**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**









**Form
      10-K**




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




**For
      the fiscal year ended October 31, 2006**




**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.)*




**900
      Sandhill Road**


**Reno,
      Nevada 89521**


**(775) 850-6000**


*(Address,
      including zip code, and telephone number, including area code of principal
      executive offices)*




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




**Title
                of Each Class**
            
            **Name
                of Each Exchange on Which Registered**Common
                Stock, par value $.001 per share
              Rights
                to Purchase Series A Junior Participating Preferred Stock
            
            The
                NASDAQ Stock Market LLC




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




**None**




**** *(Title
      of class)*




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 R




Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or 15 (d) of the Securities Exchange Act of 1934. Yes o NoR




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




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




Large
      accelerated filer o Accelerated
      filer o Non-accelerated
      filer R




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




The
      aggregate market value of common stock held by nonaffiliates of the registrant
      (9,306,421shares) based on the closing price of the registrant’s common stock as
      reported on the NASDAQ Global Market on April 30, 2006, which was the last
      business day of the registrant’s most recently completed second fiscal quarter,
      was $68,588,323. For purposes of this computation, all officers, directors,
      and
      10% beneficial owners of the registrant are deemed to be affiliates. Such
      determination should not be deemed to be an admission that such officers,
      directors, or 10% beneficial owners are, in fact, affiliates of the
      registrant.




As
      of
      January 16, 2007, there were outstanding 12,516,222 shares of the
      registrant’s common stock, par value $0.001 per share.




**Documents
      Incorporated By Reference**




Portions
      of the registrant’s definitive proxy statement for the 2007 Annual Meeting of
      Stockholders are incorporated by reference into Part III of this
      report.










**GAMETECH
      INTERNATIONAL, INC.**




**ANNUAL
      REPORT ON FORM 10-K**


**FISCAL
      YEAR ENDED OCTOBER 31, 2006**




**INDEX**


Page**PART
                  I**Item
                  1.
              *Business*
              
              1Item
                  1A.
              *Risk
                  Factors*
              
              11Item
                  1B.
              *Unresolved
                  Staff Comments*
              
              18Item
                  2.
              *Properties*
              
              18Item
                  3.
              *Legal
                  Proceedings*
              
              18Item
                  4.
              *Submission
                  of Matters to a Vote of Security Holders*
              
              19**PART
                  II**Item
                  5.
              *Market
                  for Registrant’s Common Equity, Related Stockholder Matters, and Issuer
                  Purchases of Equity Securities*
              
              19Item
                  6.
              *Selected
                  Financial Data*
              
              20Item
                  7.
              *Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations*
              
              21Item
                  7A.
              *Quantitative
                  and Qualitative Disclosures About Market Risk*
              
              29Item
                  8.
              *Financial
                  Statements and Supplementary Data*
              
              29Item
                  9.
              *Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure*
              
              29Item
                  9A.
              *Controls
                  and Procedures*
              
              29Item
                  9B.
              *Other
                  Information*
              
              30**PART
                  III**Item
                  10.
              *Directors
                  and Executive Officers of the Registrant*
              
              30Item
                  11.
              *Executive
                  Compensation*
              
              30Item
                  12.
              *Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters*
              
              30Item
                  13.
              *Certain
                  Relationships and Related Transactions*
              
              30Item
                  14.
              *Principal
                  Accountant Fees and Services*
              
              30**PART
                  IV**Item
                  15.
              *Exhibits
                  and Financial Statement Schedules*
              
              31SIGNATURES
              
              34INDEX
                  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 2007 and
      thereafter; expansion of products or product development; expansion into new
      domestic and international markets; potential acquisitions or strategic
      alliances; statements regarding our future expectations with respect to our
      pending acquisition of Summit Amusement & Distributing, Ltd; 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. Among the factors that could cause actual results
      to
      differ materially are the factors discussed in Item 1A, “Risk
      Factors.”*









**PART
      I**




**Item
      1.*****Business***




**General**




We
      design, develop, and market interactive electronic bingo player terminals and
      systems. We currently market portable terminals, which can be played anywhere
      within a bingo hall, and fixed-base systems with touchscreen-activated monitors.
      We have portable and fixed-base terminals operating in charitable, Native
      American, commercial, and military bingo halls. Both our portable and fixed-base
      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 per session, 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.




Our
      company was founded 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 reputation for superior
      customer service and support enable us to compete effectively in the highly
      competitive bingo industry.




Bingo
      is
      a legal enterprise in 47 states (excluding Arkansas, Hawaii, and Utah) and
      the
      District of Columbia. Nonprofit organizations sponsor bingo games for
      fundraising purposes, while Native American, commercial entities, and
      government-sponsored entities operate bingo games for profit. As of October
      31,
      2006, we had systems in 30 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
      in the 47 states where bingo is legal. We estimate that bingo currently is
      played on Native American lands in 30 states. As of October 31, 2006, we had
      terminals in operation in Native American bingo halls in 13 of those states.
      Collectively, as of October 31, 2006, we had products in 40 states and in seven
      nondomestic countries.




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




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 those materials with the
      Securities and Exchange Commission.




**Business
      Strategy**




Our
      goal
      is to be the leading provider of electronic bingo products and back-office
      bingo
      management systems in the United States, on Native American lands, and
      internationally. Key elements of this strategy include the
      following:




***Emphasize
      Superior Customer Service***




We
      plan
      to continue to emphasize our customer service programs to enable us to maintain
      a high level of customer loyalty and satisfaction, which translates into
      long-term customer relationships. Approximately 40% of our employees are field
      service technicians who are on call seven days a week to support customers
      and
      respond promptly to their needs. We believe our dedication to superior customer
      service has contributed to the acceptance of our products and our ability to
      attract and retain long-term customers.




1




***Expand
      Product Offerings and Increase Player Usage of Bingo
      Electronics***




We
      plan
      to continue to expand our product offerings to provide bingo players with more
      choices and price points. 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, as well as terminals
      that
      are capable of supporting a variety of different games, which increase
      entertainment value. Our current product portfolio includes four portable
      models, one with black and white displays and three with color displays, two
      fixed-base color terminal offerings, and a back-office management
      system.




***Expand
      in Our Domestic Markets***




As
      part
      of our strategy to facilitate the expansion of the domestic bingo market, we
      are
      continuously working on new technology to enhance our current bingo products
      as
      well as new technology to expand the bingo playing experience and increase
      hall
      operator efficiency and effectiveness.




***Expand
      Internationally***




We
      plan
      to continue to expand our operations outside of the United States. We currently
      have a small installed base of terminals in the United Kingdom, Canada, the
      Philippines, Guam, Mexico, Norway and Japan. International revenue is currently
      8.2% of our total revenue. We are actively pursuing additional expansion into
      Mexico, the United Kingdom, certain provinces in Canada, and other locations.
      In
      both Mexico and the United Kingdom, we are working with major bingo operators
      to
      increase player acceptance levels and capitalize on the potential of placing
      additional electronic bingo terminals in bingo clubs. From time to time we
      also
      evaluate opportunities to expand into other countries.




***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.




During
      2006, we continued to broaden the application of our wireless technology to
      expand our product line. We developed a new low cost color bingo terminal,
      the
      Tracker TM ,
      and we
      anticipate a widespread release of the Tracker terminal to the general market
      during fiscal 2007.




We
      were
      also able to introduce our Latin 90 system in the Mexican marketplace late
      in
      fiscal 2006. During fiscal 2007, we expect to continue additional development
      of
      the system and expand its release in Mexico, as well as other Latin American
      markets. For additional information, see “Product and System Software
      Development.”




***Expansion
      Through Acquisition***




During
      August 2006, we announced the execution of a definitive agreement with
      privately-held Summit Amusement & Distributing, Ltd. to acquire
      substantially all of the assets of Summit. The consideration for the assets
      consists of $37 million in cash payable at closing, and a contingent payment
      of
      up to $2 million if Summit achieves certain EBITDA goals for 2006.




Headquartered
      in Billings, Montana, Summit is a developer and manufacturer of entertainment
      driven gaming devices, primarily video lottery terminal equipment and related
      software. Summit’s primary markets currently include Montana, Louisiana, South
      Dakota, West Virginia and various Native American casinos. The transaction
      is
      subject to a number of customary closing conditions. In addition, we are
      obtaining licenses in Louisiana, West Virginia, South Dakota and Montana to
      operate Summit’s business and are completing our contemplated financing for the
      acquisition, and under certain circumstances must pay Summit a $1 million
      termination fee if we are unable to obtain the required permits and financing.
      We anticipate financing the acquisition with a $10 million revolving line of
      credit and a $30 million term loan.




2




***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**




We
      provide bingo operators with a variety of electronic player terminals and
      back-office management systems. Our player terminals operate on a proprietary
      operating system known as the DiamondTM system. This operating system includes
      Point-of-Sale, or 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 Diamond system provides bingo operators a verifier that
      confirms whether a called “BINGO” is legitimate and has been won on a bingo card
      (whether electronic or paper) that was sold during the session being
      played.




We
      also
      offer bingo operators a back-office management system known as AllTrak2® while
      continuing to support our legacy product, AllTrak®. AllTrak2 is typically
      integrated with our electronic bingo terminals to provide a bingo hall with
      a
      package of accounting and marketing information that enhances the bingo
      operator’s ability to manage the bingo hall. The original AllTrak back-office
      management system operates a multi-purpose DOS-based back-office accounting
      system for bingo hall operators on a PC platform. The AllTrak2 system is a
      Windows-based, multi-purpose accounting system for bingo hall operators running
      on standard PCs. Both AllTrak systems operate together with the Diamond system
      and significantly enhance the user interface at POS terminals. In addition,
      the
      systems provide inventory-tracking capabilities for bingo paper, complete sales
      data, player tracking systems, and more.




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




·
            the
                ability to play up to 2,000 electronic bingo card images 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.




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-base terminals incorporate picture-in-picture and audio
      technology. In many markets, players can also play alternative games, such
      as
      solitaire, for entertainment only during 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 on paper, 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 two types of electronic bingo products: portable and fixed-base
      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***




We
      currently have the following four variations of portable bingo terminals in
      commercial use:




·
            the
                Traveler terminal, our state-of-the-art color portable
                terminal;




·
            the
                Tracker terminal, our lower-cost color portable terminal;




·
            the
                TED2CTM
                terminal, our high end color portable terminal;
                and




·
            the
                TED® terminal, which is our lower-cost black and white portable
                terminal.




3




Our
      portable bingo systems operate similarly to our fixed-base systems. 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, based 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-base 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 TED 2 C,
      12
      Traveler, 12 Tracker, and 25 TED terminals, respectively.




The
      Traveler is a portable player terminal introduced in 2003 that incorporates
      our
      latest generation of technology. Traveler is designed to cater to players who
      prefer a compact portable terminal with a color display and wireless
      communications. During 2006, the Traveler became our most desirable portable
      terminal. The Traveler can display up to 8 cards at one time and play 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 back-office system or the Diamond® POS system.




The
      Tracker portable color terminal offers a low-cost color alternative to players
      preferring the familiarity of our TED terminal. Tracker was developed in 2006
      and we anticipate a widespread release in 2007. Tracker incorporates many of
      the
      favored features of our TED terminal with the added enhancement of a
      high-resolution color screen. The Tracker terminal can display up to 6 bingo
      cards at a time while monitoring the play of 600 cards in a single game. The
      Tracker interfaces with both our AllTrak2 and Diamond POS back-office
      systems.




The
      TED 2 C
      terminal, with its color screen and clear easy-to-see graphics, is similar
      to
      our fixed-base bingo systems, and offers a superior player experience. The
      TED 2 C
      terminal can display up to 16 cards at one time and play up to 600 cards in
      one
      game. This easy-to-use device operates using either the AllTrak2 back-office
      system or Diamond POS system.




The
      TED
      terminal is the lower-cost black and white portable terminal. The TED terminal
      can display four bingo cards at a time, plays up to 600 cards in a single game,
      functions from a proprietary motherboard and operates using either the Alltrak2
      back-office system or the Diamond POS system.




***Fixed-Base
      Bingo Systems***




Our
      fixed-base 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-base bingo system use microcomputer
      hardware and can be operated with touchscreens. Fixed-base 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-base 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 touchscreen. 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-base 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 touchscreen, 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’s
      Terminal* .
      Each
      player’s terminal consists of a separate computer and touchcreen 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.




4




**Product
      and System Software Development**




We
      conduct an ongoing research and development program to enhance the features
      and
      capabilities of our bingo systems, to maintain a competitive advantage in the
      marketplace, and to extend our product line with new games and
      applications.




In
      2006,
      we developed a stand-alone system for the Latin American Bingo market, which
      was
      released late in fiscal 2006. The system plays a 90-number style of game, which
      is popular in Latin America. The system utilizes a server installed at the
      bingo
      hall and plays this 90-number game on our Traveler terminals. The system
      supports a communication method allowing it to communicate with our headquarters
      securely over the internet.




During
      2006, we developed a new low-cost color bingo terminal, the Tracker. It provides
      all of the same features as our TED terminal, with a color screen. It is also
      capable of future enhancements, based on new or emerging customer needs.




Additionally,
      during 2006 we made significant progress on the development of a new portable
      POS system. The system allows all POS functions to be performed wirelessly
      throughout a bingo hall.




During
      fiscal 2006, we spent approximately $2.9 million for company-sponsored research
      and development activities compared with approximately $4.1 million during
      fiscal 2005 and approximately $5.2 million during fiscal 2004.




**Sales,
      Marketing, and Distribution**




We
      utilize a network of third-party distributors as well as a direct sales force
      to
      promote the use and placement of our electronic bingo terminals and
      systems.




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 our market leading 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 operators and demonstrate the benefits
      of
      our bingo systems to both bingo operators and bingo players. Our superior
      customer service and quality products are designed to promote player loyalty
      and
      long-term relationships with bingo operators.




Our
      installation package typically includes the following:




·
            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.




***Target
      Markets***




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 Sates and foreign markets. As of December 31, 2006, we had
      terminals in approximately 500 locations serving approximately 1,200 bingo
      operators, including many charitable bingo halls in which we, or our
      distributors have multiple customers. For the year ended October 31, 2006,
      portable terminals generated approximately 80% of our revenue and fixed-based
      terminals generated approximately 20% of our revenue.




5




As
      of
      December 31, 2006, we operated in 40 states and seven nondomestic
      countries. We are actively pursuing additional opportunities in other states
      and
      countries, as well as increased activity at existing sites.




**Materials
      and Supplies**




We
      source
      all system hardware components from various domestic and international
      suppliers. The components are typically assembled and system configured at
      our
      facility in Reno, Nevada, however we occasionally use third-party manufacturers
      to assist with the assembly or refurbishing of terminals. We require that the
      assemblers of our terminals be dedicated to high quality and high production
      levels as well as support new product development.




