is included in the
consolidated financial statements or the notes thereto.





(b)  
Exhibits





Exhibit


Number                                 Description
of Exhibit




2.1
            Asset
      Purchase Agreement dated August 30, 2006 between GameTech International,
      Inc. and Summit Amusement & Distributing Ltd.
  (9)


3.1
            Certificate
      of Incorporation of the Registrant, as amended
  (1)


3.2
            Certificate
      of Designation of Series A Junior Participating Preferred Stock of the
      Registrant (6)


3.3
            Third
      Amended and Restated Bylaws of the Registrant
  (7)


4.1
            GameTech
      International, Inc. Registration Rights Agreement
  (2)


4.2
            Rights
      Agreement, dated as of March 7, 2003, between GameTech International, Inc.
      and Mellon Investor Services, LLC, as rights agent.  Amendment
      No. 1 to Rights Agreement dated as of July 16, 2009, between GameTech
      International, Inc. and Mellon Investor Services, L.L.C., as rights agent
      (5)


4.3
            Specimen
      Common Stock Certificate (6)


10.1
            GameTech
      International, Inc. 1997 Incentive Stock Plan
  (1)


10.2
            GameTech
      International, Inc. 2001 Restricted Stock Plan
  (3)


10.3
            Amended
      and Restated 1997 Incentive Stock Plan
(8)


10.4
            Form
      of Restricted Stock Agreement (8)


10.5
            Form
      of Stock Option Agreement (8)


10.6
            Form
      of Stock Unit Award Agreement (8)


10.12
            Lease
      Agreement dated November 18, 1999 between the Registrant and Cypress
      Corporate Services, including addendum to lease and first amendment dated
      April 17, 2000 (4)


10.18
            Letter
      Agreement by and between the Registrant and Marcia R. Martin, dated as of
      May 1, 2008 (10)


10.19
            Purchase
      and Sale Agreement for the purchase of Real Property between the
      Registrant and RKD Holdings, L.L.C., dated as of March 31, 2008
      (14)


10.20
            First
      Amendment to Purchase and Sale Agreement for the purchase of Real Property
      between the Registrant and RKD Holdings, L.L.C., dated as of May 27, 2008
      (14)


10.21
            Financing
      agreement dated August 22, 2008, by and among GameTech International, Inc.
      and the lenders named herein, and U.S. Bank N.A., as collateral and
      administrative agent (12)


10.22
            Second
      Amendment to Purchase and Sale Agreement for the purchase of Real Property
      between the Registrant and RKD Holdings, L.L.C., dated as of July 28, 2008
      (11)


10.23
            Letter
      Agreement by and between the Registrant and Timothy J. Minard, dated as of
      September 29, 2008 (13)


10.24
            First
      Amendment to August 22, 2008 Financing Agreement, dated as of January 28,
      2009


21
            List
      of Subsidiaries


23
            Consent
      of Independent Registered Public
Accountant


31.1
            Certification
      of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a)
      promulgated under the Securities Exchange Act of 1934, as
      amended.


31.2
            Certification
      of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a),
      promulgated by the Securities Exchange Act of 1934, as
    amended


32.1
            Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002


32.2
            Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002


-43-


EXHIBIT
INDEX





(1)
            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.


(2)
            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.


(3)
            Incorporated
      by reference to Exhibit 10.1 to the Registrant’s Registration Statement on
      Form S-8 (Registration No. 333-72886) as filed with the Commission on or
      about November 7, 2001.


(4)
            Incorporated
      by reference to Exhibit 10.16 to the Registrant’s Annual Report on Form
      10-K for the fiscal year ended October 31, 2001 as filed with the
      Commission on or about January 29, 2002, Commission File No.
      000-23401.


(5)
            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, Commission File No.
000-23401.


(6)
            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, Commission File No.
      000-23401.


(7)
            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, Commission File No.
      000-23401.


(8)
            Incorporated
      by reference to Exhibits 10.34(a), (b), (c) and (d) to the Registrant's
      Current Report on Form 8-K dated March 28, 2006 as filed with the
      Commission on or about April 3,
2006.


(9)
            Incorporated
      by reference to Exhibits 2.1 to the Registrant’s Current Report on Form
      8-K as filed with the Commission on or about August 31,
    2006.


(10)
            Incorporated
      by reference to Exhibit 99.1 to the Registrant's Current Report on Form
      8-K dated June 9, 2008 as filed with the Commission on or about June 12,
      2008.


(11)
            Incorporated
      by reference to Exhibit 99.1 to the Registrant's Current Report on Form
      8-K dated July 28, 2008 as filed with the Commission on or about August
      31, 2008.


(12)
            Incorporated
      by reference to Exhibit 10.1 to the Registrant's Current Report on Form
      8-K dated August 22, 2008 as filed with the Commission on or about August
      28, 2008.


(13)
            Incorporated
      by reference to Exhibit 10.1 to the Registrant's Current Report on Form
      8-K dated September 23, 2008 as filed with the Commission on or about
      September 30, 2008.


(14)           Incorporated
by reference to Exhibits 99.1 and 99.2 to the Registrant’s Current Report on
Form 8-K dated June 5, 2008 as filed with the Commission on or about June 5,
2008.




-44-


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


GAMETECH
      INTERNATIONAL, INC.By:
              /S/ Jay M. MeilstrupJay
      M. MeilstrupPresident,
      Chief Executive Officer, and DirectorDated:
      January 29, 2010
              (Principal
      Executive Officer)








Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
 
 
 Signature
              
              Title
              
              Date/s
      / RICHARD T. FEDOR
              
              Executive
      Chairman of the Board of Directors
              
              January
      29, 2010Richard
      T. Fedor/s/
      JAY M. MEILSTRUP
              
              President,
      Chief Executive Officer and Director
              
              January
      29, 2010Jay
      M. Meilstrup
              
              (Principal
      Executive Officer )/s/
      MARCIA R. MARTIN
              
              Chief
      Financial Officer, Treasurer, and Secretary
              
              January
      29, 2010Marcia
      R. Martin
              
              (Principal
      Financial Officer and Principal Accounting Officer)/s
      / RICHARD H. IRVINE
              
              Director
              
              January
      29, 2010Richard
      H. Irvine/s/
      SCOTT H. SHACKELTON
              
              Director
              
              January
      29, 2010Scott
      H. Shackelton/s/
      DONALD K. WHITAKER
              
              Director
              
              January
      29, 2010Donald
      K. Whitaker
 
 -45-
 GameTech
      International, Inc.Index
      to Consolidated Financial StatementsReport
      of Independent Registered Public Accounting Firm
                
                F-2Consolidated
      Financial StatementsConsolidated
      Balance Sheets
                
                F-3Consolidated
      Statements of Operations
                
                F-4Consolidated
      Statements of Stockholders' Equity
                
                F-5Consolidated
      Statements of Cash Flows
                
                F-6Notes
      to Consolidated Financial Statements
                
                F-8







F-1








Report
of Independent Registered Public Accounting Firm








To
the Board of Directors and Stockholders


GameTech
International, Inc.





We have
audited the accompanying consolidated balance sheets of GameTech International,
Inc. (a Delaware corporation) and its subsidiaries (collectively, the “Company”)
as of November 1, 2009 and November 2, 2008, and the related
consolidated statements of operations, stockholders’ equity, and cash flows for
each of the three years in the period ended November 1,
2009.  These financial statements are the responsibility of the
Company’s management.  Our responsibility is to express an opinion on
these financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform an audit of its
internal control over financial reporting.  Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting.  Accordingly, we express no
such opinion.  An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.





In our
opinion, the consolidated financial statements referred above present fairly, in
all material respects, the consolidated financial position of GameTech
International, Inc. and its subsidiaries as of November 1, 2009 and
November 2, 2008, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended
November 1, 2009 in conformity with accounting principles generally
accepted in the United States of America.





/S/
GRANT THORNTON LLP








Reno,
Nevada


January
29, 2010








F-2





GAMETECH
INTERNATIONAL, INC.


CONSOLIDATED
BALANCE SHEETS


(In
thousands, except share and per share amounts)






November
      1, 2009
              
              
              November
      2, 2008ASSETS:Current
      assets:Cash
      and cash equivalents
              
              $
              3,337
              
              
              $
              6,076Short-term
      investments
              
              
              105
              
              
              
              -Accounts
      receivable, net of allowances of $1,776 in 2009 and $1,217 in
      2008
              
              
              7,106
              
              
              
              6,303Inventory
              
              
              6,819
              
              
              
              8,976Deposits
              
              
              554
              
              
              
              42Prepaid
      expenses and other current assets
              
              
              908
              
              
              
              912Prepaid
      income taxes
              
              
              -
              
              
              
              1,634Current
      portion of notes receivable
              
              
              -
              
              
              
              119Deferred
      income taxes
              
              
              1,736
              
              
              
              1,825Total
      current assets
              
              
              20,565
              
              
              
              25,887Property,
      bingo equipment, furniture and other equipment, net
              
              
              20,808
              
              
              
              22,884Goodwill,
      net
              
              
              10,184
              
              
              
              25,900Intangibles,
      less accumulated amortization of $9,380 in 2009 and $6,198 in
      2008
              
              
              2,669
              
              
              
              6,302Restricted
      cash
              
              
              -
              
              
              
              3,158Notes
      receivable, net of current portion
              
              
              -
              
              
              
              1Deferred
      income taxes
              
              
              11,754
              
              
              
              4,539Debt
      acquisition costs, net
              
              
              222
              
              
              
              258Investments
              
              
              461
              
              
              
              566Total
      assets
              
              $
              66,663
              
              
              $
              89,495LIABILITIES
      AND STOCKHOLDERS’ EQUITY:Current
      liabilities:Accounts
      payable
              
              $
              933
              
              
              $
              2,278Accrued
      payroll and related obligations
              
              
              1,216
              
              
              
              1,168Accrued
      loss contingencies
              
              
              -
              
              
              
              4,022Income
      taxes payable
              
              
              1,083
              
              
              
              -Current
      portion of long-term debt
              
              
              4,521
              
              
              
              4,509Deferred
      revenue
              
              
              3,482
              
              
              
              3,502Other
      accrued liabilities
              
              
              1,712
              
              
              
              1,285Total
      current liabilities
              
              
              12,947
              
              
              
              16,764Long-term
      debt, net of current portion
              
              
              23,003
              
              
              
              32,652Interest
      rate swap
              
              
              1,373
              
              
              
              668Deferred
      income taxes
              
              
              -
              
              
              
              1Total
      liabilities
              
              
              37,323
              
              
              
              50,085Stockholders’
      equity:Common
      stock, $0.001 par value: 40,000,000 shares authorized; 14,480,537 shares
      in 2009, 14,480,537 shares in 2008
              
              
              14
              
              
              
              14Additional
      paid in capital
              
              
              51,942
              
              
              
              51,561Retained
      earnings (deficit)
              
              
              (9,959
              )
              
              
              543Treasury
      stock, at cost, 2,744,672 shares in 2009 and 2,773,478 shares in
      2008
              
              
              (12,657
              )
              
              
              (12,708
              )Total
      stockholders’ equity
              
              
              29,340
              
              
              
              39,410Total
      liabilities and stockholders’ equity
              
              $
              66,663
              
              
              $
              89,495


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





F-3




GAMETECH
INTERNATIONAL, INC.


CONSOLIDATED STATEMENTS OF
OPERATIONS


(In
thousands, except per share amounts)





52
      Weeks Ended
              
              
              53
      Weeks Ended
              
              
              Twelve
      Months EndedNovember
      1, 2009
              
              
              November
      2, 2008
              
              
              October
      31, 2007Net
      revenue
              
              $
              47,794
              
              
              $
              55,447
              
              
              $
              58,805Cost
      of revenue
              
              
              19,952
              
              
              
              25,365
              
              
              
              26,542Gross
      profit
              
              
              27,842
              
              
              
              30,082
              
              
              
              32,263Operating
      expenses:General
      and administrative
              
              
              10,493
              
              
              
              11,017
              
              
              
              9,538Sales
      and marketing
              
              
              11,037
              
              
              
              10,519
              
              
              
              10,519Research
      and development
              
              
              5,401
              
              
              
              5,591
              
              
              
              3,865Goodwill
      impairment
              
              
              15,716
              
              
              
              10,780
              
              
              
              -Intangible
      impairment
              
              
              2,660
              
              
              
              -
              
              
              
              -Gain
      on sale of assets
              
              
              -
              
              
              
              -
              
              
              
              (656
              )Loss
      contingencies
              
              
              (4,022
              )
              
              
              -
              
              
              
              124Total
      operating expenses
              
              
              41,285
              
              
              
              37,907
              
              
              
              23,390Income
      (loss) from operations
              
              
              (13,443
              )
              
              
              (7,825
              )
              
              
              8,873Interest
      expense
              
              
              (3,046
              )
              
              
              (4,624
              )
              
              
              (2,342
              )Impairment
      of investments
              
              
              -
              
              
              
              (3,306
              )
              
              
              -Other
      income (expense), net
              
              
              7
              
              
              
              181
              
              
              
              807Income
      (loss) before income taxes
              
              
              (16,482
              )
              
              
              (15,574
              )
              
              
              7,338Provision
      (benefit) for income taxes
              
              
              (5,980
              )
              
              
              (4,411
              )
              
              
              2,667Net
      income (loss)$
              (10,502
              )
              
              $
              (11,163
              )
              
              $
              4,671Net
      income (loss) per share:Basic
              
              $
              (0.90
              )
              
              $
              (0.92
              )
              
              $
              0.37Diluted
              
              $
              (0.90
              )
              
              $
              (0.92
              )
              
              $
              0.36Shares
      used in calculating net income (loss) per share:Basic
              
              
              11,710
              
              
              
              12,190
              
              
              
              12,566Diluted
              
              
              11,710
              
              
              
              12,190
              
              
              
              12,991


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





F-4








GAMETECH
INTERNATIONAL, INC.


CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY


(In
thousands, except share amounts)




Common
      Stock
              
              
              
              
              
              
              
              
              Treasury
      StockShares
              
              
              Amount
              
              
              Capital
      in excess of par
              
              
              Retained
      Earnings (Deficit)
              
              
              Shares
              
              
              Amount
              
              
              Related
      Party Receivable
              
              
              TotalBalances
      at October 31, 2006
              
              
              14,371,547
              
              
              $
              14
              
              
              $
              50,881
              
              
              $
              7,035
              
              
              
              1,855,325
              
              
              $
              (8,096
              )
              
              $
              -
              
              
              $
              49,834Issuance
      of common stock upon exercise of stock options
              
              
              101,185
              
              
              
              -
              
              
              
              350
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              350Stock
      based compensation
              
              
              -
              
              
              
              -
              
              
              
              (128
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (128
              )Tax
      benefit of stock option exercises
              
              
              -
              
              
              
              -
              
              
              
              252
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              252Related
      party receivable
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (500
              )
              
              
              (500
              )Net
      income (loss)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              4,671
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              4,671Balances
      at October 31, 2007
              
              
              14,472,732
              
              
              
              14
              
              
              
              51,355
              
              
              
              11,706
              
              
              
              1,855,325
              
              
              
              (8,096
              )
              
              
              (500
              )
              
              
              54,479Forfeiture
      of restricted stock
              
              
              -
              
              
              
              -
              
              
              
              (76
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (76
              )Issuance
      of common stock to employees
              
              
              7,805
              
              
              
              -
              
              
              
              16
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              16Stock
      based compensation
              
              
              -
              
              
              
              -
              
              
              
              271
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              271Tax
      benefit of stock option exercises
              
              
              -
              
              
              
              -
              
              
              
              (5
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (5
              )Related
      party receivable
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              500
              
              
              
              500Purchases
      of treasury stock
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              918,153
              
              
              
              (4,612
              )
              
              
              -
              
              
              
              (4,612
              )Net
      income (loss)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (11,163
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (11,163
              )Balances
      at November 2, 2008
              
              
              14,480,537
              
              
              
              14
              
              
              
              51,561
              
              
              
              543
              
              
              
              2,773,478
              
              
              
              (12,708
              )
              
              
              -
              
              
              
              39,410Forfeiture
      of restricted stock
              
              
              -
              
              
              
              -
              
              
              
              (29
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (29
              )Restricted
      stock issued to employees
              
              
              -
              
              
              
              -
              
              
              
              (54
              )
              
              
              -
              
              
              
              (29,596
              )
              
              
              53
              
              
              
              -
              
              
              
              (1
              )Stock
      based compensation
              
              
              -
              
              
              
              -
              
              
              
              498
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              498Tax
      benefit of stock option exercises
              
              
              -
              
              
              
              -
              
              
              
              (34
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (34
              )Repurchase
      of common stock for treasury
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              790
              
              
              
              (2
              )
              
              
              -
              
              
              
              (2
              )Net
      income (loss)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (10,502
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (10,502
              )Balances
      at November 1, 2009
              
              
              14,480,537
              
              
              $
              14
              
              
              $
              51,942
              
              
              $
              (9,959
              )
              
              
              2,744,672
              
              
              $
              (12,657
              )
              
              $
              -
              
              
              $
              29,340


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





F-5





GAMETECH
INTERNATIONAL, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In
thousands)




52
      Weeks Ended
              
              
              53
      Weeks Ended
              
              
              Twelve
      Months EndedNovember
      1, 2009
              
              
              November
      2, 2008
              
              
              October
      31, 2007Cash
      flows from operating activities:Net
      income (loss)
              
              $
              (10,502
              )
              
              $
              (11,163
              )
              
              $
              4,671Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Depreciation
      and amortization
              
              
              7,664
              
              
              
              10,108
              
              
              
              11,544Impairment
      of Goodwill
              
              
              15,716
              
              
              
              10,780
              
              
              
              -Intangible
      Impairment
              
              
              2,660
              
              
              
              -
              
              
              
              -Obsolescence
      and loss on disposal of bingo terminals and related
    equipment
              
              
              514
              
              
              
              957
              
              
              
              175Loss
      (gain) on disposal of furniture and other equipment
              
              
              93
              
              
              
              (8
              )
              
              
              65Issuance
      of note receivable for sale of inventory
              
              
              -
              
              
              
              -
              
              
              
              (247
              )Gain
      on sale of participation equipment
              
              
              -
              
              
              
              -
              
              
              
              (656
              )Loss
      on investment impairment
              
              
              -
              
              
              
              3,306
              
              
              
              -Stock
      compensation expense
              
              
              436
              
              
              
              206
              
              
              
              (124
              )Deferred
      income taxes
              
              
              (7,125
              )
              
              
              (3,710
              )
              
              
              (667
              )Amortization
      of debt acquisition costs
              
              
              56
              
              
              
              848
              
              
              
              -Interest
      rate swap
              
              
              705
              
              
              
              668
              
              
              
              -Interest
      on investments
              
              
              -
              
              
              
              (347
              )
              
              
              (365
              )Interest
      on restricted cash
              
              
              -
              
              
              
              (14
              )
              
              
              (19
              )Other
      changes in operating assets and liabilities:Accounts
      receivable, net
              
              
              (803
              )
              
              
              2,282
              
              
              
              (2,206
              )Deposits
              
              
              4
              
              
              
              (28
              )
              
              
              3Inventory
              
              
              2,130
              
              
              
              (4,678
              )
              
              
              (986
              )Prepaid
      taxes
              
              
              1,634
              
              
              
              (1,558
              )
              
              
              (13
              )Restricted
      short-term investments
              
              
              -
              
              
              
              -
              
              
              
              4,515Prepaid
      expenses and other current assets
              
              
              (10
              )
              
              
              (67
              )
              
              
              (115
              )Notes
      receivable
              
              
              120
              
              
              
              128
              
              
              
              -Income
      taxes payable
              
              
              1,083
              
              
              
              -
              
              
              
              (294
              )Accounts
      payable
              
              
              468
              
              
              
              (1,312
              )
              
              
              (1,332
              )Accrued
      payroll and related obligations
              
              
              48
              
              
              
              94
              
              
              
              134Accrued
      loss contingencies
              
              
              (4,022
              )
              
              
              -
              
              
              
              124Deferred
      revenues
              
              
              (20
              )
              
              
              2,735
              
              
              
              767Other
      accrued liabilities
              
              
              427
              
              
              
              (178
              )
              
              
              (158
              )Net
      cash provided by operating activities
              
              $
              11,276
              
              
              $
              9,049
              
              
              $
              14,816


F-6





GAMETECH
INTERNATIONAL, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)


(In
thousands)




52
      Weeks Ended
              
              
              53
      Weeks Ended
              
              
              Twelve
      Months EndedNovember
      1, 2009
              
              
              November
      2, 2008
              
              
              October
      31, 2007Cash
      flows from investing activities:Proceeds
      from sale of short-term investments
              
              
              -
              
              
              
              10,238
              
              
              
              18,034Acquisition
      of intangibles
              
              
              (165
              )
              
              
              (100
              )
              
              
              -Payments
      for purchase of short-term investments
              
              
              -
              
              
              
              (6,000
              )
              
              
              (18,027
              )Capital
      expenditures for property, bingo equipment, furniture, and other
      equipment
              
              
              (6,847
              )
              
              
              (10,965
              )
              
              
              (6,211
              )Restricted
      cash for capital expenditures
              
              
              2,641
              
              
              
              (2,642
              )
              
              
              -Payment
      for the acquisition of Summit Amusement & Distributing,
      Ltd
              
              
              -
              
              
              
              -
              
              
              
              (41,401
              )Proceeds
      from sale of assets
              
              
              -
              
              
              
              -
              
              
              
              1,523Net
      cash (used in) investing activities
              
              $
              (4,371
              )
              
              $
              (9,469
              )
              
              $
              (46,082
              )Cash
      flows from financing activities:Proceeds
      from issuance of long-term obligations
              
              
              -
              
              
              
              38,000
              
              
              
              38,946Payments
      on long-term obligations
              
              
              (9,622
              )
              
              
              (30,755
              )
              
              
              (9,563
              )Payment
      for debt acquisition costs
              
              
              (20
              )
              
              
              (267
              )
              
              
              -Tax
      benefit from stock options exercised
              
              
              -
              
              
              
              -
              
              
              
              252Cash
      paid to related party for stock repurchase
              
              
              -
              
              
              
              -
              
              
              
              (500
              )Repurchase
      of common stock for treasury
              
              
              (2
              )
              
              
              (4,112
              )
              
              
              -Proceeds
      from issuance of common stock
              
              
              -
              
              
              
              -
              
              
              
              350Net
      cash provided by (used in) financing activities
              
              $
              (9,644
              )
              
              $
              2,866
              
              
              $
              29,485Net
      increase (decrease) in cash and cash equivalents
              
              
              (2,739
              )
              
              
              2,446
              
              
              
              (1,781
              )Cash
      and cash equivalents at beginning of period
              
              
              6,076
              
              
              
              3,630
              
              
              
              5,411Cash
      and cash equivalents at end of period
              
              $
              3,337
              
              
              $
              6,076
              
              
              $
              3,630Supplemental
      cash flow information:Cash
      paid during the period for:Interest
              
              $
              2,411
              
              
              $
              2,834
              
              
              $
              2,282Income
      taxes
              
              $
              230
              
              
              $
              918
              
              
              $
              2,164Non-cash
      investing and financing activities:Acquisition
      of assets included in accounts payable
              
              $
              169
              
              
              $
              1,981
              
              
              $
              485Settlement
      of related party receivable in the company's common stock
              
              $
              -
              
              
              $
              500
              
              
              $
              -Issuance
      of note payable for insurance
              
              $
              -
              
              
              $
              157
              
              
              $
              -Notes
      payable for the purchase of a patent
              
              $
              -
              
              
              $
              -
              
              
              $
              250


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





F-7











GAMETECH
INTERNATIONAL, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


November
1, 2009, November 2, 2008, and October 31, 2007





1.
Business and Summary of Significant Accounting Policies





Fiscal
Year





The
Company reports on a 52/53 week fiscal year which began with the period ending
on the first Sunday in November for 2008.  Fiscal year ending November
1, 2009 includes 52 weeks versus the fiscal year ending November 2, 2008 which
had 53 weeks.  The fiscal year ending October 31, 2007 was on a twelve
month calendar basis.





Description
of Business





GameTech
International, Inc. (the "Company") was incorporated in Delaware on
April 18, 1994. The Company operates two business segments: the design,
development, and marketing of interactive electronic bingo systems consisting of
portable and fixed-based systems under contractual arrangements with terms
generally ranging from month-to-month to three years with bingo hall customers
and wireless server-based gaming technologies (collectively referred to as our
“bingo business”); and the design, development, manufacturing, and marketing of
video lottery terminals, slot machine equipment, and related software
(collectively referred to as our “box business”).    As of
November 1, 2009, the Company had bingo systems in service in 40 states and four
foreign countries and sales of boxes and related software and equipment in 13
states and various Native American locations.





Consolidation
Principles





The
Company’s consolidated financial statements include the accounts of GameTech
International, Inc. and its wholly-owned subsidiaries (“GameTech”). All
significant inter-company accounts and transactions have been eliminated in
consolidation.





Reclassifications





Certain
reclassifications were made to the 2008 consolidated financial statements to
conform to the current year format.





Use of Estimates





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





Cash
and Cash Equivalents





The
Company considers all highly liquid investments with an original maturity of
three months or less at the date of purchase to be cash
equivalents.