**Intellectual
      Property**




We
      have
      registered trademarks with the U.S. Patent and Trademark Office for the
      following names: “AllTrak,” “AllTrak2,” “Blazing Quarters,” “Bowling for Cash,”
“Cadillac Bingo,” “Diamond Bingo,” “Diamond Elite,” “Diamond Plus Bingo,”
“Diamond TED,” “Firestar,” “GameTech,” “GameTech and Design,” “Nevada Classic,”
“Pay-N-Play,” “Sunken Treasure,” “TED,” “TED2C,” “The Electronic Dauber,” and
“Traveler.” We have trademark applications pending with the U.S. Patent and
      Trademark Office for the following names: “Bingo Enhanced Tabs System,” “Club
      76,” “Crystal Ball,” “Diamond Pro,” “Diamond VIP,” “GameTech Arizona
      Corporation,” “GameTech Elite,” “GameTech Players Club,” “Latin 90,” “Tracker,”
and “GameTech Mini.” We have registered Canadian trademarks for the following
      names: “AllTrak,” “Diamond Bingo,” “Diamond Elite,” “Diamond Plus Bingo,”
“Diamond Pro,” “Diamond TED,” “ Diamond VIP,” “GameTech and Design,” “TED,”
“TED2C,” and “The Bingo Players Choice.” We have Canadian trademark applications
      pending for the following names: “GameTech.” We have Mexican trademark
      applications pending for the following names: “GameTech,” “Gringo Bingo,”
“Loteria Loco,” “Tracker,” “Traveler,” and “GameTech Mexico,” and “Latin 90.” We
      have registered Norwegian trademarks for the following names: “GameTech and
      Design” and “TED.” We cannot provide assurance that any of our domestic or
      foreign trademark applications will be granted.




**Competition**




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 Bettina Corp.,
      California Concepts, EZ Bingo, FortuNet, Inc., 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 may 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-base bingo systems, combined with superior service
      and customer support, differentiate us from our competitors.




**Government
      Regulation**




We
      are
      subject to regulation and oversight by governmental authorities in virtually
      all
      jurisdictions in which we conduct business. As of December 31, 2006, we
      held approximately 60 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 5% 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, regulation
      results 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 states in which charitable bingo is legal, the state
      imposes operating restrictions on the game of bingo and on the form of business
      relations we can have with the charitable 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.




6




***Nevada*** **Regulation
      and Licensing**




In
      October 2006, we were successful in obtaining registration with the Nevada
      Gaming Commission (the “Commission”) as a publicly traded corporation and were
      licensed as (i) a manufacturer and distributor of gaming devices, (ii) an
      operator of a mobile gaming system, and (iii) an operator of an inter-casino
      linked system. Additionally, the Commission found us suitable to manufacture
      and
      distribute certain equipment used in casino gaming operations which the
      Commission refers to as “associated equipment” and found various of our officers
      and directors suitable to hold such positions in the company. The foregoing
      licenses, findings of suitability, and related approvals were limited by the
      Commission to expire in two years, unless otherwise renewed by the Commission.




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
      various local regulations. Our manufacturing and distributing businesses are
      subject to the licensing and regulatory control of the Commission, the Nevada
      State Gaming Control Board (the “Gaming Board”) and various local licensing
      authorities.




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.




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.




7




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.




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 not deemed to be inconsistent 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.
            such
                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;




8




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 any of
      the
      following actions without having first obtained the approval of the Commission:
      If a person or entity that is a lender to a licensed company is found unsuitable
      to be a lender under the circumstances, 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.




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 environmental 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.




9




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 of the Gaming Board of their 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
      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.




IGRA
      defines Class II gaming to include “the game of chance commonly known as
      bingo, whether or not electronic, computer or other technologic aids are used
      in
      connection therewith,” and defines Class III gaming to include “electronic
      or electromechanical facsimiles of any game of chance or slot machines of any
      kind.” In the event of classification as a Class III product, such a
      designation would reduce the potential market for the devices because only
      Native American gaming halls that have entered into a tribal-state compact
      that
      permits Class III electronic gaming systems would be permitted to use the
      device, unless we could modify the systems to have them reclassified as a
      Class II game. We may not be able to make any such modifications in the
      event of such a classification.




***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 Johnson Act may result in seizure and forfeiture of the equipment as well
      as
      other penalties. It is our understanding that the Department of Justice will
      be
      proposing amendments to the Johnson Act which are intended to refine and clarify
      the differences in existing federal gambling laws under the IGRA and the Johnson
      Act. 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.




10




***Regulation
      of Electronic Bingo Systems***




Our
      electronic bingo products, including our portable and fixed-base terminals,
      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 in charitable
      halls is currently permitted in more than 35 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 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 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.




**Employees**




As
      of
      January 1, 2007, we had approximately 200 full-time equivalent 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.




***There
      is no assurance that the Summit acquisition will be
      successfully***  ***completed.
      If we fail to obtain required financing and licenses and
      Summit***  ***meets
      our conditions to closing, we will be required to pay Summit a $1
      million***  ***termination
      fee.***




On
      August
      30, 2006, we entered into an asset purchase agreement with Summit Amusement
      & Distributing, Ltd. to acquire substantially all of its assets and assume
      certain of its liabilities. The closing of the agreement is subject to a number
      of conditions, and we cannot control whether all of them will be met. In
      addition, the agreement may be terminated under specified circumstances, some
      of
      which are not within our control. For example, Summit may terminate the
      agreement by paying us $1 million if it enters into a definitive agreement
      to
      sell its business to a third party. If we are unable to obtain required licenses
      or financing for the acquisition and Summit meets our conditions to closing,
      we
      will be required to pay Summit a $1 million termination fee.




***If
      completed, our acquisition of Summit may not produce the results
      we***  ***anticipate.***




Our
      acquisition of Summit is the largest acquisition undertaken by our company.
      The
      success of the acquisition will depend in large part on our management’s ability
      to integrate, maintain and grow Summit’s business. Challenges we face include
      the following:




·
            the
                diversion of management time and effort from our existing business




11




·
            managing
                a much larger combined business, including implementing adequate
                internal
                controls




·
            the
                potential loss of key employees of Summit, and




·
                  maintaining
                      Summit’s customers and growing the customer base and
                      markets.




It
      is
      anticipated that none of Summit’s employees will have employment agreements with
      us, although two of Summit’s key employees would sign nonsolicitation agreements
      and would each receive upon joining us options to purchase 100,000 shares of
      our
      common stock, vesting after two years.




In
      addition, Summit’s business is subject to many risks and uncertainties,
      including the following:




·
            its
                dependence on the video lottery terminal industry




·
            its
                dependence on key markets in Montana, Louisiana, South Dakota, and
                West
                Virginia




·
            its
                ability to respond to rapid technological change and market demand
                for
                product enhancements, and changes in laws and regulations.




***We
      anticipate incurring significant debt to finance the acquisition of
      Summit.***




We
      anticipate financing the acquisition of Summit with a $10 million revolving
      credit facility and a $30 million term loan secured by substantially all of
      our
      and Summit’s assets. Servicing the debt will require a significant amount of
      cash, and our ability to generate the required cash depends on our ability
      to
      successfully manage Summit’s business and upon other factors some of which are
      beyond our control. We expect that the agreement governing the new debt will
      contain substantial affirmative and restrictive covenants, including the
      maintenance of certain financial ratios. A breach of any of our obligations
      under the debt agreement could result in a default allowing the lender to elect
      to declare all amounts outstanding together with accrued interest to be
      immediately due and payable.




**We
      depend on the bingo and electronic bingo industry.**




Our
      future revenue and profits depend upon continued market acceptance of our
      products and services, the continued penetration of electronic bingo into bingo
      halls nationwide, and various other factors, many of which are beyond our
      control. For example, we depend on the continued popularity of bingo as a
      leisure activity and as a means of charitable fundraising. The bingo industry
      in
      North America is a mature industry and has declined. We anticipate continuing
      declines in the future as a result of an increase in competing forms of
      entertainment, including those resulting from developments in online gaming
      and
      the continued expansion of the legalization of casino gaming, such as riverboat
      gaming and gaming on Native American lands.




***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, 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 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.




***To
      compete successfully, we must retain and extend our existing contracts 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. Our 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 inability to renew or
      materially alter a significant number of contracts, could, depending on the
      circumstances, have a material adverse effect on our business, results of
      operation, and financial condition.




12




**Some
      of our customers may terminate agreements with us on relatively short
      notice.**




Some
      of
      our agreements with customers may permit termination by the customers upon
      relatively short notice to us and without penalty, and do not designate us
      as
      the customer’s exclusive electronic bingo system provider. Some contract terms
      may not be memorialized in writing.




***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 expand. 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 change or change in interpretation,
      and other jurisdictions, including the federal government, may elect to regulate
      or tax bingo, video lottery or gaming. 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.




***We
      depend on our relationships with our distributors.***




We
      derive
      a significant portion of our revenue from customers serviced through
      distributors. Our 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.




***We
      depend on Native American laws in the operation of a portion of our
      business.***




Our
      terminals are operated in many bingo halls located on Native American
      reservations in the United States. State and federal laws governing the business
      or other conduct of private citizens generally do not apply on Native American
      lands. We may have limited recourse if any Native American tribe operating
      a
      particular bingo hall seized the terminals or barred entry onto the reservation
      in the event of a contract or other dispute. However, any seizure of our
      terminals is likely to result in a capital loss and loss of revenue to our
      company and could, were it to occur on a large scale, have a material adverse
      effect on our business, capital resources, results of operations, and financial
      condition.




***If
      our games were classified as Class III games 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 be classified as
      Class II games.***




Our
      operations in Native American gaming halls, which generated approximately 19%
      of
      our revenue during fiscal 2006, 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.




13




***Nevada
      Regulation.***




In
      October 2006, we were successful in obtaining registration with the Commission
      as a publicly traded corporation and were licensed as (i) a manufacturer and
      distributor of gaming devices, (ii) an operator of a mobile gaming system,
      and
      (iii) an operator of an inter-casino linked system. Additionally, the Commission
      found us suitable to manufacture and distribute certain equipment used in casino
      gaming operations which the Commission refers to as “associated equipment” and
      found various of our officers and directors suitable to hold such positions
      in
      the company. The foregoing licenses, findings of suitability, and related
      approvals were limited by the Commission to expire in two years, unless
      otherwise renewed by the Commission. The licenses also require an annual
      calendar year renewal fee and as such were renewed on January 1, 2007 for one
      year. Under Nevada gaming law all directors, officers and 5% 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. All of our directors and officers and 5% shareholders were found
      suitable and we have applied for such finding of suitability for our new Chief
      Financial Officer, but there can be no assurance that she will be found
      suitable. 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 the aforementioned Nevada licenses,
      we may not be able to place our electronic bingo systems 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. We rely on the Texas
      market for a significant portion of our revenue.




The
      concentration of our revenue in the Texas market, which generated approximately
      17% of fiscal 2006 revenue, potentially heightens the exposure of regulatory
      changes or market changes that may prevent or impede us from doing business
      in
      that state. Furthermore, the loss of or inability of our company to find
      suitable distributors in Texas, 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 industry is 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, any of which could materially and adversely affect our
      business, operating results, and financial condition. 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,
      we compete 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.




***Investors
      may not be able to exercise control over our company as a result of principal
      stockholders’ ownership.***




The
      current executive officers and directors of our company beneficially own
      approximately 29.1% of our
      outstanding common stock. As a result, the executive officers and directors
      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 also might
      adversely affect the market price of the common stock and the voting and other
      rights of our company’s other stockholders.




14




***We
      must be able to attract and retain skilled employees.***




Our
      operations depend to a great extent on our ability to retain existing and
      attract new key personnel. Competition is intense for skilled marketing and
      product research and development employees in particular. We may not be
      successful in attracting and retaining such personnel, and we may incur
      increased costs in order to attract and retain personnel. Although we believe
      we
      can locate replacement personnel, the loss of key personnel, were we unable
      to
      hire suitable replacements, or our failure to attract additional qualified
      employees, could have a material adverse effect on our business, results of
      operations, and financial condition.




***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 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.




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 manage effectively 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;




15




·
            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
      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.




***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 16, 2007, we had outstanding 12,516,222 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
      3.0 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 exercise of outstanding
      options 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
      having appearance and functionality that closely resemble our
      systems.




As
      the
      number of electronic bingo terminals in the industry increases 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.




16




***Our
      operating results could differ materially from the forward-looking statements
      included in this report.***




Some
      of
      the statements and information contained in this report concerning future,
      proposed, and anticipated activities of our company, anticipated trends with
      respect to our revenue, operating results, capital resources, and liquidity
      or
      with respect to the markets in which we compete or the bingo industry in
      general, and statements regarding our future expectation with respect to our
      pending acquisition of Summit, and other statements contained in this report
      regarding matters that are not historical facts are forward-looking statements,
      as that term is defined in the securities laws. Forward-looking statements,
      by
      their very nature, include risks and uncertainties, many of which are beyond
      our
      control. Accordingly, actual results may differ, perhaps materially, from those
      expressed in or implied by such forward-looking statements. Factors that could
      cause actual results to differ materially include those discussed elsewhere
      under this Item 1A, “Risk Factors.”




***We
      depend on our controls to prevent and detect misstatements on a timely
      basis.***




Our
      financial disclosure controls and procedures are designed to provide reasonable
      assurances of achieving their objectives. An internal control deficiency exists
      when the design or operation of a control does not allow management or
      employees, in the normal course of performing their assigned functions, to
      prevent or detect misstatements on a timely basis. In preparing our tax
      provision for fiscal 2005, we identified certain adjustments to our tax
      liability accounts and related tax provision. We concluded that this was a
      significant deficiency constituting a material weakness in that there is more
      than a remote likelihood that a misstatement could have occurred and would
      not
      have been prevented or detected by our internal controls on a timely basis.
      Remediation efforts, including engaging an independent public accounting firm
      to
      assist us, increasing our skill level in the area, and other steps have been
      implemented and we are in the process of correcting the deficiencies. During
      fiscal 2006, our internal controls over preparing the tax provision have
      improved but a significant deficiency still exists. We are continuing to improve
      our knowledge and skill level in the area, and other steps are being implemented
      in this process to correct the deficiency. Although we have not noted any other
      deficiencies, we cannot give assurances that no other deficiency exists or
      may
      occur which might, in the future, prevent or detect misstatements on a timely
      basis. Failure to achieve and 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.




Pursuant
      to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our Annual
      Report on Form 10-K for the fiscal year ending October 31, 2008, we will be
      required to furnish a report by our management on our internal control over
      financial reporting and we will be required to provide our independent
      registered public accounting firm attestation report with respect to our
      internal controls over financial reporting beginning with our Annual Report
      on
      Form 10-K for the fiscal year ending October 31, 2009. We were not subject
      to
      these requirements for the fiscal year ended October 31, 2006. Management’s
      internal control report must contain (i) a statement of management’s
      responsibility for establishing and maintaining adequate internal control over
      financial reporting, (ii) a statement identifying the framework used by
      management to conduct the required evaluation of the effectiveness of our
      internal control over financial reporting, (iii) management’s assessment of the
      effectiveness of our internal control over financial reporting as of the end
      of
      our most recent fiscal year, including a statement as to whether or not internal
      control over financial reporting is effective. In
      order
      to achieve compliance with Section 404 within the prescribed period, we are
      engaged in a process to document and evaluate our internal control over
      financial reporting, which is both costly and challenging. In this regard,
      we
      have dedicated internal resources and adopted a detailed work plan to (i) assess
      and document the adequacy of internal control over financial reporting, (ii)
      take steps to improve control processes where appropriate, (iii) validate
      through testing that controls are functioning as documented, and (iv) implement
      a continuous reporting and improvement process for internal control over
      financial reporting. Despite our efforts, we can provide no assurance as to
      our,
      or our independent registered public accounting firm’s conclusions with respect
      to the effectiveness of our internal control over financial reporting under
      Section 404 at the times required. There is a risk that neither we nor our
      independent registered public accounting firm will be able to conclude that
      our
      internal controls over financial reporting are effective as required by Section
      404 at the required dates. This may result in an adverse reaction in the
      financial markets due to a loss of confidence in the reliability of our
      financial statements.




17




**Item
      1B.** ***Unresolved Staff Comments***




Not
      Applicable.




**Item
      2.*****Properties***




Our
      corporate headquarters are located in Reno, Nevada, in a 41,000 square-foot
      leased facility under a lease that expires in November 2010. We also
      operate two regional facilities: an 8,080 square-foot site in Broadview Heights,
      Ohio, and a 4,115 square-foot site in Southlake, Texas. The Ohio lease expires
      in November 2007 and the Texas lease expires in September 2007. 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***




On
      March
      22, 2001, we filed GameTech International, Inc. v. Trend Gaming Systems, LLC,
      CIV 01-0540 PHX LOA, a claim in the United States District Court for the
      District of Arizona, seeking a declaratory judgment that we are not in material
      breach of our November 1, 1999 Distribution Agreement with Trend Gaming Systems,
      LLC (“Trend”), and seeking damages for past due payments and wrongful
      withholdings by Trend. Trend counterclaimed, alleging that its payments were
      in
      compliance with its contractual obligations. Trend also contended that we were
      in breach of certain of our contractual obligations to Trend, including that
      we
      had wrongfully terminated Trend. On December 16, 2002, the court entered at
      our
      request an order enjoining Trend from using approximately $540,000 in funds
      it
      had collected on our behalf, pending a trial on our ownership interest in those
      funds. The money was placed in two bank accounts/constructive trusts, subject
      to
      the court’s control. The sums in those accounts now total approximately
      $600,000. In addition, collections of accounts receivable by Trend, if any,
      are
      also being placed in that account, pending the resolution of the case. We have
      posted a $450,000 deposit with the court as a bond, which is presented as
      restricted cash on our condensed consolidated balance sheets. The accounts
      receivable from Trend were fully reserved as of October 31, 2006. Trial in
      this
      matter commenced October 4, 2004. On November 1, 2004, the jury returned a
      verdict in favor of Trend against us in the amount of $3.5 million in
      compensatory damages. The jury also awarded us $735,000 in compensatory damages
      against Trend for funds Trend collected on our behalf but failed to remit to
      us.
      The court denied all of our post-trial motions, except that it maintained the
      injunction imposing a constructive trust, pending resolution of the issues
      on
      appeal. The court setoff the jury awards and entered an amended judgment for
      Trend on May 12, 2005, in the amount of $2.8 million, plus interest on that
      sum
      at the rate of 3.31% per annum beginning March 30, 2005. We appealed to the
      United States Court of Appeals for the Ninth Circuit on April 8, 2005. We posted
      a supersedeas bond on April 8, 2005 in the court-appointed amount of $3.4
      million, which bond stays any action by Trend to collect on the judgment,
      pending appeal. Trend initially sought an award of $810,000 in legal fees and
      $26,000 in expenses and costs. In an amended request, Trend sought an award
      of
      $1.4 million in legal fees and $61,000 in expenses and costs. The court awarded
      Trend $909,000 in legal fees, expenses and costs plus interest of 3.77% per
      annum beginning August 5, 2005. We appealed the fee award to the United States
      Court of Appeals for the Ninth Circuit on August 5, 2005. We posted an
      additional supersedeas bond with the court on August 18, 2005 in the amount
      of
      $1.1 million, thereby staying any action by Trend to collect the fees, pending
      appeal. Any cash used in the collateralization of the bonds is accounted for
      as
      restricted short-term investments on our consolidated balance sheets. We cannot
      provide assurance that we will succeed in setting the judgments aside on appeal.
      Currently, the court has not set a hearing date for the appeal. For the year
      ended October 31, 2004, we recorded an estimated loss contingency in the Trend
      litigation of $3.6 million, which was estimated based on the amounts of the
      judgment described above. We recorded an additional loss contingency of $72,000
      in the third quarter of fiscal 2005 to account for the increased total award
      to
      Trend for legal fees and expenses and costs of $909,000. In addition, loss
      contingencies of $133,000 and $65,000 were recorded in the fiscal years ended
      October 31, 2006 and 2005, respectively, to account for interest accrued on
      the
      Trend judgment. We feel the amount recorded is appropriate as of October 31,
      2006.




On
      October 30, 2002, Capital Gaming Supplies (“Capital”) filed Capital Gaming
      Supplies, Inc. v. GameTech International, Inc. Civil Action No. 3:02 CV1636WS
      in
      the United States District Court for the Southern District of Mississippi,
      seeking a judgment that we tortiously interfered with alleged existing and
      prospective customer accounts. We denied the allegations and filed a
      counter-claim seeking a judgment that Capital tortiously interfered with our
      customer accounts. On April 18, 2003, Capital filed an amended complaint, adding
      other claims against us and other defendants, including a claim for malicious
      breach of contract against International Gaming Systems, Inc. (“IGS”) and its
      principals. In November 2002, we acquired certain assets of IGS and assumed
      certain claims filed by Capital against IGS and its principals. Capital sought
      compensatory and punitive damages from all defendants. On September 30, 2004,
      the district court entered a summary judgment in favor of all defendants
      dismissing all of Capital’s claims with prejudice. Capital appealed the judgment
      to the United States Court of Appeals for the Fifth Circuit, which heard oral
      argument on the matter on December 5, 2005. On February 8, 2006, the appellate
      court affirmed the judgment by the district court.




18




On
      March
      2, 2004, the jury rendered a verdict in our favor awarding compensatory and
      punitive damages against Trend Gaming, LLC, a Kentucky LLC (“Trend Gaming”)
      (involving a prior distribution agreement in Virginia) in the total amount
      of
      approximately $1.5 million. The jury also returned a verdict against Steven
      W.
      and Rhonda Hieronymus awarding compensatory and punitive damages of $1.0
      million. The court reduced compensatory damages against Trend Gaming to $1.1
      million. The court affirmed $150,000 in punitive damages against Trend Gaming
      and awarded us fees and costs of suit against Trend Gaming in the amount of
      $650,000. Compensatory damages against Mr. and Mrs. Hieronymus have been reduced
      to $762,000 but the punitive damage award against them in the amount of $150,000
      remains unchanged. Of the total compensatory damages of $1.1 million awarded
      to
      us, $762,000 represents compensation for lost profits. We can only collect
      such
      damages from one of the defendants to avoid a double recovery. Defendants have
      appealed the judgment against them. The Appellate Court heard oral argument
      on
      defendant’s appeal on October 17, 2006. We are awaiting a decision in this
      matter. Defendants did not post a supersedeas bond, and we are therefore not
      precluded from pursuing collection on the judgment during the appeal. We have
      not recorded an estimated gain contingency, as we can give no assurances whether
      we will be able to collect any award from the defendants.




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




**Item
      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, 2004:




**High**
            
            **Low****Year
                Ended October 31, 2005**First
                Quarter
            
            $
            5.15
            
            $
            3.46Second
                Quarter
            
            $
            4.51
            
            $
            2.38Third
                Quarter
            
            $
            3.39
            
            $
            2.20Fourth
                Quarter
            
            $
            4.00
            
            $
            2.60**Year
                Ended October 31, 2006**First
                Quarter
            
            $
            5.00
            
            $
            3.18Second
                Quarter
            
            $
            7.59
            
            $
            3.76Third
                Quarter
            
            $
            9.80
            
            $
            6.68Fourth
                Quarter
            
            $
            11.25
            
            $
            6.84**Year
                Ended October 31, 2007**First
                Quarter (through January 16, 2007)
            
            $
            12.90
            
            $
            9.10




On
      January 16, 2007, the last reported sales price of our common stock was
      $10.80 per share. On January 16, 2007, there were 159 record holders of our
      common stock.




19




**Dividend
      Policy**




During
      December 2003, we announced the initiation of an ongoing quarterly dividend
      after our Board of Directors reviewed current business conditions and future
      prospects. We declared ongoing quarterly dividends of approximately $0.03 per
      share per quarter. In December 2004, our Board determined that payment of a
      quarterly dividend was inconsistent with the growth objectives of our company
      and ended the quarterly dividend policy effective January 10, 2005. Any payment
      of future dividends will be at the discretion of 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.




**Item
      6.*****Selected
      Financial Data***




The
      selected consolidated statement of operations data for the fiscal year ended
      October 31, 2006 and 2005 and the selected consolidated balance sheet data
      set forth below as of October 31, 2006 and 2005, 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 statements of operations data for the fiscal years
      ended October 31, 2004 have been derived from our consolidated financial
      statements, which have been audited by Ernst & Young LLP, independent
      registered public accounting firm, included elsewhere herein. The selected
      consolidated statement of operations data for the years ended October 31,
      2003 and 2002 and the selected consolidated balance sheet data set forth below
      at October 31, 2004, 2003 and 2002 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.









**Years
                Ended October 31,****2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002****(In
                thousands, except per share amounts)****Statements
                of Operations Data:**Net
                revenue
            
            $
            49,289
            
            $
            49,651
            
            $
            51,490
            
            $
            52,329
            
            $
            48,861Cost
                of revenue
            
            
            19,929
            
            
            20,304
            
            
            24,027
            
            
            21,775
            
            
            18,982Gross
                profit
            
            
            29,360
            
            
            29,347
            
            
            27,463
            
            
            30,554
            
            
            29,879Operating
                expenses:General
                and administrative
            
            
            8,303
            
            
            11,406
            
            
            11,154
            
            
            11,426
            
            
            9,535Sales
                and marketing
            
            
            11,041
            
            
            11,952
            
            
            12,561
            
            
            12,323
            
            
            13,245Research
                and development
            
            
            2,885
            
            
            4,058
            
            
            5,179
            
            
            4,692
            
            
            2,671Loss
                contingencies
            
            
            133
            
            
            137
            
            
            3,628
            
            
            —
            
            
            —Impairment
                of goodwill
            
            
            —
            
            
            —
            
            
            6,625
            
            
            —
            
            
            —Total
                operating expenses
            
            
            22,362
            
            
            27,553
            
            
            39,147
            
            
            28,441
            
            
            25,451Income
                (loss) from operations
            
            
            6,998
            
            
            1,794
            
            
            (11,684
            )
            
            2,113
            
            
            4,428Interest
                and other income (expense), net
            
            
            346
            
            
            76
            
            
            58
            
            
            3
            
            
            (7
            )Income
                (loss) before income taxes
            
            
            7,344
            
            
            1,870
            
            
            (11,626
            )
            
            2,116
            
            
            4,421Provision
                for (benefit from) income taxes
            
            
            2,961
            
            
            534
            
            
            (1,720
            )
            
            925
            
            
            1,688Net
                income (loss)
            
            $
            4,383
            
            $
            1,336
            
            $
            (9,906
            )
            $
            1,191
            
            $
            2,733Diluted
                net income (loss) per share
            
            $
            0.34
            
            $
            0.11
            
            $
            (0.84
            )
            $
            0.10
            
            $
            0.23Shares
                used in the calculation of diluted net income (loss) per
                share
            
            
            12,757
            
            
            11,960
            
            
            11,775
            
            
            11,818
            
            
            11,945Cash
                dividends per common share
            
            $
            0.00
            
            $
            0.03
            
            $
            0.21
            
            $
            0.00
            
            $
            0.00




20




**As
                of October 31,****2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002****(In
                thousands, except per share amounts)****Balance
                Sheet Data:**Cash,
                cash equivalents and short-term investments
            
            $
            12,819
            
            $
            6,833
            
            $
            8,706
            
            $
            11,952
            
            $
            9,278Restricted
                short-term investments
            
            
            4,515
            
            
            4,581
            
            
            —
            
            
            —
            
            
            —Working
                capital
            
            
            15,412
            
            
            10,824
            
            
            5,209
            
            
            14,806
            
            
            16,562Total
                assets
            
            
            59,214
            
            
            51,130
            
            
            51,679
            
            
            60,175
            
            
            58,101Total
                debt
            
            
            —
            
            
            —
            
            
            —
            
            
            275
            
            
            13Total
                stockholders’ equity
            
            
            49,834
            
            
            41,889
            
            
            40,670
            
            
            52,621
            
            
            50,490




**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
      results anticipated 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 interactive electronic player terminals and bingo
      systems. We currently market portable systems that can be played anywhere within
      a bingo hall and fixed-base systems with touchscreen-activated monitors. For
      our
      three most recent fiscal years ended October 31, 2006, 2005, and 2004, our
      portable terminals generated approximately 80%, 77%, and 74% of our revenue,
      respectively, while, during those same years, our fixed-base terminals generated
      the balance of our revenue. As of October 31, 2006, we had systems in service
      in
      40 states and in seven nondomestic countries.




We
      generate revenue by placing electronic bingo systems in bingo halls under
      contracts based on (1) a fixed fee per use per session; (2) a fixed
      weekly fee per terminal; or (3) a percentage of the revenue generated by
      each terminal. Revenue growth is affected by player acceptance of electronic
      bingo as an addition or an alternative to paper bingo, and our ability to expand
      operations into new markets and our ability to increase our market share.
      Fixed-base bingo terminals generate greater revenue per terminal than portable
      bingo terminals, but also require a greater initial capital
      investment.




We
      typically install our electronic bingo systems at no charge to our customers,
      and we capitalize the costs. For fiscal year 2006 and fiscal year 2005, costs
      of
      $116,000 and $185,000 were capitalized respectively, and are amortized 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
      expenses consist primarily of: (a) cost of revenue, consisting of expenses
      associated with technical and operational support of the bingo systems within
      bingo halls, depreciation and amortization of bingo terminals, repair,
      refurbishment, and disposals of bingo terminals and related support equipment,
      and excess or obsolescence allowance; (b) general and administrative,
      consisting of activities associated with management of our company and related
      support, which includes finance and accounting, legal, compliance, information
      systems, human resources, and accounts receivable reserve; (c) sales and
      marketing, consisting primarily of commissions paid to distributors for
      promoting and supporting our products and an internal sales force with a focus
      upon generating new customers and upgrades for existing customers; and
      (d) research and development, consisting of company-sponsored research and
      development activities to provide players with new or enhanced products on which
      to play electronic bingo.




21


**Fiscal
      2006 Highlights**




During
      fiscal 2006, profitability significantly increased as a result of various
      factors, including the following:




·
            a
                $2.1 million reduction in outside legal expenses as a result of the
                resolution of certain matters and the timing of matters under
                appeal;




·
            a
                $1.2 million reduction in research and development expenses as a
                result of
                reductions in personnel and employee related
                costs;




·
            reduction
                in sales and marketing of $911,000 primarily due to reductions in
                employee
                related costs and severance charges we incurred in fiscal year
                2005.




During
      fiscal 2006, our capital expenditures increased approximately 55%, or $4.1
      million to $11.5 million, from $7.4 million during fiscal 2005, primarily
      related to the purchase of our Traveler terminals, bingo systems and related
      support equipment.




**Transactions
      Resulting in Stock Compensation Expense**




In
      December 2004, the vesting period for 20,000 employee stock options to purchase
      shares of our common stock was accelerated and became fully vested. As a result
      of this stock option modification, we recorded compensation expense of $29,000
      for the quarter ended January 31, 2005. The stock compensation expense was
      calculated using the intrinsic value method, which compares the common stock
      option exercise price to the fair market value of the underlying common stock
      on
      the date of modification. The stock compensation expense is recorded in the
      general and administrative section of the accompanying consolidated statement
      of
      operations.