Investment
Securities





Available-for-sale
securities are reported at fair value, with unrealized gains and losses recorded
in accumulated other comprehensive income (loss).  See Notes 13 and
15.


F-8


Bingo
Equipment, Furniture, and Other Equipment





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




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




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





Software
Development Capitalization





The
Company capitalizes costs related to the development of certain software
products according to GAAP guidance, which 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. The Company is
capitalizing qualified costs of software developed for new products or for
significant enhancements to existing products. The Company ceases capitalizing
costs when the product is available for general release to the Company’s
customers. The Company amortizes 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 products’
economic life require management’s judgment. Any changes in key assumptions,
market conditions or other circumstances could result in an impairment of the
capitalized asset and a charge to the Company’s operating results.





Goodwill
and Intangibles





The
Company measures and tests goodwill for impairment at least annually, or more
often if there are indicators of impairment.  Depending upon the
results of that measurement, the recorded goodwill may be written down and
charged to income from operations when its carrying amount exceeds its estimated
fair value. Amortization is still required for identifiable intangible assets
with finite lives.





The
Company’s evaluation of the goodwill of its operations consists of two reporting
units, bingo and box. Goodwill of a reporting unit must be tested for impairment
on at least an annual basis.  The Company conducts its annual goodwill
impairment analysis during the fourth quarter of each fiscal year, measured as
of the last day of the third quarter.  In addition to an annual
review, the Company assesses the impairment of goodwill whenever events or
changes in circumstances indicate that the carrying value may be greater than
fair value.  Factors the Company considers important that could
trigger an impairment review include significant underperformance relative to
historical or projected future operating results, significant changes in the
manner of the use of the Company’s assets or the strategy for its overall
business and significant negative industry or economic trends.





The
annual evaluation of goodwill and other non-amortizing intangible assets
requires the use of estimates about future operating results of each reporting
unit to determine their estimated fair value.  Changes in forecasted
operations can materially affect these estimates.  The Company
determines fair value of each reporting unit using either the market approach,
the income approach, or the asset approach.  The choice of which
approach to use in a particular situation depends on the specific facts and
circumstances associated with the Company, as well as the purpose for which the
valuation analysis is being conducted.  The bingo reporting unit was
analyzed using the market and income approaches, specifically the market
multiple, comparable transaction and discounted cash flow
methodologies.  For the box reporting unit, the market multiple and
discounted cash flow methods were used, as relevant comparable transactions were
not identified. Once an impairment of goodwill or other intangible assets has
been recorded, it cannot be reversed. For additional information, see Note 2
“Goodwill and Intangibles” to our Consolidated Financial Statements contained
herein.


F-9


Impairment
of Long-Lived Assets





The
Company reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.  Recoverability of long-lived assets are measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset, undiscounted and without interest.  If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets.  For fiscal 2009, the Company recorded $2.7
million for the impairment of the obsolete gaming library related to the Summit
acquisition. This impairment is included in the accumulated amortization on the
Company’s consolidated balance sheets. There was no impairment charge for
long-lived assets in fiscal 2008 or 2007.





Revenue
Recognition





We
recognize revenue when the following criteria are met:


·
            Persuasive
      evidence of an arrangement between us and our customer
    exists,


·
            Delivery
      has occurred, bingo terminals are available or ready for play, or services
      have been rendered,


·
            The
      price is fixed or determinable, and


·
            Collectability
      is reasonably assured.





The
Company earns revenue in a variety of ways. The Company offers products for
lease or sale, and also sells service and software updates for equipment
previously sold or leased.





Bingo
Equipment


Revenue
is recognized for bingo terminals and bingo systems installed as a single
element placed in bingo halls under contracts based on (1) a fixed fee per
use per session; (2) a fixed weekly fee per terminal; or (3) a
percentage of the revenue generated by each terminal. Revenue recognition is a
key component of the Company's results of operations, and determines the timing
of certain expenses, such as commissions.  The Company exercises
judgment in assessing the credit worthiness of customers and distributors to
determine whether collectability is reasonably assured. Should changes in
conditions cause the Company to determine the factors are not met for future
transactions, revenue recognized for future reporting periods could be adversely
affected.





Box
Equipment


The
Company’s product sales revenues are generated from the sale of box equipment in
accordance with FASB ASC 985-605-25.  Revenues are reported net of
discounts, sales taxes and other taxes of a similar nature. Revenues related to
contracted production are recognized as the related work is delivered. The
Company recognizes license fee revenues over the term of the associated
agreement unless the fee is in exchange for products delivered or services
performed that represent the culmination of a separate earnings process. Amounts
received prior to completing the earnings process are deferred until revenue
recognition criteria are met.  In some instances, we recognize
recurring participation revenue in lieu of a one-time machine
sale.  The Company’s sales credit terms are predominately
30 days. In certain limited circumstances, credit terms may be extended up
to 160 days.





Deferred
Revenue





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


F-10


Accounts
Receivable and Allowance for Doubtful Accounts





Bingo
Equipment


The
Company estimates the possible losses resulting from non-payment of outstanding
accounts receivable arising from the lease of our bingo units.  The
Company’s customer base consists primarily of entities operating in charitable,
Native American, and commercial bingo halls located throughout the United
States, Canada, and the United Kingdom.  In some jurisdictions, the
billing and collection function is performed as part of a distributor
relationship, and in those instances, the Company maintains allowances for
possible losses resulting from non-payment by both the customer and distributor.
The Company performs ongoing evaluations of its customers and distributors for
credit worthiness, economic trends, changes in its customer’s payment terms, and
historical collection experience when evaluating the adequacy of its allowance
for doubtful accounts. The Company also reserves a percentage of accounts
receivable based on aging categories. In determining these percentages, the
Company reviews historical write-offs of any receivables, payment trends, and
other available information. While such estimates have been within the Company’s
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 its estimates of collectability of its receivables.





Box
Equipment


The
Company estimates the possible losses resulting from non-payment of outstanding
accounts receivables arising from the sale of video lottery terminals and
related equipment. The Company’s customer base consists of casinos located in
various states and Native American territories. Ongoing evaluations are
performed on customers and distributors for credit worthiness, economic trends,
changes in customer payment terms, and historical collection experience when
evaluating the adequacy of its allowance for doubtful accounts.





Inventories





Inventories
are stated at the lower of cost or market.  Raw materials are valued
using the first-in, first-out method and finished goods are valued using average
costing that approximates the first-in, first-out method. Management
periodically reviews inventory balances, using recent and future expected sales
to identify slow-moving or obsolete items. Inventories consist of the following
at November 1, 2009 and November 2, 2008 (in thousands):




November
      1, 2009
              
              
              November
      2, 2008Raw
      Materials
              
              $
              2,683
              
              
              $
              2,474Work
      in Progress
              
              
              -
              
              
              
              4,480Finished
      Goods
              
              
              4,136
              
              
              
              2,022$
              6,819
              
              
              $
              8,976




Legal
Contingencies





The
Company is currently involved in various claims and legal proceedings.
Periodically, the Company reviews the status of each significant matter and
assesses the potential financial exposure. If the potential loss from any claim
or legal proceeding is considered probable and the amount can be estimated, the
Company accrues 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,
the Company reassesses the potential liability related to pending claims and
litigation and may revise its estimates. Such revisions in the estimates of the
potential liabilities could have a material impact on the Company’s results of
operations, and financial condition.


F-11


Advertising
and Promotion Costs





Advertising
and promotion costs are expensed as incurred. For the 52 weeks ended November 1,
2009 expenses of $867 thousand were incurred.  For the 53 weeks ended
November 2, 2008 and twelve months ended October 31, 2007 the amounts were $88
thousand and $300 thousand respectively.





Research
and Development Costs





Research
and development costs are charged to the results of operations when
incurred.  For the 52 weeks ended November 1, 2009 expenses of $5.4
million were incurred.  For the 53 weeks ended November 2, 2008 and
twelve months ended October 31, 2007 the amounts incurred were $5.6 million and
$3.9 million respectively.





Income
Taxes





The
Company accounts for income taxes based on the estimated effective annual income
tax rates.  The provision differs from income taxes currently payable
because certain items of income and expense are recognized in different periods
for financial statement purposes than for tax return purposes. The Company
reduces deferred tax assets by a valuation allowance when it is more likely than
not that some or all of the deferred tax assets will not be
realized.  Net current and non-current deferred tax assets or
liabilities are determined separately for federal, state, and foreign
jurisdictions





In fiscal
2008, the Company adopted FASB ASC Topic 740-10-5 – Tax Positions.
This guidance created a single model to address uncertainty in income tax
positions and prescribes the minimum recognition threshold a tax position is
required to meet before being recognized in the financial
statements.  FASB ASC Topic 740 also provides guidance on the
de-recognition, measurement, classification, interest and penalties, accounting
in interim periods, disclosure, and transition.   The impact of this
adoption in fiscal 2008 on the Company’s financial position, cash flows and
results of operations was not material.





Stock-Based
Compensation





The
Company adopted fair value recognition of all share-based compensation at the
end of fiscal 2005.  At the same time, the Company’s 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.





The
Company has elected to adopt the alternative transition method for calculating
the tax effects of share-based compensation. 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 fair value recognition.




Share-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. The
Company continues 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 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 its stock. 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 Consolidated Statements of Operations. The
“simplified” method was extended for use for those companies that conclude that
it is not reasonable to base its estimate of expected life of options on its
historical share option exercise experience.  The Company has used the
“simplified” method for all estimations of stock option compensation expense
since adopting fair value recognition due to insufficient historical exercise
data and changes in the terms of the share option grants. The use of this method
will continue to be evaluated in fiscal year 2010 to determine if sufficient
relevant data is readily available to estimate the expected term.


F-12


Net
Income (Loss) Per Share





The
Company presents both basic and diluted net income (loss) per share. Basic net
income (loss) per share is based solely upon the weighted average number of
common shares outstanding and excludes any dilutive effects of options, warrants
and convertible securities. Diluted net income (loss) per share is based upon
the weighted average number of common shares and common-share equivalents
outstanding during the year excluding those common-share equivalents where the
impact to basic net income (loss) per share would be anti-dilutive. The
difference between basic and diluted net income (loss) per share is attributable
to stock options.





Concentrations
of Credit Risk





Financial
instruments, which potentially subject the Company to concentration of credit
risk, consist primarily of cash and cash equivalents, investments, and trade
receivables. Cash equivalents and investments are investment-grade, short-term
debt instruments, consisting of treasury bills, mortgage-backed securities,
asset-backed commercial paper, unsecured corporate notes, and money market
accounts, all of which management monitors credit quality of financial
instruments to mitigate risk of loss due to potential credit loss. Cash and cash
equivalents are in excess of Federal Deposit Insurance Corporation insurance
limits.





One
customer made up 13.8% of the Company’s overall revenue for the 52 weeks ended
November 1, 2009.  This customer made up 9.1% of the revenue for the
53 weeks ended November 2, 2008 and 8.4% of the revenue for the 12 months ended
October 31, 2007.  For Box division revenue, this customer was 75.6%
for the 52 weeks ended November 1, 2009 and 44.0% for the 53 weeks ended
November 2, 2008 and 42.1% for the 12 months ended October 31,
2007.





The
Company conducts a substantial amount of its business through distributor
relationships, many of which act as a collection agent.  As of November 1,
2009, there was one distributor that represented 42.4% of the consolidated
accounts receivable balance.  As of November 1, 2009, there was one
distributor that represented 86.8% of the Box accounts receivable
balance.





Interest
Rate Swap Contract





The
Company has entered into an interest rate swap agreement to hedge its interest
rate exposure on its credit facility described in Note 4. In this agreement, the
Company agrees to pay the counterparty a fixed rate payment in exchange for the
counterparty agreeing to pay the Company a variable rate payment that is
intended to approximate the Company’s variable rate payment obligation on the
credit facility. The payment obligation is based on the notional amount of the
swap. Depending on the state of interest rates in general, the use of interest
rate swaps could enhance or harm the overall performance of the common shares.
The market value of interest rate swaps is based on pricing models that consider
the time value of money, volatility, and the current market and contractual
prices of the underlying financial instrument. Unrealized gains are reported as
an asset and unrealized losses are reported as a liability on the Company’s
Consolidated Balance Sheet. The change in value of interest rate swaps,
including the accrual of periodic amounts of interest to be paid or received on
swaps is reported as interest expense in the Company’s Consolidated Statements
of Operations.  Swap agreements involve, to varying degrees, elements
of market and counterparty risk, and exposures to loss in the related amounts
are reflected in the Company’s Balance Sheet.