In
      January 2005, the term for 67,500 options of a former employee to purchase
      shares of our common stock was extended for an additional six months and vesting
      was accelerated as the result of an executed consulting agreement. As a result
      of this six-month consulting agreement to assist us in various legal matters
      and
      resulting stock option modification, we recorded compensation expense of $64,000
      for the quarter ended January 31, 2005. The stock options are subject to
      measurement under Financial Accounting Standards 123 (FAS 123) and Emerging
      Issues Task Force Issue No. 96-18 (EITF 96-18). FAS 123 set forth the
      requirements with respect to accounting for transactions involving a company’s
      stock that is issued in exchange for goods or services. According to FAS 123,
      these transactions should be measured at the fair value of the equity issued.
      In
      accordance with EITF 96-18, compensation expense is measured based on the fair
      value of the option at the date the performance commitment is reached. We have
      determined that the performance commitment was reached upon the effective date
      of the consulting agreement that occurred January 2, 2005. The fair value of
      the
      stock options was measured at that date based on the Black-Scholes model using
      a
      FAS 123 approach. Per EITF 96-18, a recognized expense should not be reversed
      even if the option expires unexercised. The stock compensation expense is
      recorded in sales and marketing expense in the consolidated statement of
      operations.




On
      August
      31, 2005 our Board of Directors approved the acceleration of the vesting of
      all
      unvested stock options awarded under our 1997 Incentive Stock Plan. As a result
      of this action, options to purchase approximately 367,000 shares of common
      stock
      became exercisable as of that date. Of these options, approximately 267,000
      were
      out-of-the-money at the time of the accelerated vesting. The remaining 100,000
      options resulted in stock compensation expense of $10,000. The stock
      compensation expense was calculated using the intrinsic value method, which
      compares the common stock option exercise price to the fair market value of
      the
      underlying common stock on the date of modification. This stock compensation
      expense is recorded in general and administrative expense in the consolidated
      statement of operations. All other terms and conditions applicable to such
      options, including the exercise prices, remain unchanged. The decision to
      accelerate vesting of these options was made to avoid recognizing the related
      compensation expense in the future consolidated financial statements upon our
      adoption of SFAS No. 123(R), *Share
      Based Payment* beginning in fiscal 2006.




**Critical
      Accounting Policies and Estimates**




Management’s
      Discussion and Analysis of Financial Condition and Results of Operations
      discusses 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 date and reported amounts
      of revenue and expenses during the reporting period. On an ongoing basis, we
      evaluate our estimates and judgments, including those related to revenue
      recognition, bad debts, bingo terminal depreciation, goodwill impairment, and
      contingencies and litigation. We base our estimates and judgments on historical
      experience and on various other factors that 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.




22




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***




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. Our revenue recognition
      is
      a key component of our results of operations, and determines the timing of
      certain expenses, such as commissions. We recognize revenue in accordance with
      accounting principles generally accepted in the United States when all of the
      following factors exist: (a) evidence of an arrangement with the customer;
      (b) play or availability of the bingo terminals; (c) a fixed or
      determinable fee; and (d) collectibility is reasonably assured. We exercise
      judgment in assessing the credit worthiness of our customers and therefore
      in
      our determination of whether collectibility is reasonably assured. Should
      changes in conditions cause us to determine these criteria are not met for
      future transactions, revenue recognized for future reporting periods could
      be
      adversely affected.




***Reserve
      for Bingo Terminal Obsolescence***




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




***Software
      Development Capitalization***




We
      capitalize costs related to the development of certain software products that
      meet the criteria of Statement of Financial Accounting Standards (“SFAS”) No. 86
      - *Accounting
      for the Costs of Computer Software to Be Sold, Leased, or Otherwise
      Marketed* .
      SFAS
      No. 86 provides for the capitalization of computer software that is to be used
      as an integral part of a product or process to be sold or leased, after
      technological feasibility has been established for the software and all research
      and development activities for the other components of the product or process
      have been completed. We are capitalizing qualified costs of software developed
      for new products or for significant enhancements to existing products. We cease
      capitalizing costs when the product is available for general release to our
      customers. We amortize the costs on a straight-line method over the estimated
      economic life of the product beginning when the product is available for general
      release.




The
      achievement of technological feasibility and the estimate of a 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***




We
      estimate the possible losses resulting from non-payment of outstanding accounts
      receivable. We perform ongoing evaluations of our customers and distributors
      for
      credit worthiness, economic trends, changes in our customer payment terms,
      and
      historical collection experience when evaluating the adequacy of our allowance
      for doubtful accounts. We also reserve a percentage of our accounts receivable
      based on aging category. In determining these percentages, we review historical
      write-offs of our receivables, payment trends, and other available information.
      While such estimates have been within our expectations and the provisions
      established, a change in financial condition of specific customers or in overall
      trends experienced may result in future adjustments of our estimates of
      recoverability of our receivables.




23




***Impairment
      of Goodwill and Intangible Assets***




We
      are
      required to perform an annual goodwill impairment review, and depending upon
      the
      results of that measurement, the recorded goodwill may be written down and
      charged to income from operations when its carrying amount exceeds its estimated
      fair value. In addition, we assess the impairment of goodwill whenever events
      or
      changes in circumstances indicate that the carrying value may not be
      recoverable, such as a significant adverse change in legal factors or in the
      business climate, an adverse action or assessment by a regulator, unanticipated
      competition, or a loss of key personnel. The review for fiscal 2006 was
      completed as of July 31, 2006 (the valuation date), and we determined there
      is
      no impairment of goodwill as of that date.




We
      assess
      the impairment of identifiable intangible assets whenever events or changes
      in
      circumstances indicate that the carrying value may not be recoverable. Factors
      we consider important that could trigger an impairment review include the
      following:




·
            a
                significant change in the manner of our use of the acquired assets
                or the
                strategy for our overall business;




·
            a
                significant decrease in the market price of an
                asset;




·
            a
                significant adverse change in legal factors or in the business climate
                that could affect the value of an asset, including an adverse action
                or
                assessment by a regulator;




·
            a
                current period operating or cash flow loss combined with a history
                of
                operating or cash flow losses or a projection or forecast that
                demonstrates reduced profitability associated with the use of an
                asset;
                and




·
            a
                current expectation that, more likely than not, an asset will be
                sold or
                otherwise disposed of significantly before the end of its previously
                estimated useful life.




All
      of
      these assessments require management judgment. Any changes in key assumptions
      about the business and its prospects, or changes in market conditions or other
      externalities, could result in an impairment charge and such a charge could
      have
      a material adverse effect on our consolidated results of operations and
      financial condition.




***Share-based
      Compensation***




We
      account for share-based compensation in accordance with SFAS No. 123(R) - *Accounting
      for Stock-Based 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 7 of
      our
      Consolidated Financial Statements for additional information regarding the
      adoption of SFAS No. 123(R).




***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
      consolidated results of operations and financial condition.




**Internal
      Control Over Accounting for Taxes**




We
      have
      identified a significant deficiency in our accounting for income taxes as
      described herein. In preparing our tax provision for fiscal 2005, we identified
      certain adjustments to our tax liability accounts and related tax provision.
      This significant deficiency constituted a material weakness in that there is
      more than a remote likelihood that a misstatement could have occurred and would
      not be prevented or detected by our internal control on a timely basis. Although
      we have improved our control process related to the tax provision, a significant
      deficiency remains for fiscal 2006. All adjustments to correct this matter
      have
      been reflected in our consolidated financial statements as of and for the fiscal
      years ending October 31, 2005 and 2006.




24




We
      are
      continuing to take corrective action aimed at the timely calculation of the
      provision for income taxes. Our remediation efforts have included engaging
      an
      independent public accounting firm to assist in the tax reconciliation and
      evaluation process, and we plan to continue increasing the skill and experience
      level of senior management. In addition, we are developing definitive procedures
      for the detailed documentation and reconciliations supporting the income taxes
      payable, deferred income tax and tax provision balances and amounts, including
      the appropriate review and approval of related journal entries.




Upon
      the
      complete implementation of the above measures, we will have significantly
      improved our previous internal control and reduced to a lesser likelihood the
      possibility of a misstatement that would not be prevented or detected. We have
      therefore concluded that appropriate steps have been taken or are in process,
      to
      mitigate the above deficiency.




**Results
      of Operations**




The
      following table sets forth, for the periods indicated, certain consolidated
      statement of operations data for our company expressed as a percentage of
      revenue:




**Years
                Ended October 31,****2006**
            
            **2005**
            
            **2004****Statements
                of Operations Data:**Net
                revenue
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Cost
                of revenue
            
            
            40.4
            
            
            40.9
            
            
            46.7Gross
                profit
            
            
            59.6
            
            
            59.1
            
            
            53.3Operating
                expenses:General
                and administrative
            
            
            16.8
            
            
            23.0
            
            
            21.7Sales
                and marketing
            
            
            22.4
            
            
            24.1
            
            
            24.4Research
                and development
            
            
            5.9
            
            
            8.2
            
            
            10.0Loss
                contingency
            
            
            0.3
            
            
            0.2
            
            
            7.0Impairment
                of goodwill
            
            
            —
            
            
            —
            
            
            12.9Total
                operating expenses
            
            
            45.4
            
            
            55.5
            
            
            76.0Income
                (loss) from operations
            
            
            14.2
            
            
            3.6
            
            
            (22.7
            )Interest
                and other income, net
            
            
            0.7
            
            
            0.2
            
            
            0.1Income
                (loss) before provision for (benefit from) income taxes
            
            
            14.9
            
            
            3.8
            
            
            (22.6
            )Provision
                for (benefit from) income taxes
            
            
            6.0
            
            
            1.1
            
            
            (3.3
            )Net
                income (loss)
            
            
            8.9
            %
            
            2.7
            %
            
            (19.3
            )%




**Year
      Ended October 31, 2006 Compared with Year Ended October 31,
      2005**




*Revenue.* Revenue
      for fiscal 2006 decreased $362,000, or 0.7%, to $49.3 million compared to
      revenue of $49.7 million in fiscal 2005. The decrease in revenue for fiscal
      2006
      is a result of several factors including increased regional competition and
      pricing pressures, continued migration of commercial accounts to more profitable
      slot machine style gaming over bingo, hall closures and the elimination of
      certain unprofitable accounts. These unfavorable changes were offset in part
      by
      increased revenue in Michigan and other key states, increased expansion in
      Canada and the United Kingdom, and the continued popularity and rollout of
      our
      Traveler terminals.




*Cost
      of Revenue.* Cost
      of
      revenue decreased $375,000, or 1.8%, to $19.9 million for fiscal 2006
      compared to $20.3 million for fiscal 2005. Cost of revenue as a percentage
      of revenue for fiscal 2006 was 40.4% compared to 40.9% for fiscal 2005. Key
      components of our cost of revenue include, among other items, expenses
      associated with technical and operational support of the bingo systems within
      bingo halls, depreciation and amortization of bingo terminals, repair,
      refurbishment, and disposals of bingo terminals and related support equipment,
      and excess or obsolescence allowance. Bingo equipment depreciation and
      amortization of related intangibles for fiscal 2006 decreased by approximately
      $771,000 below fiscal 2005, primarily because our older terminals are becoming
      fully depreciated, which has offset the increased depreciation from more recent
      capital expenditures on new terminals.




25




*General
      and Administrative.* General
      and administrative expenses decreased $3.1 million, or 27.2%, to
      $8.3 million for fiscal 2006 compared to $11.4 million for fiscal
      2005. General and administrative costs as a percentage of revenue for fiscal
      2006 were 16.8% compared to 23.0% for fiscal 2005. Outside legal expenses
      decreased $2.1 million as a result of the resolution of certain matters and
      the
      timing of matters under appeal. Fiscal 2005 included elevated levels of legal
      expenses, including those related to litigation with a former distributor in
      Texas, a patent infringement lawsuit in Nevada, litigation with a former
      distributor of IGS in Mississippi, and other legal proceedings. In addition,
      fiscal 2005 included legal expenses associated with a Notice of Opportunity
      to
      Show Compliance in Texas. Additionally, fiscal 2005 expenses include a severance
      agreement with our former CEO, a settlement with the Texas Lottery Commission,
      and increased accounting fees due to increased compliance reviews associated
      with the Sarbanes-Oxley Act of 2002.




*Sales
      and Marketing.* Sales
      and
      marketing expenses decreased $911,000, or 7.6%, to $11.0 million for fiscal
      2006 compared to $12.0 million for fiscal 2005. Sales and marketing costs
      as a percentage of revenue for fiscal 2006 were 22.4% compared to 24.1% for
      fiscal 2005. Sales and marketing includes distributor commissions and personnel,
      travel, promotional, and support costs for our internal sales force. Distributor
      commissions decreased $259,000 to $7.1 million or 14.5% of revenue for
      fiscal 2006 compared to 14.9% of revenue for fiscal 2005. Costs reductions
      of
      $652,000 associated with our internal sales force are due primarily to severance
      costs in fiscal 2005.




*Research
      and Development.* Research
      and development expenses decreased $1.2 million, or 28.9% to $2.9 million
      for fiscal 2006 compared to $4.1 million for fiscal 2005. Research and
      development costs as a percentage of revenue for fiscal 2006 were 5.9% compared
      to 8.2% for fiscal 2005. The cost reductions were accomplished with reductions
      in personnel and employee related costs, including employee severance costs.




During
      fiscal 2006 and fiscal 2005 we capitalized internally developed software costs
      of approximately $88,000 and $632,000, respectively, consisting of payroll
      related costs, from our research and development and software quality assurance
      functions that meets technological feasibility and recoverability tests in
      accordance with FASB Statement No. 86.




*Loss
      Contingencies.* Loss
      contingencies decreased $4,000, or 2.9% to $133,000 for fiscal year 2006
      compared to $137,000 for fiscal 2005. Loss contingencies for 2006 consisted
      of
      interest accrued on a legal judgment. Loss contingencies for 2005 consisted
      of
      an additional award of $72,000 for legal fees and expenses and $65,000 for
      interest accrued on a legal judgment.




*Impairment
      of Goodwill.* We
      recorded no expense for impairment of goodwill in 2006 and 2005.




*Provision
      for Income Taxes.* Our
      effective income tax rate was approximately 40.3% and 28.5% for the fiscal
      years
      ended October 31, 2006 and 2005, respectively. The change in effective tax
      rate
      reflects certain permanent differences between financial accounting and tax
      accounting and the effect of state and federal income taxes and nondeductible
      expenses on the pre-tax income. In addition, fiscal 2005 included a credit
      of
      $360,000 due to an adjustment in income tax liabilities.




**Year
      Ended October 31, 2005 Compared with Year Ended October 31,
      2004**




*Revenue.* Revenue
      for fiscal 2005 decreased $1.8 million, or 3.6%, to $49.7 million compared
      to
      revenue of $51.5 million in fiscal 2004. The decrease in revenue for fiscal
      2005
      is a result of several factors including the impact of the loss of certain
      customer accounts in the fourth quarter of 2004, unfavorable legislative changes
      in the state of Oklahoma that allowed more profitable slot machine style gaming
      over bingo, and decreased revenue in certain states. These unfavorable changes
      were offset in part by increased expansion in Canada and the United Kingdom,
      increased revenue in Texas, Michigan, and other key states and the continued
      popularity and rollout of our Traveler terminals.




*Cost
      of Revenue.* Cost
      of
      revenue decreased $3.7 million, or 15.5%, to $20.3 million for fiscal
      2005 compared to $24.0 million for fiscal 2004. Cost of revenue as a
      percentage of revenue for fiscal 2005 was 40.9% compared to 46.7% for fiscal
      2004. Key components of our cost of revenue include, among other items, expenses
      associated with technical and operational support of the bingo systems within
      bingo halls, depreciation and amortization of bingo terminals, repair,
      refurbishment, and disposals of bingo terminals and related support equipment,
      and excess or obsolescence allowance. Cost reductions were effected by
      reductions in service and operations personnel, increased efficiencies in our
      refurbishments, and reductions in travel related costs. Bingo equipment
      depreciation and amortization of related intangibles for fiscal 2005 decreased
      by approximately $320,000 below fiscal 2004, primarily as the increased
      depreciation as a result of our investment in Traveler terminals is offset
      by
      our older terminals becoming fully depreciated.




26




*General
      and Administrative.* General
      and administrative expenses increased $252,000, or 2.3%, to $11.4 million
      for fiscal 2005 compared to $11.2 million for fiscal 2004. General and
      administrative costs as a percentage of revenue for fiscal 2005 were 23.0%
      compared to 21.7% for fiscal 2004. Fiscal 2005 and fiscal 2004 included elevated
      levels of legal expenses, including those related to litigation with a former
      distributor in Texas, a patent infringement lawsuit in Nevada, litigation with
      a
      former distributor of IGS in Mississippi, and other legal proceedings. In
      addition, fiscal 2005 included legal expenses associated with a Notice of
      Opportunity to Show Compliance in Texas. Other increases in general and
      administrative expenses include a severance agreement with our former CEO,
      a
      settlement with the Texas Lottery Commission, and increased accounting fees
      due
      to increased compliance reviews associated with the Sarbanes-Oxley Act of
      2002.




*Sales
      and Marketing.* Sales
      and
      marketing expenses decreased $609,000, or 4.8%, to $12.0 million for fiscal
      2005 compared to $12.6 million for fiscal 2004. Sales and marketing costs
      as a percentage of revenue for fiscal 2005 were 24.1% compared to 24.4% for
      fiscal 2004. Sales and marketing includes distributor commissions and personnel,
      travel, promotional, and support costs for our internal sales force. Distributor
      commissions decreased $1.1 million to $7.4 million or 14.9% of revenue for
      fiscal 2005 compared to 16.5% of revenue for fiscal 2004. Costs associated
      with
      our internal sales force grew by $522,000 as a result of an increase in
      severance costs and increases in marketing, and other business promotion
      costs.




*Research
      and Development.* Research
      and development expenses decreased $1.1 million, or 21.6% to $4.1 million
      for fiscal 2005 compared to $5.2 million for fiscal 2004. Research and
      development costs as a percentage of revenue for fiscal 2005 were 8.2% compared
      to 10.0% for fiscal 2004. The cost reductions were accomplished with reductions
      in personnel and employee related costs, including employee severance costs,
      and
      reduced, but more focused, project costs.




During
      fiscal 2005 and fiscal 2004 we capitalized internally developed software costs
      of approximately $632,000 and $727,000, respectively, of payroll related costs,
      from our research and development and software quality assurance functions
      that
      meets technological feasibility and recoverability tests in accordance with
      FASB
      Statement No. 86.




*Loss
      Contingencies.* Loss
      contingencies decreased $3.5 million, or 96.2% to $137,000 for fiscal year
      2005
      compared to $3.6 million for fiscal 2004. Loss contingencies for 2005 consisted
      of an additional award of $72,000 for legal fees and expenses and costs and
      $65,000 for interest accrued on a legal judgment. Loss contingencies for 2004
      consisted of $2.8 million for a legal judgment and related legal fees and
      expenses and costs of $836,000.




*Impairment
      of Goodwill.* We
      recorded no expense for impairment of goodwill in 2005 compared to an expense
      of
      $6.6 million recorded in fiscal 2004.




*Provision
      for (Benefit from) Income Taxes.* Our
      effective income tax rate was approximately 28.5% and 14.8% for the fiscal
      years
      ended October 31, 2005 and 2004, respectively. The change in effective tax
      rate
      reflects certain permanent differences between financial accounting and tax
      accounting and the effect of state and federal income taxes and nondeductible
      expenses (including goodwill impairment in fiscal 2004) on the pre-tax income
      in
      fiscal 2005 versus pre-tax loss in fiscal 2004. In addition, fiscal 2005
      included a credit of $360,000 due to an adjustment in income tax
      liabilities.




**Liquidity
      and Capital Resources**




Operating
      activities provided $14.5 million of cash during fiscal 2006 compared to
      $6.5 million during fiscal 2005. The $14.5 million consisted primarily of
      net income of $4.4 million, adjusted positively by $11.0 million for
      depreciation, amortization, obsolescence, and loss on disposal of bingo
      terminals and related equipment provisions, and a net use of funds of $859,000
      from changes in other operating assets and liabilities and other items. During
      fiscal 2005, the $6.5 million consisted primarily of net income of $1.3
      million, adjusted positively by $11.9 million for depreciation,
      amortization, obsolescence, and loss on disposal of bingo terminals and related
      equipment provisions, less a net use of funds of $6.8 million from changes
      in
      other operating assets and liabilities and other items including $4.6 million
      used to purchase two restricted short-term investments related to the Trend
      litigation issue.




We
      used
      approximately $18.7 million of cash in investing activities during fiscal
      2006 compared to $6.0 million of cash used during fiscal 2005. The
      $18.7 million consisted of $11.5 million of capital expenditures
      ($11.4 million of which was expended on bingo terminals and associated
      support equipment), an increase in short-term investments of $6.7 million,
      and
      $302,000 of expenditures for the acquisition of Summit Amusement &
Distributing, Ltd. During fiscal 2005, the $6.0 million consisted of
      $7.4 million of capital expenditures ($7.3 million of which was
      expended on bingo terminals, primarily due to purchases of our Traveler
      terminals and associated support equipment), the purchase and development of
      software and other intangible assets for a total of $801,000, and a decrease
      in
      short-term investments of $2.1 million.




27




Financing
      activities provided $3.2 million during fiscal 2006 compared to the cash used
      of
      $220,000 during fiscal 2005. The $3.2 million provided during fiscal 2006 was
      from proceeds from stock option exercises of $2.5 million and $714,000 from
      the
      tax benefit from stock options exercised. The $220,000 used during fiscal 2005
      was for cash dividends of $355,000, offset by proceeds from stock option
      exercises of $135,000.




As
      of
      October 31, 2006, we had cash, cash equivalents, and unrestricted short-term
      investments of approximately $12.8 million. In addition to our cash, cash
      equivalents, and short-term investments, we have a $2.5 million line of
      credit with Wells Fargo Bank, N.A., which has an interest rate based on the
      prime rate or London InterBank Offered Rate (“LIBOR”) plus 2.0%, at our option,
      on which there was no outstanding balance at October 31, 2006. The
      agreement contains certain restrictive covenants, which, among other things,
      require that specified financial balances and ratios be maintained, requires
      profitability to be maintained on a quarterly basis, and restricts the
      incurrence of additional indebtedness and payment of dividends. The
      revolving credit facility expires on April 2, 2007. No assurance can be
      made for renewal on terms acceptable to us.




We
      believe that cash flows from operations and cash, cash equivalents, and
      short-term investments on hand will be sufficient to support our operations,
      provide for budgeted capital expenditures, and meet liquidity requirements
      through the remainder of fiscal 2007. We will need to raise the capital required
      to complete the acquisition of Summit. We anticipate financing the acquisition
      with a $10 million revolving line of credit, which would replace our existing
      line of credit, and a $30 million term loan. If we are unable to obtain the
      required financing and Summit has met all of our conditions to closing, we
      would
      be required to pay Summit a $1 million termination fee. Our long-term liquidity
      requirements will depend on many factors, including the rate at which we expand
      our business, and whether we do so internally or through acquisitions. In
      addition, strategic opportunities we may pursue 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 calls 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 additional
      financing will be available or that, if it is available, it will be on terms
      acceptable to us.




**Contractual
      Obligations**




The
      following table presents information on contractual obligations held as of
      October 31, 2006:




**Payments
                Due by Period****Total**
            
            **Less
                than 1 year**
            
            **1
                - 3 years**
            
            **3
                - 5 years**
            
            **More
                than 5 years**Operating
                Leases
            
            $
            2,551,000
            
            $
            676,000
            
            $
            1,345,000
            
            $
            530,000
            
            $
            —Other
                Long Term Obligations
            
            
            181,000
            
            
            21,000
            
            
            45,000
            
            
            31,000
            
            
            84,000Total
                Contractual Cash Obligations
            
            $
            2,732,000
            
            $
            697,000
            
            $
            1,390,000
            
            $
            561,000
            
            $
            84,000




**Purchase
      Commitments**




From
      time
      to time, we enter into commitments with our vendors to purchase bingo terminals
      and support equipment at fixed prices and/or guaranteed quantities. During
      the
      third quarter of the fiscal year ended October 31, 2005, we entered into two
      agreements with the same vendor to provide $2.5 million in Traveler terminals.
      As of October 31, 2006, we had fulfilled these purchase commitments. In
      addition, during the fiscal year ended October 31, 2006, we entered into seven
      additional agreements with the same vendor to provide an additional $5.4 million
      in Traveler terminals and $1.1 million in other component parts. As of October
      31, 2006, approximately $900,000 of the Traveler commitment was remaining and
      $1.0 million of the other component parts commitment was remaining. All
      purchases are expected to occur by the end of the second quarter of fiscal
      2007.




28




**Item
      7A.*****Quantitative
      and Qualitative Disclosures About Market Risk***




As
      described in Note 9 to our Consolidated Financial Statements, we maintain an
      investment portfolio, of approximately $7.4 million, in investment grade
      corporate issues, and in investment grade auction rate securities. The values
      of
      these investments are subject to changes in interest rates. However, because
      these investments are short-term and are generally allowed to mature, we do
      not
      believe that any risk inherent in our portfolio is likely to have a material
      effect on expected cash flows. We monitor these investments for impairment
      and
      make appropriate reductions in carrying value when necessary.




Our
      revolving credit facility with Wells Fargo is a $2.5 million line of credit
      with an interest rate based on the prime rate or LIBOR plus 2.0%, at our option. The
      agreement contains certain restrictive covenants, which, among other things,
      require that specified financial balances and ratios be maintained, requires
      profitability to be maintained on a quarterly basis, and restricts the
      incurrence of additional indebtedness and payment of dividends. The
      line
      of credit expires on April 2, 2007. No assurance can be made for
      renewal.




Because
      the interest rate on the revolving credit facility is variable, our cash flow
      may be affected by increases in interest rates, in that we would be required
      to
      pay more interest in the event that both the prime and LIBOR interest rates
      increase. We do not believe, however, that any risk inherent in the
      variable-rate nature of the loan is likely to have a material effect on our
      interest expense or available cash. We currently maintain a zero balance on
      the
      revolving credit facility.




*Sensitivity
      Analysis Market Risks* . ****** Assuming
      we had a $2.5 million balance outstanding as of October 31, 2006, the rate
      of interest calculated using the prime rate option would be 8.25%. Our monthly
      interest payment, if the rate stayed constant, would be $17,188. If the prime
      rate rose to 15.0%, which assumes an unusually large increase, our monthly
      payment would be $31,250. A more likely increase of 1.0% or 2.0% would result
      in
      a monthly payment of $19,271 or $21,354, respectively. We do not believe the
      risk resulting from such fluctuations is material or that the payment required
      would have a material effect on cash flow or our results of
      operations.




Our
      exposure to changes in interest rates relates primarily to our portfolio of
      investments. The primary objective of our investment portfolio is to preserve
      principal while maximizing yields. This is accomplished by maintaining a
      well-diversified portfolio of high-quality investment-grade securities, all
      of
      which have an effective maturity within the next twelve months. A hypothetical
      50-basis-point increase in interest rates at October 31, 2006 would have had
      an
      immaterial impact on the fair value of our portfolio.




**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***




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 October 31, 2006. Based on this evaluation, our Chief Executive Officer
      and Chief Financial Officer have concluded that our disclosure controls and
      procedures are effective as of October 31, 2006 to ensure that 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 principal executive and principal financial officers, or persons performing
      similar functions, as appropriate to allow timely decisions regarding required
      disclosures. Except as described herein, during the fiscal year covered by
      this
      report, there have not been any changes in our internal controls over financial
      reporting that have materially affected, or are reasonably likely to materially
      affect, our internal control over financial reporting .





*Accounting
      for Income Taxes and Other Matters.*




In
      connection with the evaluation described above, our Chief Executive Officer
      and
      our Chief Financial Officer have concluded that there was a significant
      deficiency in our accounting for income taxes. In preparing our tax provision
      for fiscal years 2005 and 2006, we identified certain adjustments to our tax
      liability accounts and related income tax provision. All adjustments to correct
      these matters have been reflected in our consolidated financial statements
      as of
      and for the fiscal years ended October 31, 2005 and 2006.




29




Given
      the
      significance of the tax account balances and the absence of sufficient
      mitigating controls, the deficiency was considered a material weakness for
      fiscal 2005 in that there was more than a remote likelihood that a misstatement
      could have occurred and would not have been prevented or detected by our
      internal control on a timely basis. Although
      we have improved our related control processes, a significant deficiency
      remained at October 31, 2006.




As
      of the
      filing of this report, we have engaged the tax advisory services of an
      independent public accounting firm to assist in the analysis and evaluation
      of
      our income taxes, and we will continue to increase the skill and experience
      level of senior management. In
      addition, we are developing definitive procedures for the detailed documentation
      and reconciliations supporting the income taxes payable, deferred income tax
      and
      tax provision balances and amounts, including the appropriate review and
      approval of related journal entries.




Upon
      the
      complete implementation of the above measures, we will have mitigated the effect
      of the deficiencies, significantly improved our previous internal control,
      and
      reduced to a lesser likelihood the possibility of a misstatement that would
      not
      be prevented or detected. 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.




**Item
      9B.**  ***Other
      Information***




Not
      applicable.




**PART
      III**




**Item
      10.**  ***Directors
      and Executive Officers of the Registrant***




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 2007 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 2007 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 2007 Annual Meeting of Stockholders.




**Item
      13.**  ***Certain
      Relationships and Related Transactions***




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 2007 Annual Meeting of Stockholders.