F-13


Significant
Market Revenue Concentration





A
significant portion of the Company’s revenue is concentrated in the Texas,
Montana, and Louisiana markets. For the 52 weeks ended November 1, 2009, Texas
represented 15.3% of our bingo revenue and 12.5% of consolidated revenue
compared to 16.4% of bingo revenue and 13.1% of consolidated revenue for fiscal
year ended November 2, 2008, and 17.0% of bingo revenue and 14.0% of
consolidated revenue for the twelve months ended October 31,
2007.  The Montana market generated 20.9% of box revenue and 3.9% of
consolidated revenue for the 52 weeks ended November 1, 2009 compared to 44.0%
of box revenue and 9.1% of consolidated revenue for 53 weeks ended November 2,
2008, and 50.0% of box revenue and 10.0% of consolidated revenue for the twelve
months ended October 31, 2007.  The Louisiana market generated 75.6%
of box revenue and 16.3% of consolidated revenue for the 52 weeks ended November
1, 2009 compared to 44.0% of box revenue and 10.8% of consolidated revenue for
53 weeks ended November 2, 2008, and 42.0% of box revenue and 10.0% of
consolidated revenue for the twelve months ended October 31, 2007.  As
of November 1, 2009, one distributor represented 42.4% of the consolidated
accounts receivable balance.  Certain state laws require electronic bingo
devices and systems to be placed through qualified distributors.





Fair
Value Measurements





At the
beginning of fiscal 2009, the Company adopted new fair value accounting guidance
which refined the definition of fair value, established a framework for
measuring fair value, and permitted the election of fair value measurement with
unrealized gains and losses on designated items recognized in earnings at each
subsequent period for certain financial assets and liabilities. The Company
applied the new fair value definition and framework for non-financial assets and
liabilities at the beginning of fiscal 2010.


Fair
value is defined as the price that would be received to sell an asset or paid to
transfer a liability (exit price), in the principal or most advantageous market,
in an orderly transaction between market participants, on the measurement date.
Assets and liabilities carried at fair value are classified and disclosed in one
of the following three categories:





·
            Level
      1 - Quoted market prices in active markets for identical
      instruments


·
            Level
      2 - Observable
      inputs other than quoted prices in active markets for identical assets and
      liabilities, quoted prices for identical or similar assets or liabilities
      in inactive markets, or other inputs that are observable or can be
      corroborated by observable market data for substantially the full term of
      the asset or liabilities


·
            Level
      3 - Inputs
      that are generally unobservable and typically reflect management’s
      estimates of assumptions that market participants would use in pricing the
      asset or liability





Recent
Accounting Pronouncements





In
February 2007, the FASB issued new standards on financial instruments as
codified in ASC 825-10, which requires disclosures about fair value of financial
instruments in financial statements for interim reporting periods and in annual
financial statements of publicly-traded companies. The new standard also
requires entities to disclose the methods and significant assumptions used to
estimate the fair value of financial instruments in financial statements on an
interim and annual basis and to highlight any changes from prior periods. The
new standard is effective for interim and annual periods ending after June 15,
2009. The Company adopted this standard in 2009. The adoption of this standard
did not have a material impact on our consolidated financial
statements.  In February 2008, the FASB delayed the implementation of
ASC 820 for nonfinancial assets and nonfinancial liabilities, except for items
that are recognized or disclosed at fair value in the financial statements on a
recurring basis. This statement defers the effective date to fiscal years
beginning after November 15, 2008 and interim periods within those fiscal
years, which is fiscal year 2010 for the Company.





In
December 2007, the FASB issued new standards for business combinations as
codified in ASC 805-10. The objective of the new standard is to improve the
relevance, representational faithfulness and comparability of the information
that a reporting entity provides in its financial reports about a business
combination and its effects. It establishes principles and requirements for the
acquirer to recognize and measure the identifiable assets acquired, the
liabilities assumed, any non-controlling interest in the acquiree, the goodwill
acquired or a gain from a bargain purchase. It also provides disclosure
requirements to enable users of the financial statements to evaluate the nature
and financial effects of the business combination. The new standard applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The Company is evaluating the impact, if any, that the
adoption of ASC 805-10 will have on our consolidated financial. The Company does
not expect that the adoption of this standard will have a material impact on our
consolidated financial statements.


F-14


In
December 2007, the Securities and Exchange Commission issued Staff Accounting
Bulletin  (“SAB") No. 110 to permit entities, under certain
circumstances, to continue to use the “simplified” method, in developing
estimates of expected term of “plain-vanilla” share options in accordance with
ASC 718-10 Share-Based Payment. SAB No. 110 amended SAB No. 107 to permit the
use of the “simplified” method beyond December 31, 2007. The Company continues
to use the “simplified” method and will do so until more detailed relevant
information about exercise behavior becomes readily available.





In March
2008, the FASB issued new standards on derivatives and hedging as codified in
ASC 815-10. The objective of the standard is to amend and expand the disclosure
requirements with the intent to provide users of financial statements with an
enhanced understanding of: (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for and its related interpretations and (c) how derivative instruments
and related hedged items affect an entity’s financial position, financial
performance and cash flows.  The effective date is for fiscal years
and interim periods beginning after November 15, 2008.  The Company
does not expect that the adoption of this standard will have a material impact
on our consolidated financial statements.





In April
2008, the FASB issued new standards on intangible assets as codified in ASC
350-30. The new standard amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset. The objective is to improve the consistency
between the useful life of a recognized intangible asset and the period of
expected cash flows used to measure the fair value of the asset. The new
standard applies to all intangible assets, whether acquired in a business
combination or otherwise and is effective for financial statements issued for
fiscal years beginning after December 15, 2008 and interim periods within those
fiscal years and applied prospectively to intangible assets acquired after the
effective date. This statement will be effective for us at the beginning of
2010. The Company does not expect that the adoption of this standard will have a
material impact on our consolidated financial statements.





In May
2009, the FASB issued new standards on subsequent events as codified in ASC
855-10. The new standard establishes general standards for accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are available to be issued. More specifically, the new
standard sets forth the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition in the financial statements, identifies the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements and the
disclosures that should be made about events or transactions that occur after
the balance sheet date. The new standard is effective for fiscal years and
interim periods ending after June 15, 2009. The Company has adopted this
standard during 2009. The adoption of this standard did not have a material
impact on our consolidated financial statements. The Company has evaluated
subsequent events through January 29, 2010, the date this report on Form 10-K
was filed with the U.S. Securities and Exchange Commission. The Company made no
significant changes to our consolidated financial statements as a result of our
subsequent events evaluation.





In June
2009, the FASB issued Accounting Standards Codification ASC 105-10, which
establishes the Codification as the source of authoritative accounting guidance
to be applied in the preparation of financial statements in conformity with
generally accepted accounting principles (“GAAP”). The Codification, which
changes the referencing of financial standards, became effective for interim and
annual periods ending on or after September 15, 2009. The codification is now
the single official source of authoritative U.S. GAAP (other than guidance
issued by the Securities and Exchange Commission), superseding existing FASB,
American Institute of Certified Public Accountants, Emerging Issues Task Force
and related literature. Only one level of authoritative U.S. GAAP now exists.
All other literature is considered non-authoritative. The Codification does not
change U.S. GAAP. The Company adopted the Codification during our fiscal year
ended November 1, 2009.


F-15


2.
Goodwill and Intangibles





In fiscal
2007, the Company acquired the assets of Summit Gaming and added $26.5 million
to goodwill, which included trade names of $1.6 million. In addition, the
Company acquired $7.7 million in identifiable intangible assets which will be
amortized over 5 to 10 years. The Company conducts its annual goodwill
impairment analysis during the fourth quarter of each fiscal year, measured as
of the last day of the third quarter.  The Company assessed the value
of its goodwill as of July 31, 2007 (its annual review date) and concluded that
goodwill was not impaired.  The Company performed its 2008 annual
impairment testing of goodwill and intangibles as of July 31, 2008. Based on a
combination of factors, including the current economic environment, decreased
revenues and increased costs, the Company recorded noncash goodwill impairment
associated with our acquisition of Summit of $10.8 million in the fourth quarter
of fiscal 2008.  The Company performed its 2009 annual impairment
testing of goodwill and intangibles as of August 2, 2009.  Based on a
combination of factors, including the current economic environment, decreased
revenues and increased costs, the Company recorded noncash goodwill impairment
associated with our acquisition of Summit of $15.7 million in the fourth quarter
of fiscal 2009.  The annual evaluation of goodwill and other
non-amortizing intangible assets requires the use of estimates about future
operating results of each reporting unit to determine their estimated fair
value.  Changes in forecasted operations can materially affect these
estimates.  Once an impairment of goodwill or other intangible assets
has been recorded, it cannot be reversed.





For
fiscal 2009, the Company recorded $2.7 million for the impairment of the
obsolete gaming library related to the Summit acquisition.  This
impairment is included in the accumulated amortization on the Company’s
consolidated balance sheets.  There was no impairment charge for
long-lived assets in fiscal 2008 or 2007.





Goodwill
activity by segment for the fiscal year ended November 1, 2009 and November 2,
2008 (in thousands):




Bingo
              
              
              Box
              
              
              Total2008Beginning
      balance
              
              $
              10,184
              
              
              $
              26,496
              
              
              $
              36,680Impairment
      Charges
              
              
              -
              
              
              
              (10,780
              )
              
              
              (10,780
              )Ending
      balance
              
              
              10,184
              
              
              
              15,716
              
              
              
              25,9002009Impairment
      Charges
              
              
              -
              
              
              
              (15,716
              )
              
              
              (15,716
              )Ending
      balance
              
              $
              10,184
              
              
              $
              -
              
              
              $
              10,184




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




Stated
      Value
              
              
              Accumulated
      Amortization
              
              
              Net
      Carrying Value
              
              
              Weighted
      Average Amortization Period (in years)Intellectual
      property (software)
              
              $
              3,822
              
              
              $
              (3,557
              )
              
              $
              265
              
              
              
              2.9Copyrights/trademarks
              
              
              247
              
              
              
              (69
              )
              
              
              178
              
              
              
              9.9Distributor
      buyouts
              
              
              260
              
              
              
              (260
              )
              
              
              -
              
              
              
              -Summit
      Gaming identifiable intangible assets:Customer
      relationships
              
              
              3,600
              
              
              
              (1,860
              )
              
              
              1,740
              
              
              
              2.5Patent
      applications
              
              
              620
              
              
              
              (134
              )
              
              
              486
              
              
              
              7.5Game
      software library
              
              
              3,500
              
              
              
              (3,500
              )
              
              
              -
              
              
              
              -$
              12,049
              
              
              $
              (9,380
              )
              
              $
              2,669
  Intangible
assets consisted of the following as of November 2, 2008 (in
thousands):




Stated
      Value
              
              
              Accumulated
      Amortization
              
              
              Net
      Carrying Value
              
              
              Weighted
      Average Amortization Period (in years)Intellectual
      property (software)
              
              $
              4,173
              
              
              $
              (4,091
              )
              
              $
              82
              
              
              
              0.7Copyrights/trademarks
              
              
              247
              
              
              
              (55
              )
              
              
              192
              
              
              
              10.8Distributor
      buyouts
              
              
              260
              
              
              
              (260
              )
              
              
              -
              
              
              
              -Summit
      Gaming identifiable intangible assets:Customer
      relationships
              
              
              3,600
              
              
              
              (1,140
              )
              
              
              2,460
              
              
              
              3.4Patent
      applications
              
              
              620
              
              
              
              (82
              )
              
              
              538
              
              
              
              8.4Game
      software library
              
              
              3,600
              
              
              
              (570
              )
              
              
              3,030
              
              
              
              8.4$
              12,500
              
              
              $
              (6,198
              )
              
              $
              6,302
  F-16
 Estimated
future aggregate amortization expense for intangible assets subject to
amortization as of November 1, 2009 is as follows (in thousands):




2010
              
              $
              8812011
              
              
              8782012
              
              
              4582013
              
              
              702014
              
              
              70After
      2014
              
              
              312$
              2,669
  3.
Property, Bingo Equipment, Furniture and Other Equipment





Property,
bingo equipment, furniture and other equipment consisted of the following as of
November 1, 2009 and November 2, 2008 (in thousands):




November
      1, 2009
              
              
              November
      2, 2008Land
              
              $
              2,438
              
              
              $
              2,471Building
              
              
              8,441
              
              
              
              4,864Bingo
      equipment
              
              
              50,914
              
              
              
              51,384Office
      furniture and equipment
              
              
              5,031
              
              
              
              4,733Leasehold
      improvements
              
              
              120
              
              
              
              874$
              66,944
              
              
              $
              64,326Less
      accumulated depreciation and amortization
              
              
              48,732
              
              
              
              45,076Less
      reserve for excess or obsolete terminals
              
              
              149
              
              
              
              220$
              18,063
              
              
              $
              19,030Construction
      in progress
              
              
              -
              
              
              
              264Add
      bingo component parts
              
              
              2,745
              
              
              
              3,590Property,
      bingo equipment, furniture and other equipment, net
              
              $
              20,808
              
              
              $
              22,884




Depreciation
for bingo equipment is applied over three- and five-year periods. Terminals
on-hand that are not expected to be re-used are provided for as excess or
obsolete.





Overall
depreciation expense during the 52 weeks ended November 1, 2009, 53 weeks ended
November 2, 2008, and twelve months ended October 31, 2007 amounted to $6.5
million, $8.5 million, and $10.2 million, respectively.  In
addition, during the 52 weeks ended November 1, 2009, 53 weeks ended November 2,
2008, and fiscal year ended October 31, 2007, the Company reserved $71,000,
$81,000, and $38,000, respectively for bingo terminals and parts not expected to
be re-used.





Component
parts are for the assembly of terminals and recorded at average cost until the
completed terminal is placed in bingo equipment and depreciated.





4.
Credit Agreements and Acquisition of Real Property





The
current credit facility provides a senior secured revolving credit facility (the
“Revolver”) of $2.0 million, maturing on August 31, 2010, with monthly
interest-only payments due on the last day of each month beginning September 30,
2008. The Company selects the interest rate calculation for each advance under
the revolver from two allowable interest rate calculations. The first allowed
interest rate calculation, called the Base Rate, is the higher of the Agent’s
prime rate or the Federal Funds rate plus 0.50% (a “Base Rate Loan”) minus
0.25%. The second allowed interest rate calculation is the 1, 2, 3, 6, or
12-month LIBOR rate plus 2.0%. As of November 1, 2009, there were no outstanding
borrowings under the Revolver.During the first quarter
of fiscal 2010, we borrowed $750 thousand on the revolver.


F-17


The
current credit facility also provided for a senior secured term loan of $38.0
million that required monthly interest payments beginning September 30, 2008,
and quarterly principal payments of $1.1 million beginning October 31, 2008,
until its maturity on August 28, 2013, when the balance will be due in full. The
Company’s obligations under the current credit facility are secured by first
priority security interest in all of the Company’s assets, including a first
deed of trust on real estate and property purchased concurrently with closing of
current credit facility, and future cash flows. The interest rate for the term
loan varies based upon the one-month LIBOR rate plus 2.80%.  In
connection with the term loan agreement, the Company also entered into an
interest rate swap agreement with U.S. Bank N. A., which exchanged the
variable one-month LIBOR rate of the term loan for a fixed LIBOR rate of 3.99%
per annum effective August 22, 2008, through the maturity of the term loan.
As of November 1, 2009, there was $27.4 million outstanding under the term loan
at an average interest rate of 6.79% and the value of the interest rate swap was
($1.4) million.





Combined
aggregate principal maturities of the current credit facility during the next
five years and thereafter are as follows (in thousands):




PrincipalRepayments2010
            
            $
            4,4712011
            
            
            4,4712012
            
            
            4,4712013
            
            
            14,0002014
            
            
            0$
            27,413


Under the
current credit facility, the Company must comply with various financial and
non-financial covenants. The financial covenants include a cash flow leverage
ratio, fixed charge coverage ratio, working capital requirement and liquidity
requirement. The non-financial covenants include restrictions on asset
divestitures; liens; transactions with related parties; limitations on
additional indebtedness; mergers, acquisitions and consolidations; cash
dividends; redemptions of stock; and change of control. The current credit
facility provides for a mandatory prepayment of principal equal to 50% of free
cash flow when a collateral shortfall is present, measured on an annual basis
beginning October 31, 2009. A collateral shortfall will exist if the outstanding
principal balance of the credit facility exceeds the sum of (i) 100% of cash
held in a control account, (ii) 80% of accounts receivable, (iii) 50% of net
book value of finished goods and raw materials, (iv) 75% of the net book value
of land, buildings, and property improvements, and (v) 50% of the net book value
of all other fixed assets. Free cash flow is defined as EBITDA as of the fiscal
year then ended less the sum of (i) unfinanced capital expenditures, (ii) cash
paid interest, (iii) cash paid taxes, (iv) the change in working capital, and
(v) debt amortization under the current credit facility. During
the fourth quarter of fiscal 2009, the Company anticipated a collateral
shortfall was probable, which would have triggered a mandatory prepayment of
approximately $1.9 million.  To avoid triggering a collateral
shortfall and to reduce the outstanding balance under the term loan, the Company
voluntarily prepaid $5 million from existing cash resources.  As a
result of both the voluntary prepayment and scheduled mandatory quarterly
principal payment, the outstanding balance under our term loan was reduced from
$33.5 million at August 2, 2009 to $27.4 million at November 1, 2009.
O n January
28, 2009, the Company entered into an amendment with both lenders of the current
credit facility (“Amendment”).  The Amendment waived the fixed charge
coverage ratio requirement for the fiscal 2008 year end.  The
Amendment also reduced the minimum fixed charge coverage ratio for the first
fiscal quarter of 2009, increased the base rate on the Revolver by 0.25%, and
increased the LIBOR spread on the Revolver from 2.0% to 2.5%.  At
November 1, 2009, the Company was in compliance with all the covenants as
amended.





On August
22, 2008, the Company purchased real property in southeast Reno, Nevada for an
aggregate purchase price of $7.2 million. The real property includes a 100,000
square foot building that is being used as our new headquarters. The Company has
invested $3.3 million in additional improvements to the interior of the
building to add office space, and provide for the manufacturing and assembly
needs of bingo, VLT and slot equipment. The purchase price of the building and
related improvements have been funded by proceeds from the credit facility, of
which $2.7 million was held in a construction control cash account with U.S.
Bank N.A.  The credit facility provided for the release of the funds
to cover payments for the construction of the additional improvements. As of May
3, 2009, the account was closed.  The Company relocated to our new
corporate headquarters and completed all major building improvements during the
second quarter of 2009.  The Company expensed $321 thousand of related
exit fees during the second quarter of 2009 such as the write-off of leasehold
improvements, prepaid insurance, final rents, prepaid real estate property
taxes, and utilities related to our old headquarters.


F-18


5.
Commitments and Contingencies





Leases





The
Company leases administrative and warehouse facilities and certain equipment
under non-cancelable operating leases. Rent expense during the 52 weeks ended
November 1, 2009, the 53 weeks ended November 2, 2008, and twelve months ended
October 31, 2007 was $641 thousand, $1.0 million, $847 thousand,
respectively.





Future
minimum lease payments under these leases as of November 1, 2009 are as follows
(in thousands):




LeasePayments2010
              
              $
              1772011
              
              
              182012
              
              
              132013
              
              
              42014
              
              
              0$
              212




Purchase
Commitments





From time
to time, the Company enters into commitments with our vendors to purchase box
parts, bingo terminals and support equipment at fixed prices and/or guaranteed
quantities. During the 53 weeks ended November 2, 2008, the Company entered into
an agreement with a vendor for $3.4 million to purchase box hardware for a sale
expected to deliver in early 2009.  As of November 1, 2009 all of this
commitment was fulfilled.  The Company also entered into a
construction agreement in September 2008 with a general contractor for $2.7
million for improvements to our new corporate headquarters which was funded by
the loan proceeds in the construction account.  As of November 1,
2009, this commitment was fulfilled. Various other additional purchase
commitments have been placed in the ordinary course of business throughout
fiscal 2009, of which $0.2 million was outstanding as of November 1,
2009.





In
December 2009, the Company also entered into an agreement for $1.5 million to
license the design and right to manufacture and sell a portable hand-held gaming
platform.  As of January 29, 2010, $150 thousand of this commitment was
fulfilled.  This agreement requires a $600 thousand payment in February
2010 and three quarterly payments of $250 thousand to be paid by the end of
November 2010.





Litigation





GameTech International, Inc. v.
Trend Gaming Systems, LLC. On March 22, 2001, the Company 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 (involving a
distribution agreement in Texas), seeking a declaratory judgment that the
Company was 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 the Company was in breach of certain of our contractual
obligations to Trend, including that the Company had wrongfully terminated
Trend. On December 16, 2002, the court entered at the Company’s request an order
enjoining Trend from using $540 thousand in funds it had collected on the
Company’s behalf, pending a trial on the Company’s ownership interest in those
funds. The money was placed in two bank accounts/constructive trusts, subject to
the court’s control (the “Deposited Funds”). The sums in those accounts now
total $657 thousand. In addition, collections of accounts receivable by
Trend, if any, are also being placed in that account, pending the resolution of
the case. The Company has posted a $450 thousand deposit with the court as a
bond, which was presented as restricted cash on the Company’s consolidated
balance sheets in fiscal years prior to 2009 but is now presented in deposits in
the Company’s consolidated balance sheets. The accounts receivable from Trend
were fully reserved. During the quarter ended April 30, 2008, the Company wrote
off all receivables and related reserves. Trial in this matter commenced October
4, 2004. On November 1, 2004, the jury returned a verdict in favor of Trend
against the Company in the amount of $3.5 million in compensatory damages. The
jury also awarded the Company $735 thousand in compensatory damages against
Trend for funds Trend collected on the Company’s behalf but failed to remit to
the Company. The court denied all of the Company’s post-trial motions, except
that it maintained the injunction imposing a constructive trust on the Deposited
Funds, pending resolution of the issues on appeal. The court setoff the jury
awards and entered an amended judgment for Trend on March 12, 2005, in the
amount of $2.8 million, plus interest on that sum at the rate of 3.31% per annum
beginning March 30, 2005.


F-19


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





On May
16, 2007, the United States Court of Appeals for the Ninth Circuit issued its
ruling in the Company’s favor upholding each of the items the Company appealed,
reversing the trial court’s rulings and remanding the matter back to the trial
court for a new trial. As a result of this decision, the supersedeas bonds the
Company posted prior to filing the appeal were released by the lower court as of
August 18, 2007. Upon receipt of the released supersedeas bonds from the court
the Company terminated the supporting insurance policies and had the letters of
credit released giving the Company access to the certificates of deposit, which
had served as the cash security for the supersedeas bonds.





For the
year ended October 31, 2004, the Company recorded an estimated loss contingency
in the Trend litigation of $2.8 million, which was estimated based on the
amounts of the judgment described above. The Company recorded an additional loss
contingency of $0.9 million in the third quarter of fiscal 2005 to account for
the increased total award to Trend for legal fees and expenses and costs. In
addition, the Company recorded a loss of $313 thousand through October 31, 2007,
for the interest accrued on the Trend judgment. With the United States Court of
Appeals for the Ninth Circuit ruling upholding each of the items the Company
appealed, reversing the trial court’s rulings and remanding the matter back to
the trial court for a new trial, no additional loss contingencies have been
accrued.





A new
trial in this matter commenced October 19, 2009, in the United States District
Court for the District of Arizona.  On November 12, 2009, the jury
returned a verdict in the Company’s favor and against Trend in the amount of
$821 thousand in compensatory damages.  On November 17, 2009, the
court entered a judgment affirming the jury’s verdict in this
matter.  On November 18, 2009, the Company filed a motion with the
court seeking an amended final judgment with a provision for accrued prejudgment
interest in the amount of $589 thousand and a provision for post-judgment
interest in an amount to be determined by the court.  On November 24,
2009, the Company filed a second post-trial motion with the court seeking an
order directing the release of the Deposited Funds to GameTech in partial
satisfaction of the jury’s compensatory damages award entered against
Trend.  Both of these post-trial motions are pending before the
court.  As of November 1, 2009, GameTech had a high probability of
prevailing in the Trend proceedings. As a result, the loss contingency of $4.0
million that had been recorded in fiscal 2004 was reversed.


F-20


GameTech
International, Inc. v. Trend Gaming, LLC. On March 2, 2004, a jury rendered a
verdict in the Company’s favor and against Trend Gaming, LLC, a Kentucky LLC
(“Trend Gaming”) (involving a prior distribution agreement in Virginia) awarding
compensatory and punitive damages in the total amount of $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 thousand in punitive damages against Trend Gaming and awarded the Company
fees and costs of suit against Trend Gaming in the amount of $650 thousand.
Compensatory damages against Mr. and Mrs. Hieronymus have been reduced to $762
thousand but the punitive damage award against them in the amount of $150
thousand remains unchanged. Of the total compensatory damages of $1.1 million
awarded to the Company, $762 thousand represents compensation for lost profits.
The Company 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 the Company’s favor. On June 16, 2008, the Ninth Circuit Court of
Appeals awarded attorney fees in the amount of $139 thousand, in favor of
GameTech and jointly and severally against Trend Gaming L.L.C., Steven W.
Hieronymus, and the marital estate of Steven W. Hieronymus and Rhonda
Hieronymus. The Company has not recorded an estimated gain contingency, as the
Company can give no assurances whether the Company will be able to collect any
award from the defendants.