**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 2007 Annual Meeting of Stockholders.




30


**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***




31







**Exhibit**
              **Number**
            
            **Description
                of Exhibit**2.1
            
            Asset
                Purchase Agreement dated August 30, 2006 between GameTech International,
                Inc. and Summit Amusement & Distributing Ltd. (16)3.1
            
            Certificate
                of Incorporation of the Registrant, as amended (1)3.3
            
            Certificate
                of Designation of Series A Junior Participating Preferred Stock of
                the
                Registrant (7)3.4
            
            Second
                Amended and Restated Bylaws of the Registrant (8)4.1
            
            GameTech
                International, Inc. Registration Rights
                Agreement (2)4.3
            
            Rights
                Agreement, dated as of March 7, 2003, between GameTech International,
                Inc.
                and Mellon Investor Services, LLC, as rights agent (6)4.4
            
            Specimen
                Common Stock Certificate (7)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  (13)10.4
            
            Form
                of Restricted Stock Agreement (13)10.5
            
            Form
                of Stock Option Agreement (13)10.6
            
            Form
                of Stock Unit Award Agreement (13)10.7
            
            Employment
                Agreement effective February 1, 2005, between the Registrant and
                Cornelius
                T. Klerk (9)10.8
            
            Letter
                Agreement by and between the Registrant and James C. Wilson, dated
                as of
                April 29, 2005 (10)10.9
            
            Release
                and Severance Agreement by and between the Registrant and James C.
                Wilson,
                dated as of August 25, 2006 (17)10.10
            
            Settlement
                and Release Agreement by and between the Registrant and John Furman,
                dated
                as of June 28, 2005 (12)10.11
            
            Letter
                Agreement by and between the Registrant and Jay M. Meilstrup, dated
                as of
                July 1, 2005 (12)10.12
            
            Letter
                Agreement by and between the Registrant and John McCafferty, dated
                as of
                May 22, 200610.13
            
            Letter
                Agreement by and between the Registrant and Tracy Pearson, dated
                as of
                October 31, 2006 (18)10.14
            
            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)10.15
            
            Credit
                Agreement, dated April 2, 2005, by and between the Registrant and
                Wells
                Fargo Bank, National Association (11)10.16
            
            Revolving
                Line of Credit Note, dated April 2, 2005 in favor of Wells Fargo
                Bank,
                National Association (11)10.17
            
            Security
                Agreement relating to equipment, dated April 2, 2005, in favor of
                Wells
                Fargo Bank, National Association (11)10.18
            
            Continuing
                Security Agreement relating to rights to payment and inventory, dated
                April 2, 2005, in favor of Wells Fargo Bank, National Association
                (11)10.19
            
            Credit
                Agreement, dated April 3, 2006, by and between the Registrant and
                Wells
                Fargo Bank, National Association (14)10.20
            
            Revolving
                Line of Credit Note, dated April 3, 2006 in favor of Wells Fargo
                Bank,
                National Association (14)21
            
            List
                of Subsidiaries23.1
            
            Consent
                of Grant Thornton LLP, Independent Registered Public Accounting
                Firm23.2
            
            Consent
                of Ernst & Young LLP, Independent Registered Public Accounting
                Firm31.1
            
            Certification
                of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a),
                promulgated by the Securities Exchange Act of 1934, as
                amended31.2
            
            Certification
                of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a),
                promulgated by the Securities Exchange Act of 1934, as
                amended




32




**Exhibit**
              **Number**
            
            **Description
                of Exhibit**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
                200232.2
            
            Certification
                of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002





(1)
            Incorporated
                by reference to 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.
 (5)
                    Intentionally
                      omitted.
 (6)
                      Incorporated by reference
                          to Exhibit 4.3
                          to the Registrant’s Current Report on Form 8-K dated March 7, 2003 as
                          filed with the Commission on or about March 10,
                          2003.
 (7)
                        Incorporated by reference
                            to Exhibits 3.3
                            and 4.4 to the Registrant’s Quarterly Report on Form 10-Q for the
                            quarterly period ended January 31, 2003 as filed with
                            the Commission on or
                            about March 17, 2003.
 (8)
                          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.
 (9)
                            Incorporated
                                by reference to Exhibit 10.26 to the Registrant’s Quarterly Report on Form
                                10-Q for the quarterly period ended July 31, 2004
                                as filed with the
                                Commission on or about September 14,
                                2004.
 (10)
                              Incorporated
                                  by reference to Exhibit 10.27 to the Registrant’s Current Report on Form
                                  8-K dated May 2, 2005 as filed with the Commission
                                  on or about May 4,
                                  2005.
 (11)
                                  Incorporated
                                      by reference to Exhibits 10.28, 10.29, 10.30
                                      and 10.31 to the Registrant’s
                                      Quarterly Report on Form 10-Q for the quarterly
                                      period ended April 30,
                                      2005 as filed with the Commission on or about
                                      June 14,
                                      2005.
 (12)
                                      Incorporated
                                          by reference to Exhibits 10.32 and 10.33
                                          to the Registrant’s Current
                                          Report on Form 8-K dated June 28, 2005
                                          as filed with the Commission on or
                                          about July 5, 2005.
 (13)
                                          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.
 (14)
                                              Incorporated
                                                  by reference to Exhibits 10.35
                                                  and 10.36 to the Registrant’s Quarterly
                                                  Report on Form 10-Q for the quarterly
                                                  period ended April 30, 2006 as
                                                  filed
                                                  with the Commission on or about
                                                  June 14,
                                                  2006.
 (15)
                                                Intentionally
                                                    omitted.
 (16)
                                                      Incorporated
                                                          by reference to Exhibit
                                                          2.1 to the Registrant’s Current Report on Form
                                                          8-K
                                                          dated August 30, 2006 as
                                                          filed with the Commission
                                                          on or about August 31,
                                                          2006.
 (17)
                                                            Incorporated
                                                                by reference to Exhibit
                                                                10.1 to the Registrant's
                                                                Quarterly Report
                                                                on Form
                                                                10-Q for the quarterly
                                                                period ended July
                                                                31, 2006 as filed
                                                                with the
                                                                Commission on or
                                                                about September 14,
                                                                2006.
 (18)
                                                                  Incorporated
                                                                      by reference
                                                                      to Exhibit
                                                                      10.1 to the
                                                                      Registrant’s Current Report
                                                                      on Form
                                                                      8-K dated November
                                                                      13, 2006 as
                                                                      filed with
                                                                      the Commission
                                                                      on or about
                                                                      November 15,
                                                                      2006.
 33


**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. Meilstrup*President,
                Chief Executive Officer, and Director*
              *(Principal
                Executive Officer)*Dated:
              January 29, 2007




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
              
              Chairman
                  of the Board of Directors
              
              January
                  29, 2007Richard
                  T. Fedor/s/JAY
                  M. MEILSTRUP
              
              President,
                  Chief Executive Officer and Director
              
              January
                  29, 2007Jay
                  M. Meilstrup
              
              (Principal
                  Executive Officer )/s/TRACY
                  C. PEARSON
              
              Chief
                  Financial Officer, Treasurer,and
                  Secretary
              
              January
                  29, 2007Tracy
                  C. Pearson
              
              (Principal
                  Financial Officer)/s/ANN
                  D. MCKENZIE
              
              Corporate
                  Controller
              
              January
                  29, 2007Ann
                  D. McKenzie
              
              (Principal
                  Accounting Officer)/s/
                  RICHARD H. IRVINE
              
              Director
              
              January
                  29, 2007Richard
                  H. Irvine/s/SCOTT
                  H. SHACKELTON
              
              Director
              
              January
                  29, 2007Scott
                  H. Shackelton/s/DONALD
                  K. WHITAKER
              
              Director
              
              January
                  29, 2007Donald
                  K. Whitaker




34




**EXHIBIT
      INDEX**




**Exhibit**
              **Number**
            
            **Description
                of Exhibit**2.1
            
            Asset
                Purchase Agreement dated August 30, 2006 between GameTech International,
                Inc. and Summit Amusement & Distributing Ltd. (16)3.1
            
            Certificate
                of Incorporation of the Registrant, as amended (1)3.3
            
            Certificate
                of Designation of Series A Junior Participating Preferred Stock of
                the
                Registrant (7)3.4
            
            Second
                Amended and Restated Bylaws of the Registrant (8)4.1
            
            GameTech
                International, Inc. Registration Rights
                Agreement (2)4.3
            
            Rights
                Agreement, dated as of March 7, 2003, between GameTech International,
                Inc.
                and Mellon Investor Services, LLC, as rights agent (6)4.4
            
            Specimen
                Common Stock Certificate (7)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  (13)10.4
            
            Form
                of Restricted Stock Agreement (13)10.5
            
            Form
                of Stock Option Agreement (13)10.6
            
            Form
                of Stock Unit Award Agreement (13)10.7
            
            Employment
                Agreement effective February 1, 2005, between the Registrant and
                Cornelius
                T. Klerk (9)10.8
            
            Letter
                Agreement by and between the Registrant and James C. Wilson, dated
                as of
                April 29, 2005 (10)10.9
            
            Release
                and Severance Agreement by and between the Registrant and James C.
                Wilson,
                dated as of August 25, 2006 (17)10.10
            
            Settlement
                and Release Agreement by and between the Registrant and John Furman,
                dated
                as of June 28, 2005 (12)10.11
            
            Letter
                Agreement by and between the Registrant and Jay M. Meilstrup, dated
                as of
                July 1, 2005 (12)10.12
            
            Letter
                Agreement by and between the Registrant and John McCafferty, dated
                as of
                May 22, 2006 (15)10.13
            
            Letter
                Agreement by and between the Registrant and Tracy Pearson, dated
                as of
                October 31, 2006 (18)10.14
            
            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)10.15
            
            Credit
                Agreement, dated April 2, 2005, by and between the Registrant and
                Wells
                Fargo Bank, National Association (11)10.16
            
            Revolving
                Line of Credit Note, dated April 2, 2005 in favor of Wells Fargo
                Bank,
                National Association (11)10.17
            
            Security
                Agreement relating to equipment, dated April 2, 2005, in favor of
                Wells
                Fargo Bank, National Association (11)10.18
            
            Continuing
                Security Agreement relating to rights to payment and inventory, dated
                April 2, 2005, in favor of Wells Fargo Bank, National Association
                (11)10.19
            
            Credit
                Agreement, dated April 3, 2006, by and between the Registrant and
                Wells
                Fargo Bank, National Association (14)10.20
            
            Revolving
                Line of Credit Note, dated April 3, 2006 in favor of Wells Fargo
                Bank,
                National Association (14)21
            
            List
                of Subsidiaries23.1
            
            Consent
                of Grant Thornton LLP, Independent Registered Public Accounting Firm23.2
            
            Consent
                of Ernst & Young LLP, Independent Registered Public Accounting
                Firm31.1
            
            Certification
                of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a),
                promulgated by the Securities Exchange Act of 1934, as
                amended31.2
            
            Certification
                of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a),
                promulgated by the Securities Exchange Act of 1934, as
                amended




35




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
                200232.2
            
            Certification
                of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002







(1)
            Incorporated
                by reference to 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.




(5)
            Intentionally
                omitted.




(6)
            Incorporated
                by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K
                dated March 7, 2003 as filed with the Commission on or about March
                10,
                2003.




(7)
            Incorporated
                by reference to Exhibits 3.3 and 4.4 to the Registrant’s Quarterly Report
                on Form 10-Q for the quarterly period ended January 31, 2003 as filed
                with
                the Commission on or about March 17,
                2003.




(8)
            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.




(9)
            Incorporated
                by reference toExhibit
                10.26 tothe
                Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended
                July 31, 2004 as filed with the Commission on or about September
                14,
                2004.




(10)
            Incorporated
                by reference toExhibit
                10.27 tothe
                Registrant’s Current Report on Form 8-K dated May 2, 2005 as filed with
                the Commission on or about May 4,
                2005.




(11)
            Incorporated
                by reference toExhibits
                10.28, 10.29, 10.30 and 10.31 tothe
                Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended
                April 30, 2005 as filed with the Commission on or about June 14,
                2005.




(12)
            Incorporated
                by reference toExhibits
                10.32 and 10.33 tothe
                Registrant’s Current Report on Form 8-K dated June 28, 2005 as filed with
                the Commission on or about July 5, 2005.




(13)
            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.




(14)
            Incorporated
                by reference to Exhibits 10.35 and 10.36 to the Registrant’s Quarterly
                Report on Form 10-Q for the quarterly period ended April 30, 2006
                as filed
                with the Commission on or about June 14,
                2006.




(15)
            Intentionally
                omitted.




(16)
            Incorporated
                by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
                dated August 30, 2006 as filed with the Commission on or about August
                31,
                2006.




(17)
            Incorporated
                by reference to Exhibit 10.1 to the Registrant's Quarterly Report
                on Form
                10-Q for the quarterly period ended July 31, 2006 as filed with the
                Commission on or about September 14,
                2006.




(18)
            Incorporated
                by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
                8-K dated November 13, 2006 as filed with the Commission on or about
                November 15, 2006.




36






**GameTech
      International, Inc.**


**Index
      to Consolidated Financial Statements**




Report
                of Grant Thornton LLP, Independent Registered Public Accounting
                Firm
            
            
            F-2Report
                of Ernst & Young LLP, Independent Registered Public Accounting Firm
            
            
            F-3Consolidated
                Financial StatementsConsolidated
                Balance Sheets
            
            
            F-4Consolidated
                Statements of Operations
            
            
            F-5Consolidated
                Statements of Stockholders' Equity
            
            
            F-6Consolidated
                Statements of Cash Flows
            
            
            F-7Notes
                to Consolidated Financial Statements
            
            
            F-9




F-1




**Report
      of Independent Registered Public Accounting Firm**




**Board
      of Directors and Stockholders**




**GameTech
      International, Inc.**




We
      have
      audited the accompanying consolidated balance sheets of GameTech International,
      Inc. and subsidiaries as of October 31, 2006 and 2005, and the related
      consolidated statements of operations, stockholders’ equity, and cash flows for
      each of the years in the two-year period ended October 31, 2006. 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 amount 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 to above present fairly,
      in all material respects, the financial position of GameTech International,
      Inc.
      and subsidiaries as of October 31, 2006 and 2005, and the results of their
      operations and their cash flows for each of the years in the two-year period
      ended October 31, 2006, in conformity with accounting principles generally
      accepted in the United States of America.




As
      discussed in Note 1, Stock Based Compensation, to the consolidated financial
      statements, the Company adopted Statement 123(R), Share-Based Payments, as
      of
      November 1, 2005.






**/S/
      GRANT THORNTON LLP**




Reno,
      Nevada


January
      5, 2007


F-2




**Report
      of Ernst & Young LLP,**


**Independent
      Registered Public Accounting Firm**




**The
      Board of Directors and Shareholders**




**GameTech
      International, Inc.**




We
      have
      audited the accompanying consolidated statements of operations, stockholders’
equity and cash flows of GameTech International, Inc. for the year ended October
      31, 2004. 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 audit.




We
      conducted our audit 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. We were not engaged to perform
      an
      audit of the Company’s 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,
      and
      evaluating the overall financial statement presentation. We believe that our
      audit provides a reasonable basis for our opinion.




In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the consolidated results of operations and cash flows of
      GameTech International, Inc. for the year ended October 31, 2004, in conformity
      with U.S. generally accepted accounting principles.