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





6.
Stockholders' Equity





Stock-Based
Compensation





The
Company generally grants stock options to its 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 also grant restricted stock grants valued at the
price equal to the fair value of the shares on the date of grant.





Stock
Incentive Plan





In August
1997, the Company with the approval of its stockholders and directors, adopted
the 1997 Incentive Stock Plan (the "1997 Plan"). Under the 1997 Plan, either
incentive stock options ("ISO's") or nonqualified stock options ("NSO's") may be
granted to employees, directors, and consultants to purchase the Company's
common stock at an exercise price determined by the Board of Directors on the
date of grant. ISO's may be granted only to employees at an exercise price that
equals or exceeds the fair value of such shares on the date such option is
granted. The options generally have a term of ten years and vesting periods of
one to four years are determined at the discretion of the Board of Directors.
The Company has reserved 4,000,000 shares of common stock for issuance under the
1997 Plan, which included options granted during the twelve months immediately
preceding the adoption of the 1997 Plan. In October 2001, the Company adopted
the 2001 Restricted Stock Plan (the “2001 Plan”). Under the 2001 Plan, the
Company authorized the granting of restricted stock to employees who are not
officers or directors, consultants, and independent contractors. At the annual
meeting of stockholders held on March 28, 2006, the stockholders of the Company
approved the amendment and restatement of the 1997 Plan, which included the
combination of the 2001 Plan with the 1997 Plan and the extension of the term of
the 1997 Plan for an additional ten years.





The
aggregate intrinsic value represents the difference between the closing price of
our common stock on November 1, 2009, which was $1.33, and the exercise price,
multiplied by the number of in-the-money stock options as of the same date. This
represents the amount that would have been received by the stock option holders
if they had all exercised their stock options on November 1, 2009. In future
periods, this amount will change depending on fluctuations in our stock price.
The aggregate intrinsic value of the options outstanding at November 1, 2009 is
$56 thousand.  For those options that were exercisable, the aggregate
intrinsic value at November 1, 2009 was zero.  During the 52 weeks
ended November 1, 2009, the 53 weeks ended November 2, 2008, and the twelve
months ended October 31, 2007, the aggregate intrinsic value of options
exercised under our stock option plans were $0.0 million, $0.5 million, and $0.6
million, respectively, determined as of the date of option
exercise.


F-21


Stock
options activity for the 52 weeks ended November 1, 2009:




52
      Weeks Ended November 1, 2009
              
              
              53
      Weeks Ended November 2, 2008
              
              
              Twelve
      Months Ended October 31, 2007Number
      of
              
              
              
              
              
              Number
      of
              
              
              
              
              
              Number
      ofShares
              
              
              Weighted-Average
              
              
              Shares
              
              
              Weighted-Average
              
              
              Shares
              
              
              Weighted-Average(Options)
              
              
              Exercise
      Price
              
              
              (Options)
              
              
              Exercise
      Price
              
              
              (Options)
              
              
              Exercise
      PriceBalance
      at beginning of year
              
              
              612,150
              
              
              $
              4.02
              
              
              
              721,550
              
              
              $
              4.38
              
              
              
              847,735
              
              
              $
              3.93Options:Granted
              
              
              497,500
              
              
              
              1.22
              
              
              
              -
              
              
              
              -
              
              
              
              300,000
              
              
              
              10.44Forfeited
              
              
              (63,300
              )
              
              
              9.95
              
              
              
              (76,900
              )
              
              
              7.52
              
              
              
              (325,000
              )
              
              
              9.09Expired
              
              
              (13,900
              )
              
              
              3.91
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -
              
              
              
              (32,500
              )
              
              
              3.65
              
              
              
              (101,185
              )
              
              
              3.46Balance
      at end of year
              
              
              1,032,450
              
              
              
              2.32
              
              
              
              612,150
              
              
              
              4.02
              
              
              
              721,550
              
              
              
              4.38Exercisable
      at end of year
              
              
              534,950
              
              
              
              3.34
              
              
              
              562,150
              
              
              
              3.36
              
              
              
              621,550
              
              
              
              3.39Weighted
      average grant-date fair value of options granted during the
      year
              
              
              $
              0.78
              
              
              
              
              
              
              $
              -
              
              
              
              
              
              
              $
              6.88


Restricted
shares activity for the 52 weeks ended November 1, 2009:




52
      Weeks Ended November 1, 2009
              
              
              53
      Weeks Ended November 2, 2008
              
              
              Twelve
      Months Ended October 31, 2007Number
      of
              
              
              
              
              
              Number
      of
              
              
              
              
              
              Number
      ofShares
              
              
              Weighted-Average
              
              
              Shares
              
              
              Weighted-Average
              
              
              Shares
              
              
              Weighted-Average(Options)
              
              
              Exercise
      Price
              
              
              (Options)
              
              
              Exercise
      Price
              
              
              (Options)
              
              
              Exercise
      PriceBalance
      at beginning of year
              
              
              162,000
              
              
              $
              4.61
              
              
              
              -
              
              
              $
              -
              
              
              
              -
              
              
              $
              -Options:Granted
              
              
              67,500
              
              
              
              1.01
              
              
              
              162,000
              
              
              
              4.61
              
              
              
              -
              
              
              
              -Forfeited
              
              
              (21,666
              )
              
              
              5.06
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Expired
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Vested
              
              
              (30,669
              )
              
              
              4.61
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Balance
      at end of year
              
              
              177,165
              
              
              
              3.18
              
              
              
              162,000
              
              
              
              4.61
              
              
              
              -
              
              
              
              -Expected
      to vest
              
              
              177,165
              
              
              $
              3.18
              
              
              
              162,000
              
              
              $
              4.61
              
              
              
              -
              
              
              $
              -


The
assumptions used in the Black-Scholes model for fiscal years 2009, 2008 and 2007
were as follows:




Option
      Valuation Assumptions52
      Weeks Ended
              
              
              53
      Weeks Ended
              
              
              12
      Months EndedNovember
      1, 2009
              
              
              November
      2, 2008
              
              
              October
      31, 2007Risk-free
      interest rate
              
              
              3.67
              %
              
              
              N/A
              
              
              
              4.81
              %Dividend
      yield
              
              
              0.00
              %
              
              
              N/A
              
              
              
              0.00
              %Volatility
      factor
              
              
              65.80
              %
              
              
              N/A
              
              
              
              61.60
              %Expected
      life (in years)
              
              
              6.00
              
              
              
              N/A
              
              
              
              6.40
  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.
During 2008, the Company did not grant any stock options, therefore the
assumptions are not represented above.




Report
      Share-based Compensation52
      Weeks Ended
              
              
              53
      Weeks Ended
              
              
              12
      Months EndedNovember
      1, 2009
              
              
              November
      2, 2008
              
              
              October
      31, 2007(In
      thousands)Pre-tax
      expense (benefit)
              
              $
              469.6
              
              
              $
              246.0
              
              
              $
              (128.0
              )Tax
      benefit (expense)
              
              
              (82.3
              )
              
              
              (58.1
              )
              
              
              47.2After-tax
      expense (benefit)
              
              $
              387.3
              
              
              $
              187.9
              
              
              $
              (80.8
              )
  F-22
 The
following table summarizes information regarding stock options outstanding and
exercisable as of November 1, 2009:





Weighted-
              
              
              
              
              
              
              
              
              Weighted-Average
              
              
              Weighted-
              
              
              
              
              
              Average
              
              
              Weighted-Remaining
              
              
              Average
              
              
              
              
              
              Remaining
              
              
              AverageRange
      of  Exercise
              
              
              Number
              
              
              Contractual
              
              
              Exercise
              
              
              Number
              
              
              Contractual
              
              
              ExercisePrices
              
              
              Outstanding
              
              
              Life
      (in years)
              
              
              Price
              
              
              Exercisable
              
              
              Life
      (in years)
              
              
              Price$
              0.84
      -$1.16
              
              
              
              200,000
              
              
              
              9.19
              
              
              $
              1.08
              
              
              
              -
              
              
              
              -
              
              
              $
              -$
              1.31
      - $1.84
              
              
              
              297,500
              
              
              
              9.58
              
              
              
              1.31
              
              
              
              -
              
              
              
              -
              
              
              
              -$
              2.85
      - $2.97
              
              
              
              313,500
              
              
              
              5.58
              
              
              
              2.87
              
              
              
              313,500
              
              
              
              5.58
              
              
              
              2.87$
              3.10
      - $3.63
              
              
              
              121,950
              
              
              
              5.42
              
              
              
              3.18
              
              
              
              121,950
              
              
              
              5.42
              
              
              
              3.18$
              3.89
      - $6.54
              
              
              
              99,500
              
              
              
              4.70
              
              
              
              4.87
              
              
              
              99,500
              
              
              
              4.70
              
              
              
              4.871,032,450
              
              
              
              7.33
              
              
              $
              2.32
              
              
              
              534,950
              
              
              
              5.38
              
              
              $
              3.34


As of
November 1, 2009, the total compensation cost related to unvested stock-based
awards granted to employees under the Company’s stock option plans but not yet
recognized was $704 thousand. This cost will be amortized for fiscal years 2010,
2011, and 2012 and thereafter at $443 thousand, $209 thousand, $42
thousand, and $10 thousand respectively, and will be adjusted for subsequent
changes in estimated forfeitures.


Stockholder
Rights Agreement





On
March 7, 2003, the Company adopted a Rights Agreement (the "Rights
Agreement") that may have the effect of deterring, or preventing a change in
control that might otherwise be in the best interest of the Company’s
stockholders. Under the Rights Agreement, a dividend of one preferred share
purchase right was issued for each outstanding share of common stock held by the
stockholders of record as of the close of business on March 17, 2003. Each right
entitles the stockholder to purchase, at a price of $16.00, one one-thousandth
of a share of Series A Junior Participating Preferred Stock.





In
general, subject to certain limited exceptions, the stock purchase rights become
exercisable when a person or group acquires 15% or more of the Company's common
stock or a tender offer or exchange offer for 15% or more of the Company's
common stock is announced or commenced. After any such event, the Company's
other stockholders may purchase additional shares of common stock at 50% of the
then-current market price.  The rights will cause substantial dilution
to a person or group that attempts to acquire the Company on terms not approved
by the Board of Directors.  The rights may be redeemed by the Company
at $0.01 per stock purchase right at any time before any person or group
acquires 15% or more of the outstanding common stock. The rights should not
interfere with any merger or other business combination approved by the Board of
Directors. The rights expire on March 17, 2013.





On July
16, 2009 we entered into Amendment No. 1 to the Rights
Agreement.  Amendment No. 1 amends the definition of “Acquiring
Person” to increase from 15% to 26.5% the minimum beneficial ownership interest
in the Company’s outstanding common stock that would cause our current Chairman
of the Board (as a “Grandfathered Person”) to become an Acquiring
Person.  Thus, Amendment No. 1 permits our Chairman of the Board to
acquire up to 26.5% of our common stock before triggering the dilutive effect of
the rights under the rights Agreement.  No other changes were made to
the Rights Agreement.




F-23


7.
Income Taxes





The
income tax provision (benefit) recorded in the consolidated statement of
operations consists of the following (in thousands):




52
      Weeks Ended
              
              
              53
      Weeks Ended
              
              
              12
      Months EndedNovember
      1, 2009
              
              
              November
      2, 2008
              
              
              October
      31, 2007Current:Federal
              
              $
              911
              
              
              $
              (1,046
              )
              
              $
              2,587State
              
              
              127
              
              
              
              135
              
              
              
              378Foreign
              
              
              109
              
              
              
              208
              
              
              
              3871,147
              
              
              
              (703
              )
              
              
              3,352Deferred:Federal
              
              
              (6,341
              )
              
              
              (2,948
              )
              
              
              (500
              )State
              
              
              (811
              )
              
              
              (676
              )
              
              
              (130
              )Foreign
              
              
              25
              
              
              
              (84
              )
              
              
              (55
              )(7,127
              )
              
              
              (3,708
              )
              
              
              (685
              )Income
      tax provision (benefit)
              
              $
              (5,980
              )
              
              $
              (4,411
              )
              
              $
              2,667
  The
significant components of the Company's deferred income tax assets and
liabilities as of November 1, 2009 and November 2, 2008 are as follows (in
thousands):





November
      1, 2009Current
              
              
              Non-CurrentDeferred
      income tax assets:Amortization
      of intangible assets
              
              $
              -
              
              
              $
              10,058Depreciation
              
              
              -
              
              
              
              549Allowance
      for doubtful accounts
              
              
              217
              
              
              
              -Reserve
      for obsolete inventory
              
              
              9
              
              
              
              -Reserve
      for obsolete terminals
              
              
              -
              
              
              
              55Loss
      contingencies
              
              
              -
              
              
              
              -Accrued
      vacation
              
              
              189
              
              
              
              -Stock
      option expense
              
              
              102
              
              
              
              92Royalties
              
              
              -
              
              
              
              -Deferred
      Revenue
              
              
              1,278
              
              
              
              -Foreign
      tax credit carry-forward
              
              
              -
              
              
              
              312Loss
      carry-forwards
              
              
              104
              
              
              
              12Fair
      market value write-down on investments
              
              
              -
              
              
              
              1,227Value
      of credit swap derivative
              
              
              -
              
              
              
              510Total
      deferred income tax assets
              
              
              1,899
              
              
              
              12,815Valuation
      allowance
              
              
              (163
              )
              
              
              (1,061
              )Deferred
      income tax assets, net
              
              
              1,736
              
              
              
              11,754Deferred
      income tax liability
              
              
              -
              
              
              
              -Net
      deferred income tax asset
              
              $
              1,736
              
              
              $
              11,754
   F-24
  November
      2, 2008Current
              
              
              Non-CurrentDeferred
      income tax assets:Amortization
      of intangible assets
              
              $
              -
              
              
              $
              3,904Allowance
      for doubtful accounts
              
              
              418
              
              
              
              -Reserve
      for obsolete terminals
              
              
              -
              
              
              
              83Loss
      contingencies
              
              
              1,478
              
              
              
              -Accrued
      vacation
              
              
              177
              
              
              
              -Stock
      option expense
              
              
              43
              
              
              
              63Royalties
              
              
              (37
              )
              
              
              -Foreign
      tax credit carry-forward
              
              
              -
              
              
              
              34Value
      of credit swap derivative
              
              
              -
              
              
              
              248Fair
      market value write-down on investments
              
              
              -
              
              
              
              1,289Loss
      carry-forwards
              
              
              111
              
              
              
              12Total
      deferred income tax assets
              
              
              2,190
              
              
              
              5,633Valuation
      allowance
              
              
              (365
              )
              
              
              (924
              )Deferred
      income tax assets, net
              
              
              1,825
              
              
              
              4,709Deferred
      income tax liability:Depreciation
              
              
              -
              
              
              
              (170
              )Net
      deferred income tax asset
              
              $
              1,825
              
              
              $
              4,539





The
differences between the Company's provision for (benefit from) income taxes as
presented in the accompanying consolidated statements of operations and
provision for (benefit from) income taxes computed at the federal statutory rate
of 34% was as follows:




52
      Weeks Ended
              
              
              53
      Weeks Ended
              
              
              12
      Months EndedNovember
      1, 2009
              
              
              November
      2, 2008
              
              
              October
      31, 2007Income
      tax provision (benefit) at the statutory rate
              
              
              (34.0
              %)
              
              
              (34.0
              %)
              
              
              34.0
              %State
      income taxes, net
              
              
              (2.7
              %)
              
              
              (4.9
              %)
              
              
              3.1
              %Meals
      and entertainment
              
              
              0.2
              %
              
              
              0.3
              %
              
              
              0.6
              %Non
      deductible lobbying expenses
              
              
              0.1
              %
              
              
              0.1
              %
              
              
              0.1
              %State
      minimum/capital taxes
              
              
              0.0
              %
              
              
              0.4
              %
              
              
              0.0
              %Change
      in valuation allowance
              
              
              0.0
              %
              
              
              8.1
              %
              
              
              0.0
              %Other,
      net
              
              
              0.1
              %
              
              
              1.7
              %
              
              
              (1.5
              %)Income
      tax provision (benefit) at its effective rate
              
              
              (36.3
              %)
              
              
              (28.3
              %)
              
              
              36.3
              %
  At
November 1, 2009, the Company incurred a federal net operating tax loss of $187
thousand.  The entire amount of the federal net operating loss is
eligible for carryback and/or carryforward subject to limitations under Sections
172 and 382 of the Internal Revenue Code, which generally limit the amount of
carryforwards available per year for use against future taxable
income.   The Company will be carrying the federal net operating
loss back and there is sufficient prior year taxable income to fully absorb the
loss and yield a full benefit in the form of a refund.





At
November 2, 2008, the Company had net operating loss carryforwards for state
income tax purposes only of approximately $2.4 million, the entire amount of
which was subject to limitations under provisions of the various state
jurisdictions to which they pertained, and in general, limited the amount of
carryforwards available per year for use against future taxable
income.  At November 1, 2009, the Company had net remaining operating
loss carryforwards for state income tax purposes only of approximately $1.7
million, having used approximately $670 thousand of the available net operating
loss carryforwards to offset state taxable income for the year.  The
remaining state tax loss carryforwards are expected to be fully utilized before
they expire, which generally occurs within 5 to 20 years.


F-25


The
valuation allowance pertains to the deferred tax asset resulting from the
auction rate security write-down of $3.3 million. When that loss is recognized
for tax purposes, it will be a capital loss available only to offset capital
gains, and the Company does not expect to be able to utilize it during the five
year carry forward period.  However, according to FASB, our valuation
allowance has been classified as current or noncurrent based on the percentages
of current and noncurrent deferred tax assets to total deferred tax
assets.





Unrecognized
Tax Positions





The
Company files numerous consolidated and separate income tax returns in the
United States and in many state and foreign jurisdictions. With few exceptions,
the Company is no longer subject to United States federal income tax
examinations for years before 2005, and is no longer subject to state and
local, or foreign income tax examinations for years
before 2004.





The
Internal Revenue Service (IRS) commenced an examination of the Company’s U.S.
income tax returns for the fiscal year ended October 31, 2007 in the first
quarter of 2009 that was anticipated to be completed within the following twelve
months.  As of November 1, 2009, the IRS has proposed certain
adjustments to the depreciable life used in calculating federal tax depreciation
on the Company’s leased electronic bingo systems.  Management does not
agree with the proposed adjustment and, if this cannot be resolved at the
examination level, intends to file a protest with IRS
Appeals.  However, if a resolution cannot be reached, it is reasonably
possible that an additional payment of approximately $1.2 million may be made by
the end of 2010.  Therefore, the Company has accrued the $1.2 million
as a component of income taxes payable, of which $981 thousand is tax, and $184
thousand is interest and penalties.





The
Company recognizes interest and penalties accrued related to unrecognized tax
benefits in its tax provision.





A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows (in thousands):




52
      Weeks Ended
              
              
              53
      Weeks EndedNovember
      1, 2009
              
              
              November
      2, 2008Balance
      at beginning of year
              
              $
              -
              
              
              $
              -Additions
      based on tax positions related to the current year
              
              
              91
              
              
              
              -Additions
      for tax positions of prior years
              
              
              1,074
              
              
              
              -Balance
      at end of year
              
              $
              1,165
              
              
              $
              -
  At
November 1, 2009, no material amount of the unrecognized tax benefits would
affect the annual effective tax rate if recognized since they pertain only to
the timing of recognition of tax allowable deductions.





8.
Accrued Severance





The
Company has incurred expenses connected with severance agreements. These amounts
are recorded in accrued payroll. During the 52 weeks ended November 1, 2009, the
total severance expense was $182.1 thousand recorded in sales, service, general
and administrative, and operations expenses.  As of November 1, 2009,
$182.1 thousand of severance expense had been paid, with no remaining
outstanding balance.  A $44.1 thousand net decrease in severance
expense was realized from the early payment of notes payable to the Held
Group.  In fiscal 2008, total severance expenses of $192.3 thousand
was recorded in sales, service, general and administrative, and operations
expenses.





Accrued
severance consisted of the following as of November 1, 2009 and November 2, 2008
(in thousands):




November
      1, 2009
              
              
              November
      2, 2008
              
              
              October
      31, 2007Beginning
      balance
              
              $
              58
              
              
              $
              -
              
              
              $
              44Severance
      expenses
              
              
              182
              
              
              
              192
              
              
              
              111Less
      severance paid
              
              
              (240
              )
              
              
              (134
              )
              
              
              (155
              )Ending
      balance
              
              $
              -
              
              
              $
              58
              
              
              $
              -
  F-26
 9.
Other Accrued Liabilities





Other
accrued liabilities consist of (in thousands):




November
      1, 2009
              
              
              November
      2, 2008Accrued
      professional fees
              
              $
              495
              
              
              $
              153Accrued
      distributor commissions
              
              
              654
              
              
              
              582Accrued
      property tax
              
              
              78
              
              
              
              117Other
              
              
              485
              
              
              
              433$
              1,712
              
              
              $
              1,285
  10.
Net Income per Share





A
reconciliation of the shares used in the basic and fully diluted net income per
share calculations follows (in thousands):




52
      Weeks Ended
              
              
              53
      Weeks Ended
              
              
              12
      Months EndedNovember
      1, 2009
              
              
              November
      2, 2008
              
              
              October
      31, 2007Basic
      weighted average shares outstanding
              
              
              11,714
              
              
              
              12,190
              
              
              
              12,566Effect
      of dilutive securities:Stock
      options
              
              
              279
              
              
              
              279
              
              
              
              425Diluted
              
              
              11,993
              
              
              
              12,469
              
              
              
              12,991
  Employee
stock options to purchase approximately 347,500, 50,000, and 100,000, shares
during the 52 weeks ended November 1, 2009, 53 weeks ended November 2, 2008, and
the fiscal year ending October 31, 2007 respectively, were outstanding, but were
not included in the computation of diluted earnings per share because the effect
would have been anti-dilutive.





11.
Valuation and Qualifying Accounts (in thousands)




Balance
      at
              
              
              Additions
      Charged
              
              
              Net
      DeductionsBeginning
      of
              
              
              to
      Costs
              
              
              (Write-offs,
              
              
              Balance
      atDescription
              
              Period
              
              
              and
      Expenses
              
              
              Net
      of Collections)
              
              
              End
      of PeriodAllowance
      for accounts receivableYear
      ended October 31, 2007Allowance
              
              $
              2,230
              
              
              $
              561
              
              
              $
              (362
              )
              
              $
              2,429Year
      ended November 2, 2008Allowance
              
              $
              2,429
              
              
              $
              563
              
              
              $
              (1,775
              )
              
              $
              1,217Year
      ended November 1, 2009Allowance
              
              $
              1,217
              
              
              $
              615
              
              
              $
              (56
              )
              
              $
              1,776
  The
balance of the allowance for accounts receivable for fiscal year ended 2007
included a combined allowance of $1.6 million for Trend Gaming Systems, LLC and
Trend Gaming, LLC consisting of the entire accounts receivable balance related
to these companies; this balance was written off during the 53 weeks ending
November 2, 2008.  For additional information, see Note 5 “Commitments and Contingencies –
Litigation” contained herein.


F-27


Balance
      at
              
              
              Additions
      Charged
              
              
              Net
      DeductionsBeginning
      of
              
              
              to
      Costs
              
              
              (Write-offs,
              
              
              Balance
      atDescription
              
              Period
              
              
              and
      Expenses
              
              
              Net
      of Collections)
              
              
              End
      of PeriodAllowance
      for property and equipmentYear
      ended October 31, 2007Allowance
              
              $
              214
              
              
              $
              38
              
              
              $
              (113
              )
              
              $
              139Year
      ended November 2, 2008Allowance
              
              $
              139
              
              
              $
              143
              
              
              $
              (62
              )
              
              $
              220Year
      ended November 1, 2009Allowance
              
              $
              220
              
              
              $
              -
              
              
              $
              (71
              )
              
              $
              149
  12.
Agreement to Acquire Assets





On March
28, 2007, the Company acquired essentially all of the assets of Summit Gaming
for $40.9 million in cash. Summit is a leading developer and manufacturer of
entertainment driven gaming devices, including primarily VLTs, slot equipment
and related software, headquartered in Billings, Montana.





Under the
purchase method of accounting, the total purchase price is allocated to Summit’s
tangible and intangible assets based on their fair values as of the date of the
closing of the acquisition. The Company is in disagreement with the seller
regarding approximately $1.0 million of the purchase price regarding the total
working capital at the date of closing.  The Company is working with
the seller to settle this matter through arbitration.  The purchase
price may change based on the outcome of the arbitration.  The
purchase price, including the disputed working capital, has been allocated as
described below.