**/s/
      ERNST & YOUNG LLP**




Reno,
      Nevada


February
      8, 2005




F-3


**GAMETECH
      INTERNATIONAL, INC.**


**CONSOLIDATED
      BALANCE SHEETS**


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


**October
                  31,****2006**
              
              **2005****ASSETS:**Current
                  assets:Cash
                  and cash equivalents
              
              $
              5,411
              
              $
              6,330Short-term
                  investments
              
              
              7,408
              
              
              503Accounts
                  receivable, net of allowances of $2,230 in 2006 and $2,374 in
                  2005
              
              
              3,734
              
              
              3,573Deposits
              
              
              17
              
              
              21Refundable
                  income taxes
              
              
              64
              
              
              742Restricted
                  short-term investments
              
              
              4,515
              
              
              4,581Prepaid
                  expenses and other current assets
              
              
              377
              
              
              326Deferred
                  income taxes
              
              
              2,458
              
              
              2,549Total
                  current assets
              
              
              23,984
              
              
              18,625Bingo
                  equipment, furniture and other equipment, net
              
              
              22,868
              
              
              20,060Goodwill,
                  net
              
              
              10,184
              
              
              10,184Intangibles,
                  less accumulated amortization of $4,071 in 2006 and $4,335 in
                  2005
              
              
              1,217
              
              
              1,811Restricted
                  cash
              
              
              483
              
              
              450Deferred
                  income taxes, long term
              
              
              176
              
              
              —Other
                  assets
              
              
              302
              
              
              —Total
                  assets
              
              $
              59,214
              
              $
              51,130**LIABILITIES
                  AND STOCKHOLDERS' EQUITY:**Current
                  liabilities:Accounts
                  payable
              
              $
              1,819
              
              $
              641Accrued
                  payroll and related obligations
              
              
              980
              
              
              1,335Accrued
                  loss contingencies
              
              
              3,898
              
              
              3,765Income
                  taxes payable
              
              
              294
              
              
              —Other
                  accrued liabilities
              
              
              1,581
              
              
              2,060Total
                  current liabilities
              
              
              8,572
              
              
              7,801Non-current
                  employment obligations
              
              
              160
              
              
              181Deferred
                  income taxes
              
              
              648
              
              
              1,259Commitments
                  and contingencies
              
              
              —
              
              
              —Stockholders'
                  equity:Common
                  stock: $0.001 par value; 40,000,000 shares authorized; 14,371,547
                  shares
                  issued in 2006 and 13,740,539 issued in 2005
              
              
              14
              
              
              14Additional
                  paid in capital
              
              
              50,881
              
              
              47,319Retained
                  earnings
              
              
              7,035
              
              
              2,652Treasury
                  stock, at cost, 1,855,325 shares in 2006 and 2005
              
              
              (8,096
              )
              
              (8,096
              )Total
                  stockholders' equity
              
              
              49,834
              
              
              41,889Total
                  liabilities and stockholders' equity
              
              $
              59,214
              
              $
              51,130




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


F-4




**GAMETECH
      INTERNATIONAL, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS** ****


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




**Year
                ended October 31,****2006**
            
            **2005**
            
            **2004**Net
                revenue
            
            $
            49,289
            
            $
            49,651
            
            $
            51,490Cost
                of revenue
            
            
            19,929
            
            
            20,304
            
            
            24,027Gross
                profit
            
            
            29,360
            
            
            29,347
            
            
            27,463Operating
                expenses:General
                and administrative
            
            
            8,303
            
            
            11,406
            
            
            11,154Sales
                and marketing
            
            
            11,041
            
            
            11,952
            
            
            12,561Research
                and development
            
            
            2,885
            
            
            4,058
            
            
            5,179Loss
                contingencies
            
            
            133
            
            
            137
            
            
            3,628Impairment
                of goodwill
            
            
            —
            
            
            —
            
            
            6,625Total
                operating expenses
            
            
            22,362
            
            
            27,553
            
            
            39,147Income
                (loss) from operations
            
            
            6,998
            
            
            1,794
            
            
            (11,684
            )Interest
                and other income (expense), net
            
            
            346
            
            
            76
            
            
            58Income
                (loss) before income taxes
            
            
            7,344
            
            
            1,870
            
            
            (11,626
            )Provision
                for (benefit from) income taxes
            
            
            2,961
            
            
            534
            
            
            (1,720
            )Net
                income (loss)
            
            $
            4,383
            
            $
            1,336
            
            $
            (9,906
            )Net
                income (loss) per share:Basic
            
            $
            0.36
            
            $
            0.11
            
            $
            (0.84
            )Diluted
            
            $
            0.34
            
            $
            0.11
            
            $
            (0.84
            )Shares
                used in calculating net income (loss) per share:Basic
            
            
            12,181
            
            
            11,868
            
            
            11,775Diluted
            
            
            12,757
            
            
            11,960
            
            
            11,775Dividends
                declared per share
            
            $
            0.00
            
            $
            0.03
            
            $
            0.21




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


F-5




**GAMETECH
      INTERNATIONAL, INC.**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY** ****


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




**Common
                Stock**
            
            **Capital
                in excess of par**
            
            **Retained**
            
            **Treasury
                Stock****Shares**
            
            **Amount**
            
            **value**
            
            **Earnings**
            
            **Shares**
            
            **Amount**
            
            **Total**Balances
                at October 31, 2003
            
            
            13,592,764
            
            $
            14
            
            $
            46,655
            
            $
            14,048
            
            
            1,855,325
            
            $
            (8,096
            )
            $
            52,621Issuance
                of common stock upon exercise of stock options
            
            
            107,575
            
            
            —
            
            
            415
            
            
            —
            
            
            —
            
            
            —
            
            
            415Tax
                benefit of stock option exercises
            
            
            —
            
            
            —
            
            
            11
            
            
            —
            
            
            —
            
            
            —
            
            
            11Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            (9,906
            )
            
            —
            
            
            —
            
            
            (9,906
            )Dividends
                paid
            
            
            —
            
            
            —
            
            
            —
            
            
            (2,471
            )
            
            —
            
            
            —
            
            
            (2,471
            )Balances
                at October 31, 2004
            
            
            13,700,339
            
            
            14
            
            
            47,081
            
            
            1,671
            
            
            1,855,325
            
            
            (8,096
            )
            
            40,670Issuance
                of common stock upon exercise of stock options
            
            
            40,200
            
            
            —
            
            
            135
            
            
            —
            
            
            —
            
            
            —
            
            
            135Stock
                based compensation
            
            
            —
            
            
            —
            
            
            103
            
            
            —
            
            
            —
            
            
            —
            
            
            103Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            1,336
            
            
            —
            
            
            —
            
            
            1,336Dividends
                paid
            
            
            —
            
            
            —
            
            
            —
            
            
            (355
            )
            
            —
            
            
            —
            
            
            (355
            )Balances
                at October 31, 2005
            
            
            13,740,539
            
            
            14
            
            
            47,319
            
            
            2,652
            
            
            1,855,325
            
            
            (8,096
            )
            
            41,889Issuance
                of common stock upon exercise of stock options
            
            
            630,999
            
            
            —
            
            
            2,518
            
            
            —
            
            
            —
            
            
            —
            
            
            2,518Issuance
                of common stock to employee
            
            
            9
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Stock
                based compensation
            
            
            —
            
            
            —
            
            
            330
            
            
            —
            
            
            —
            
            
            —
            
            
            330Tax
                benefit of stock option exercises
            
            
            —
            
            
            —
            
            
            714
            
            
            —
            
            
            —
            
            
            —
            
            
            714Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            4,383
            
            
            —
            
            
            —
            
            
            4,383Balances
                at October 31, 2006
            
            
            14,371,547
            
            $
            14
            
            $
            50,881
            
            $
            7,035
            
            
            1,855,325
            
            $
            (8,096
            )
            $
            49,834




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




F-6




**GAMETECH
      INTERNATIONAL, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(In
      thousands)**


**Year
                  Ended October 31,****2006**
              
              **2005**
              
              **2004****Cash
                  flows from operating activities:**Net
                  income (loss)
              
              $
              4,383
              
              $
              1,336
              
              $
              (9,906
              )Adjustments
                  to reconcile net income (loss) to net cash provided by operating
                  activities:Depreciation
                  and amortization
              
              
              10,317
              
              
              11,427
              
              
              11,684Obsolescence
                  and loss on disposal of bingo terminals and related
                  equipment
              
              
              681
              
              
              493
              
              
              1,743Impairment
                  of goodwill
              
              
              —
              
              
              —
              
              
              6,625Loss
                  on disposal of furniture and other equipment
              
              
              12
              
              
              35
              
              
              83Loss
                  on disposal of intangible assets
              
              
              —
              
              
              35
              
              
              —Stock
                  compensation expense
              
              
              330
              
              
              103
              
              
              —Deferred
                  income taxes
              
              
              (696
              )
              
              379
              
              
              (3,024
              )Accrued
                  loss contingencies
              
              
              133
              
              
              137
              
              
              3,628Accrued
                  interest on short-term investments
              
              
              (187
              )
              
              (36
              )
              
              —Accrued
                  interest on restricted cash
              
              
              (33
              )
              
              —
              
              
              —Other
                  changes in operating assets and liabilities:Accounts
                  receivable, net
              
              
              (161
              )
              
              (89
              )
              
              140Deposits
              
              
              4
              
              
              8
              
              
              (1
              )Refundable
                  income taxes
              
              
              678
              
              
              (642
              )
              
              131Restricted
                  short-term investments
              
              
              66
              
              
              (4,581
              )
              
              —Prepaid
                  expenses and other current assets
              
              
              (51
              )
              
              324
              
              
              (309
              )Accounts
                  payable
              
              
              (393
              )
              
              (702
              )
              
              560Accrued
                  payroll and related obligations
              
              
              (355
              )
              
              (206
              )
              
              787Other
                  accrued liabilities
              
              
              (479
              )
              
              (332
              )
              
              649Income
                  taxes payable
              
              
              294
              
              
              (1,214
              )
              
              1,214Non-current
                  employment obligations
              
              
              (21
              )
              
              (21
              )
              
              (246
              )Net
                  cash provided by operating activities
              
              
              14,522
              
              
              6,454
              
              
              13,758




F-7




**GAMETECH
            INTERNATIONAL, INC.**
 **CONSOLIDATED
              STATEMENTS OF CASH FLOWS (Continued)**
 **(In
              thousands)**




**Year
                Ended October 31,****2006**
            
            **2005**
            
            **2004****Cash
                flows from investing activities:**Proceeds
                from sale of short-term investments
            
            
            24,945
            
            
            2,638
            
            
            2,250Payments
                for purchase of short-term investments
            
            
            (31,662
            )
            
            (500
            )
            
            (3,105
            )Capital
                expenditures for bingo equipment, furniture and other equipment
            
            
            (11,541
            )
            
            (7,359
            )
            
            (13,619
            )Payment
                for the acquisition of Summit Amusement & Distributing,
                Ltd
            
            
            (302
            )
            
            —
            
            
            —Proceeds
                from sale of assets and insurance reimbursement
            
            
            —
            
            
            17
            
            
            —Payments
                for acquisitions of intangible assets
            
            
            (113
            )
            
            (801
            )
            
            (1,054
            )Net
                cash used in investing activities
            
            
            (18,673
            )
            
            (6,005
            )
            
            (15,528
            )**Cash
                flows from financing activities:**Payments
                on long-term debt/note payable and other obligations
            
            
            —
            
            
            —
            
            
            (275
            )Payment
                of dividends
            
            
            —
            
            
            (355
            )
            
            (2,471
            )Tax
                benefit from stock options exercised
            
            
            714
            
            
            —
            
            
            —Proceeds
                from issuance of common stock
            
            
            2,518
            
            
            135
            
            
            415Net
                cash (used in) provided by financing activities
            
            
            3,232
            
            
            (220
            )
            
            (2,331
            )Net
                increase (decrease) in cash and cash equivalents
            
            
            (919
            )
            
            229
            
            
            (4,101
            )Cash
                and cash equivalents at beginning of year
            
            
            6,330
            
            
            6,101
            
            
            10,202Cash
                and cash equivalents at end of year
            
            $
            5,411
            
            $
            6,330
            
            $
            6,101**Supplemental
                cash flow information:**Cash
                paid out in the year for:Interest
            
            $
            10
            
            $
            13
            
            $
            31Income
                taxes
            
            $
            1,895
            
            $
            2,051
            
            $
            61**Non-cash
                investing and financing activities:**Acquisition
                of fixed assets included in:Accounts
                payable
            
            $
            1,517
            
            $
            —
            
            $
            —




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




F-8


**GAMETECH
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS** ****


**October
      31, 2006, 2005 and 2004**




**1.
      Business and Summary of Significant Accounting Policies**




**Description
      of Business**




GameTech
      International, Inc. (the "Company") was incorporated in Delaware on
      April 18, 1994. The Company operates in a single business segment and
      designs, develops, and markets 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.
      The Company had products in 40 states and in seven nondomestic countries as
      of
      October 31, 2006.




**Consolidation
      Principles**




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




**Use
      of Estimates**




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States requires management to make estimates
      and assumptions that affect the amounts reported in the consolidated financial
      statements and accompanying notes. Allowance for doubtful accounts,
      obsolescence, impairment of goodwill, and loss contingencies 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.




**Short-Term
      Investments**




Short-term
      investments, which consist of interest-bearing securities and investment grade
      auction rate securities, are stated at cost plus accrued interest, which
      approximates market value. Those with maturities beyond one year may be
      classified as short-term investments based on their highly liquid nature and
      because such marketable securities represent the investment of cash that is
      available for current operations. All auction rate securities are classified
      as
      short-term investments. Short-term investments are classified as available
      for
      sale and are recorded at fair market value using the specific identification
      method. Unrealized gains and losses are not material.




**Bingo
      Equipment, Furniture, and Other Equipment**




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




Bingo
                equipment
            
            
            3-5
                yearsOffice
                furniture and equipment
            
            
            3-7
                yearsLeasehold
                improvements
            
            
            10
                years




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




F-9




**GAMETECH
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (** **Continued)**




**Software
      Development Capitalization**




The
      Company capitalizes costs related to the development of certain software
      products that meet the criteria of Statement of Financial Accounting Standards
      (“SFAS”) No. 86 - *Accounting
      for the Costs of Computer Software to Be Sold, Leased, or Otherwise
      Marketed* .
      SFAS
      No. 86 provides for the capitalization of computer software that is to be used
      as an integral part of a product or process to be sold or leased, after
      technological feasibility has been established for the software and all research
      and development activities for the other components of the product or process
      have been completed. 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 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 the Company’s operating results.




**Goodwill**




The
      Company is required to perform an annual goodwill impairment review, and
      depending upon the results of that measurement, the recorded goodwill may be
      written down and charged to income from operations when its carrying amount
      exceeds its estimated fair value. Goodwill is reviewed for possible impairment
      annually, or more frequently whenever events or changes in circumstances
      indicate that the carrying value may not be recoverable, such as a significant
      adverse change in legal factors or in the business climate, an adverse action
      or
      assessment by a regulator, unanticipated competition, or a loss of key
      personnel.




**Impairment
      of Long-Lived Assets Other Than Goodwill**




The
      Company has adopted the provisions of SFAS No. 144, *Accounting
      for the Impairment or Disposal of Long-Lived Assets* .
      Long-lived assets, other than goodwill, are reviewed for impairment whenever
      events or changes in circumstances indicate that their carrying amounts may
      not
      be recoverable. Recoverability of assets is measured by comparison of the
      carrying amount of the asset to the net undiscounted future cash flows expected
      to be generated from the asset. If the future undiscounted cash flows are not
      sufficient to recover the carrying value of the assets, the assets’ carrying
      value is adjusted to fair value. The Company regularly evaluates its long-lived
      assets for indicators of impairment.