The total
purchase price is as follows (in thousands):




Cash
      paid for Summit
              
              $
              39,745Direct
      transaction costs
              
              
              1,115Total
      cash purchase price
              
              $
              40,860
  The
preliminary purchase price includes approximately $1.0 million in working
capital that is in dispute. The dispute is being arbitrated and should be
resolved in fiscal year 2010. The allocation of the preliminary purchase price
and estimated useful lives and first year amortization associated with certain
assets is as follows (in thousands):




Accounts
      receivable
              
              $
              2,645Prepaid
      expenses and other assets
              
              
              211Inventory
              
              
              3,312Property
      plant and equipment
              
              
              1,598Identifiable
      depreciable intangibles assets
              
              
              7,720Trade
      name
              
              
              1,600Goodwill
              
              
              24,896Accounts
      payable and other accrued expenses
              
              
              (1,122
              )Total
      preliminary purchase price
              
              $
              40,860
  F-28
  In the
above acquisition, the Company acquired various intangible assets listed
below:


(In
      thousands)
              
              Fair
      Market ValueAmortized
      Intangible AssetsCustomer
      relationships
              
              $
              3,600Patent
      application
              
              
              620Game
      library
              
              
              3,500Total
      amortizable intangible assets
              
              $
              7,720Unamortized
      Intangible AssetsGoodwill
              
              $
              24,896Summit
      trade name
              
              
              1,600Total
              
              $
              26,496
  13.
Investment Securities





At
November 2, 2008, we held auction rate securities (“ARS”) with an aggregate
purchase price of approximately $3.9 million. With the liquidity issues
experienced in global credit and capital markets, the ARS held by us at November
2, 2008 experienced multiple failed auctions as the amount of securities
submitted for sale exceeded the amount of purchase orders.  We
determined the estimated fair value of these securities as of November 1, 2009
utilizing the standards set forth in FASB ASC 820.  The eight ARS in
our investment portfolio (having an aggregate purchase price of approximately
$3.9 million) were classified as Level III (as defined by FASB ASC 820) as no
direct market inputs to make a pricing determination were
available.  A discounted cash flow analysis was used to determine the
estimated fair value of these securities.  Based largely upon the
credit risks of the issuers and the lack of an active trading market in these
securities, risk-adjusted discount rates were applied to determine the estimated
fair value of our Level III ARS.  Management determined that the
estimated losses in these securities were other-than-temporary and recorded an
aggregate pre-tax impairment charges of approximately $3.3 million for the 53
weeks ended November 2, 2008.





The ARS
held are private placement securities with long-term nominal maturities with the
interest rates reset through a Dutch auction each month. Prior to fiscal 2008,
the monthly auctions historically have provided a liquid market for these
securities. The Company’s investments in ARS represent interests in
collateralized debt obligations supported by pools ofresidential and
commercial mortgages, credit cards, insurance securitizations, and other
structured credits, including corporate bonds. Some of the underlying collateral
for the ARS we hold consists of sub-prime mortgages.





Consistent
with our investment policy guidelines, the ARS investments held had AAA/Aaa
credit ratings at the time of purchase. With the liquidity issues experienced in
global credit and capital markets, the ARS held by us have experienced multiple
failed auctions throughout fiscal 2008 and 2009 as the amount of securities
submitted for sale exceeded the amount of purchase orders.





Given the
failed auctions, our ARS are illiquid until there is a successful auction for
them.  Accordingly, we reclassified the entire balance of the ARS from
short-term to long-term investments in the first quarter of the 53 weeks ended
November 2, 2008.





During
the first quarter of fiscal 2010, we received a tender offer for one of the
eight ARS and were able to sell them, providing $534 thousand in
cash.  Accordingly, we reclassified the $105 thousand net carrying
value of this ARS from long term to short term investments as of November 1,
2009.





14.
Related Party Transactions





The
Company has purchased equipment from Ceronix, Inc., which is controlled by one
of our board members.  For the 52 weeks ended November 1, 2009 there
was $8.9 thousand spent with Ceronix.  The Company did not purchase
any equipment from Ceronix during the 53 weeks ended November 2,
2008.


F-29


As of
November 1, 2009, there is a balance owing to a member of the board of the
Company in the amount of $17.0 thousand, net of discount. This relates to
covering the individual and dependents for medical insurance and expenses until
the age of retirement.  This is recorded as a note payable on the
consolidated balance sheet.





15.
Fair Value Measurements





On
November 1, 2009 we adopted FASB ASC 820 Fair Value Measurements, with respect
to certain assets and liabilities.


Fair
value is defined as the price that would be received to sell an asset or paid to
transfer a liability (exit price), in the principal or most advantageous market,
in an orderly transaction between market participants, on the measurement date.
Assets and liabilities carried at fair value are classified and disclosed in one
of the following three categories:


·
            Level
      1 - Quoted market prices in active markets for identical
      instruments ·
              Level
      2 - Observable
      inputs other than quoted prices in active markets for identical assets and
      liabilities, quoted prices for identical or similar assets or liabilities
      in inactive markets, or other inputs that are observable or can be
      corroborated by observable market data for substantially the full term of
      the asset or liabilities
 ·
              Level
      3 - Inputs
      that are generally unobservable and typically reflect management’s
      estimates of assumptions that market participants would use in pricing the
      asset or liability




Auction
Rate Securities for the fiscal years ended November 1, 2009 and November 2, 2008
(In thousands):




2009
              
              
              2008Beginning
      balance
              
              $
              566
              
              
              $
              3,872Impairment
      Charges
              
              
              -
              
              
              
              (3,306
              )Ending
      balance
              
              $
              566
              
              
              $
              566
  The following table presents the investments measured at fair value on November 1, 2009 and November 2, 2008 (In thousands):


2009
                
                Fair
      Value
                
                
                Level
      1
                
                
                Level
      2
                
                
                Level
      3Auction
      Rate Securities
                
                $
                566
                
                
                $
                -
                
                
                $
                105
                
                
                $
                461Ending
      balance
                
                $
                566
                
                
                $
                -
                
                
                $
                105
                
                
                $
                4612008
                
                Fair
      Value
                
                
                Level
      1
                
                
                Level
      2
                
                
                Level
      3Auction
      Rate Securities
                
                $
                566
                
                
                $
                -
                
                
                $
                327
                
                
                $
                239Ending
      balance
                
                $
                566
                
                
                $
                -
                
                
                $
                327
                
                
                $
                239




Valuation
Techniques and Balance Sheet Presentation





Investments
in ARS are valued using discounted cash flows, with certain assumptions related
to lack of liquidity and observable market transactions.





Derivative
assets and liabilities including the interest rate swap and debt are valued
using quoted forward pricing from bank counterparties and LIBOR credit default
swap rates for non-performance risk, and approximate the net settlement amount
if the contracts were settled at the reporting date. These are presented
primarily as components of debt (current and long term) and interest rate
swap.





The fair
value of cash and equivalents, accounts receivable, accounts payable, and other
accrued liabilities are approximated by the carrying value.





16.
Business Segment Information





Due to
our acquisition of Summit in March 2007, management determined that a new
operating segment was appropriate.  The segment discussion outline
below represents the adjusted segment structure.


F-30


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





The
accounting policies of the reporting segments are the same as those described in
the summary of significant accounting policies.  The Company evaluates
the performance of these segments based on many factors including sales, sales
trends, margins, and operating performance. The Company allocates costs between
the bingo and box segments based on general overhead allocations as well as
specific allocations based on actual time and amount spent on each
segment.


Financial information for the two operating segments is as follows (in thousands):


52
      Weeks Ended
              
              
              53
      Weeks Ended
              
              
              Twelve
      Months EndedNovember
      1, 2009
              
              
              November
      2, 2008
              
              
              October
      31, 2007Net
      RevenueBingo
      Equipment
              
              $
              39,104
              
              
              $
              43,964
              
              
              $
              47,114Box
      Equipment
              
              
              8,690
              
              
              
              11,483
              
              
              
              11,691$
              47,794
              
              
              $
              55,447
              
              
              $
              58,805Net
      Cost of RevenueBingo
      Equipment
              
              $
              14,709
              
              
              $
              19,103
              
              
              $
              19,683Box
      Equipment
              
              
              5,243
              
              
              
              6,262
              
              
              
              6,859$
              19,952
              
              
              $
              25,365
              
              
              $
              26,542Net
      Income/(Loss)Bingo
      Equipment
              
              $
              5,559
              
              
              $
              549
              
              
              $
              4,510Box
      Equipment
              
              
              (16,061
              )
              
              
              (11,712
              )
              
              
              161$
              (10,502
              )
              
              $
              (11,163
              )
              
              $
              4,671Depreciation
      and AmortizationBingo
      Equipment
              
              $
              6,406
              
              
              $
              8,822
              
              
              $
              10,743Box
      Equipment
              
              
              3,918
              
              
              
              1,286
              
              
              
              801$
              10,324
              
              
              $
              10,108
              
              
              $
              11,544Interest
      ExpenseBingo
      Equipment
              
              $
              402
              
              
              $
              267
              
              
              $
              125Box
      Equipment
              
              
              2,644
              
              
              
              4,357
              
              
              
              2,217$
              3,046
              
              
              $
              4,624
              
              
              $
              2,342November
      1, 2009
              
              
              November
      2, 2008
              
              
              October
      31, 2007Identifiable
      AssetsBingo
      Equipment
              
              $
              31,896
              
              
              $
              47,088
              
              
              $
              60,378Box
      Equipment
              
              
              34,767
              
              
              
              42,407
              
              
              
              33,504$
              66,663
              
              
              $
              89,495
              
              
              $
              93,882
  F-31
 17.
Quarterly Financial Information (Unaudited)





Summarized
unaudited quarterly financial information for the 52 weeks ended November 1,
2009, the 53 weeks ended November 2, 2008, and twelve months ended October 31,
2007 are noted below (in thousands, except per share amounts):




52
      Weeks Ended November 1, 2009First
      Quarter
              
              
              Second
      Quarter
              
              
              Third
      Quarter
              
              
              Fourth
      Quarter (2)Revenue
              
              $
              12,706
              
              
              $
              12,588
              
              
              $
              11,443
              
              
              $
              11,057Gross
      Profit
              
              
              7,238
              
              
              
              7,920
              
              
              
              6,509
              
              
              
              6,175Income
      (loss) from operations
              
              
              384
              
              
              
              619
              
              
              
              179
              
              
              
              (14,625
              )Net
      (loss)
              
              
              (683
              )
              
              
              (69
              )
              
              
              (91
              )
              
              
              (9,659
              )Net
      (loss) per share:Basic
              
              
              (0.06
              )
              
              
              (0.01
              )
              
              
              (0.01
              )
              
              
              (0.82
              )Diluted
              
              
              (0.06
              )
              
              
              (0.01
              )
              
              
              (0.01
              )
              
              
              (0.82
              )





53
      Weeks Ended November 2, 2008First
      Quarter
              
              
              Second
      Quarter (1)
              
              
              Third
      Quarter (1)
              
              
              Fourth
      Quarter (1,2)Revenue
              
              $
              15,184
              
              
              $
              13,870
              
              
              $
              13,362
              
              
              $
              13,031Gross
      Profit
              
              
              8,584
              
              
              
              7,701
              
              
              
              6,547
              
              
              
              7,250Income
      (loss) from operations
              
              
              1,800
              
              
              
              1,090
              
              
              
              (11
              )
              
              
              (10,704
              )Net
      income (loss)
              
              
              331
              
              
              
              113
              
              
              
              (488
              )
              
              
              (11,119
              )Net
      income (loss) per share:Basic
              
              
              0.03
              
              
              
              0.01
              
              
              
              (0.04
              )
              
              
              (0.92
              )Diluted
              
              
              0.03
              
              
              
              0.01
              
              
              
              (0.04
              )
              
              
              (0.92
              )
   Twelve
      Months Ended October 31, 2007First
      Quarter
              
              
              Second
      Quarter (3)
              
              
              Third
      Quarter (3)
              
              
              Fourth
      Quarter (3)Revenue
              
              $
              12,016
              
              
              $
              13,411
              
              
              $
              16,637
              
              
              $
              16,741Gross
      Profit
              
              
              7,094
              
              
              
              7,465
              
              
              
              8,590
              
              
              
              9,114Income
      from operations
              
              
              1,566
              
              
              
              2,015
              
              
              
              2,537
              
              
              
              2,755Net
      income
              
              
              1,072
              
              
              
              1,207
              
              
              
              1,079
              
              
              
              1,313Net
      income per share:Basic
              
              
              0.09
              
              
              
              0.10
              
              
              
              0.09
              
              
              
              0.10Diluted
              
              
              0.08
              
              
              
              0.09
              
              
              
              0.08
              
              
              
              0.10
   1
              
              Results
      for our second, third and fourth quarters of 2008 reflect impairment
      charges of $1.0 million, $0.1 million and $2.2 million, respectively,
      related to our investments in auction rate securities.2
              
              Results
      for our fourth quarter of 2008 and 2009 reflect the impairment charge
      related to goodwill of $10.8 million and $15.7 million, respectively,
      associated with our acquisition of Summit.  Also included is a $4.0
      million reversal of a loss contingency related to Trend and a $2.7 million
      impairment charge of an obsolete gaming library related to the Summit
      acquisition.3
              
              Results
      for the second, third, and fourth quarters of fiscal 2007 reflect the
      acquisition of the assets of
Summit.