**Revenue
      Recognition**




Revenue
      is recognized for bingo terminals and bingo systems installed as a single
      element placed in bingo halls under contracts based on (1) a fixed fee per
      use 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 recognizes revenue when
      all of the following factors exist: (a) evidence of an arrangement with the
      customer; (b) play or availability of the bingo terminals; (c) a fixed
      or determinable fee; and (d) collectibility is reasonably assured. The
      Company exercises judgment in assessing the credit worthiness of customers
      to
      determine whether collectibility 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.




**Accounts
      Receivable and Allowance for Doubtful Accounts**




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




The
      Company has established an allowance for uncollectible accounts based primarily
      on management’s evaluation of the customer’s financial condition, past
      collection history and aging of accounts receivable balances. The Company's
      customer base consists primarily of entities operating in charitable, Native
      American, and commercial bingo halls located throughout the United States.
      In
      some jurisdictions, the billing and collection function is performed as part
      of
      a distributor relationship, and in those instances, the Company maintains
      allowances for possible losses resulting from non-payment by both the customer
      and distributor. The Company performs 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
      its
      allowance for doubtful accounts. The Company also reserves a percentage of
      accounts receivable based on aging category. In determining these percentages,
      the Company reviews historical write-offs of receivables, payment trends, and
      other available information.
      While such estimates have been within the Company’s expectations and the
      provisions established, a change in financial condition of specific customers
      or
      in overall trends experienced may result in future adjustments of the Company’s
      estimates of collectibility of its receivables.




F-10




**GAMETECH
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (** **Continued)**




**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.




**Advertising
      and Promotion Costs**




Advertising
      and promotion costs are expensed as incurred. Such costs during fiscal years
      2006, 2005, and 2004 were not material.




**Research
      and Development Costs**




Research
      and development costs are charged to the results of operations when
      incurred.




**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.




Prior
      to
      November 1, 2005, the Company accounted for employee stock transactions in
      accordance with Accounting Principle Board (“APB”), APB Opinion No. 25, *Accounting
      for Stock Issued to Employees* .
      The
      Company has adopted the pro forma disclosure requirements of SFAS No. 123, *Accounting
      for Stock-Based Compensation* .
      As
      permitted by SFAS No. 148, prior to adoption of SFAS No. 123(R), the Company
      accounted for stock based compensation expense under the recognition and
      measurement principles of APB Opinion No. 25 under which no compensation was
      recognized in the Company’s financial statements for the fiscal year ended
      October 31, 2005 and 2004. In connection with the modified prospective method,
      disclosures made for periods prior to the adoption of SFAS No. 123(R) do not
      reflect restated amounts.




Effective
      November 1, 2005, the Company adopted the Financial Accounting Standards Board
      (“FASB”) SFAS No. 123(R), *Share
      Based Payment* .
      This
      statement is a revision of SFAS No. 123, and supersedes APB Opinion No. 25,
      and
      its related implementation guidance. SFAS No. 123(R) addresses all forms of
      share-based payment awards including shares issued under employer stock purchase
      plans, stock options, restricted stock, and stock appreciation rights. Under
      SFAS No. 123(R), share-based payment awards result in a cost that will be
      measured at fair value on the award’s grant date. Stock options exercised in
      future periods will result in an adjustment within the Consolidated Statement
      of
      Cash Flows depicting a reduction to net cash provided by operating activities
      with an offsetting increase in net cash provided by financing activities related
      to incremental tax benefits. In the fourth quarter of the fiscal year 2005,
      the
      Company’s Board of Directors approved the acceleration of the vesting of all
      unvested stock options awarded under its 1997 Incentive Stock Plan. As a result,
      all options outstanding at October 31, 2005 were fully vested and no
      compensation cost for such options will be recognized in any future
      periods.




For
      the
      fiscal year ended October 31, 2006, the Company recognized compensation expense
      of $330,000 which is included in general and administrative expenses in the
      accompanying Consolidated Statement of Operations and a related tax benefit
      of
      $111,000 for a net cost of $219,000. For the fiscal year ended October 31,
      2006
      diluted and basic earnings per share were reduced by $0.02 as a result of
      recognizing the share-based compensation expense, net of tax.




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




F-11




**GAMETECH
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (** **Continued)**




The
      following table presents stock-based compensation expense if the Company had
      applied the fair value recognition provisions of SFAS No. 123(R), as amended
      by
      SFAS No. 148, to stock-based compensation:




**Year
                ended October
                31,****(In
                thousands, except per share
                amounts)****2005**
            
            **2004**Net
                income (loss) as reported
            
            $
            1,336
            
            $
            (9,906
            )Stock-based
                employee compensation expense included in reported net income, net
                of
                related tax benefits
            
            
            39
            
            
            —Stock-based
                employee compensation expense determined under fair value method
                for all
                awards, net of related tax effects
            
            
            (1,285
            )
            
            (475
            )Pro
                forma net income (loss)
            
            $
            90
            
            $
            (10,381
            )Net
                Income (loss) per shareBasic:As
                reported
            
            $
            0.11
            
            $
            (0.84
            )Pro
                forma
            
            $
            0.01
            
            $
            (0.88
            )Diluted:As
                reported
            
            $
            0.11
            
            $
            (0.84
            )Pro
                forma
            
            $
            0.01
            
            $
            (0.88
            )




Under
      SFAS No. 123(R) stock-based compensation cost is measured at the grant date,
      based on the estimated fair value of the award, and is recognized over the
      stated vesting period. 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 outlined in Staff Accounting Bulletin
      107 which states, “The midpoint of the average vesting period and contractual
      life is an acceptable expected life assumption.” Expected stock volatility is
      based on the historic volatility of its stock for a period equal to the length
      of time the Company has been public. Expected option exercises, the period
      of
      time the options are held, forfeitures, employee terminations and other criteria
      are based on previous experiences. The risk-free rates for periods within the
      contractual life of the options are based on United States Treasury Note rates
      in effect at the time of the grant for the period equal to the expected life.
      Application of alternative assumptions could produce significantly different
      estimates of the fair value of stock-based compensation and consequently, the
      related amounts recognized in the Consolidated Statements of
      Operations.




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




**Year
                ended October 31,****2006**
            
            **2005**
            
            **2004**Risk-free
                interest rate
            
            
            5.08
            %
            
            3.98
            %
            
            3.76
            %Dividend
                yield
            
            
            —
            
            
            —
            
            
            2.63
            %Volatility
                factor
            
            
            63.9
            %
            
            64.4
            %
            
            66.2
            %Expected
                life (in years)
            
            
            5.5
            
            
            8.0
            
            
            8.0





F-12




**GAMETECH
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (** **Continued)**




**Net
      Income (Loss) Per Share**




Net
      income (loss) per share is computed in accordance with SFAS No. 128, *Earnings
      per Share* ,
      which
      requires the presentation of 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 antidilutive. 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, short-term investments,
      restricted short-term investments, and trade receivables. Cash equivalents,
      short-term investments, and restricted short-term investments are
      investment-grade, short-term debt instruments, consisting of treasury bills,
      mortgage-backed securities, asset-backed commercial paper, unsecured corporate
      notes, and money market accounts, all of which are maintained with high credit
      quality financial institutions. Cash and cash equivalents are in excess of
      Federal Deposit Insurance Corporation insurance limits.




No
      single
      customer comprised more than ten percent of the Company's total revenue during
      fiscal years 2006, 2005 and 2004. However, the Company conducts a substantial
      amount of its business through distributor relationships, many of which act
      as a
      collection agent.




**Fair
      Values of Financial Instruments**




The
      carrying amounts reported in the consolidated balance sheets for cash and cash
      equivalents, short-term investments, accounts receivable, restricted short-term
      investments, accounts payable, and accrued liabilities approximate fair
      value.




**Significant
      Market Revenue Concentration**




A
      significant portion of the Company’s revenue is concentrated in the Texas
      market, which generated more than 15% of revenue for fiscal years 2006, 2005,
      and 2004. State law requires electronic bingo devices and systems to be placed
      through qualified distributors.




**Reclassifications**




Certain
      prior year reclassifications have been made to conform to classifications used
      in the current period. These reclassifications did not have an impact on
      previously reported financial position, cash flows or results of
      operations.




**Recent
      Accounting Pronouncements**




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




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




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




F-13




**GAMETECH
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (** **Continued)**




**2.
      Goodwill and Intangibles**




The
      Company accounts for goodwill and intangibles according to SFAS No. 142, *Goodwill
      and Other Intangible Assets* .
      This
      rule provides that goodwill should not be amortized but instead should be tested
      for impairment annually and 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.




Goodwill,
      resulting primarily from the February 1999 acquisition of Bingo
      Technologies Corporation ("BTC"), was being amortized on a straight-line basis
      over twelve years and amounted to $14,960,000, net of accumulated amortization,
      at October 31, 2002 and 2003. The November 2002 acquisition of certain
      assets of IGS added $1,849,000 to goodwill for fiscal 2003.




The
      Company assessed the value of its goodwill as of July 31, 2006, 2005 and
      2004 (its annual review date).




Based
      on
      events in the fourth quarter of fiscal 2004, including an estimated loss
      contingency recorded during the fourth quarter (Note 6), management reviewed
      its
      current and expected future results of operations and determined that future
      results of operations were expected to be less than previously anticipated.
      As a
      result of that review and an independent valuation, the Company recorded an
      impairment loss of $6,625,000 representing an impairment of goodwill.  The
      independent valuation was determined using a market approach which included
      a
      market multiple and comparable transaction methodology as well as an income
      approach using a discounted cash flow methodology.




Intangible
      assets consisted of the following as of October 31, 2006 (in thousands):




**Stated
                Value**
            
            **Accumulated
                Amortization**
            
            **Net
                Carrying Value**
            
            **Weighted
                Average Amortization Period (in years)**Intellectual
                Property (software)
            
            $
            4,173
            
            $
            (3,007
            )
            $
            1,166
            
            
            3.2Copyrights/trademarks
            
            
            255
            
            
            (255
            )
            
            __
            
            
            4.7Distributor
                buyouts
            
            
            860
            
            
            (809
            )
            
            51
            
            
            2.9$
            5,288
            
            $
            (4,071
            )
            $
            1,217




Intangible
      assets consisted of the following as of October 31, 2005 (in thousands):




**Stated
                Value**
            
            **Accumulated
                Amortization**
            
            **Net
                Carrying Value**
            
            **Weighted
                Average Amortization Period (in years)**Intellectual
                Property (software)
            
            $
            4,060
            
            $
            (2,351
            )
            $
            1,709
            
            
            3.1Copyrights/trademarks
            
            
            286
            
            
            (284
            )
            
            2
            
            
            4.5Distributor
                buyouts
            
            
            1,800
            
            
            (1,700
            )
            
            100
            
            
            2.3$
            6,146
            
            $
            (4,335
            )
            $
            1,811




Intangibles
      are being amortized over the respective useful lives of the assets ranging
      from
      two to five years. Amortization expense related to the intangibles in fiscal
      years 2006, 2005 and 2004 was $710,000, $721,000 and $1,524,000, respectively
      (including amortization of intellectual property software developed under SFAS
      86 of $656,000, $485,000 and $298,000, respectively).




F-14




**GAMETECH
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (** **Continued)**




During
      October 2004, the Company concluded that an intellectual property software
      developed for a Class II gaming device was not in compliance with proposed
      gaming regulations. The proposed regulation would classify this game as a Class
      III game and with this classification the Company’s market is limited. As a
      result, the Company believes that future cash projections for this game are
      not
      material and the entire value capitalized of $173,000 was charged to research
      and development expense.




Estimated
      aggregate amortization expense for intangible assets subject to amortization
      as
      of October 31, 2006 is as follows (in thousands):




2007
            
            $
            7042008
            
            
            4252009
            
            
            842010
            
            
            4$
            1,217




**3.
      Restricted Short-Term Investments**




Restricted
      short-term investments at October 31, 2006 and 2005 consisted of bank
      certificates of deposit used to collateralize irrevocable standby letters of
      credit pledged to the court to secure certain previous judgments against the
      Company pending results of the Company’s appeals. The certificates of deposit
      are in the amounts of $3.4 million and $1.1 million and include interest rates
      at October 31, 2006 of 3.88% and 4.51%, respectively and mature April 6, 2007
      and August 10, 2007, respectively (See Note 6).




**4.
      Bingo Equipment, Furniture and Other Equipment**




Bingo
      equipment, furniture and other equipment consisted of the following as of
      October 31, 2006 and 2005 (in thousands):




**October
                31,****2006**
            
            **2005**Bingo
                equipment
            
            $
            56,241
            
            $
            52,309Office
                furniture and equipment
            
            
            4,246
            
            
            4,328Leasehold
                improvements
            
            
            754
            
            
            75761,241
            
            
            57,394Less
                accumulated depreciation and amortization
            
            
            42,038
            
            
            36,273Less
                reserve for excess or obsolete terminals
            
            
            214
            
            
            2,87818,989
            
            
            18,243Add
                component parts
            
            
            3,879
            
            
            1,817Bingo
                equipment, furniture and other equipment, net
            
            $
            22,868
            
            $
            20,060




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.




Depreciation
      expense during the fiscal years ended October 31, 2006, 2005 and 2004
      amounted to approximately $9.6 million, $10.7 million and
      $10.2 million, respectively. In addition, during fiscal years ended
      October 31, 2006, 2005 and 2004, the Company reserved $249,000, $0 and
      $355,000, 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.




F-15




**GAMETECH
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (** **Continued)**




**5.
      Credit Agreements**




Effective
      April 3, 2006, the Company renewed its revolving line of credit agreement with
      a
      bank at substantially the same terms and conditions. The maximum amount
      available under the terms of the agreement is $2.5 million. Borrowings bear
      interest based on the bank's prime rate or LIBOR plus 2.0 %, at the Company’s
      option. Interest is payable monthly and the agreement
      expires on April 2, 2007. The Company can give no assurance that the credit
      agreement will be renewed. The Company’s obligations under the agreement are
      secured by substantially all of the Company’s assets. The agreement contains
      certain restrictive covenants, which, among other things, require that specified
      financial balances and ratios be maintained, requires profitability to be
      maintained on a quarterly basis, and restricts the incurrence of additional
      indebtedness and payment of dividends. At October 31, 2006 and 2005, there
      was
      no outstanding balance under the line of credit and the Company was in
      compliance with all terms and covenants of the agreement.




**6.
      Commitments and Contingencies**




**Leases**




The
      Company leases administrative and warehouse facilities and certain equipment
      under non-cancelable operating leases. Rent expense during the fiscal years
      ended October 31, 2006, 2005 and 2004 was $899,000, $912,000 and $943,000,
      respectively.




Future
      minimum lease payments under these leases as of October 31, 2006 are as follows
      (in thousands):




2007
            
            $
            6762008
            
            
            6692009
            
            
            6762010
            
            
            5302011
            
            
            —$
            2,551




**Purchase
      Commitments**




From
      time
      to time, the Company enters into commitments with its vendors to purchase bingo
      terminals and support equipment at fixed prices and/or guaranteed quantities.
      During the third quarter of the fiscal year ended October 31, 2005, the Company
      entered into two agreements with the same vendor to provide $2.5 million in
      Traveler terminals. As of October 31, 2006, the Company had fulfilled these
      purchase commitments. In addition, during the fiscal year ended October 31,
      2006, the Company entered into seven additional agreements with the same vendor
      to provide an additional $5.4 million in Traveler terminals and $1.1 million
      in
      other component parts. As of October 31, 2006, approximately $900,000 of the
      Traveler commitment was remaining and $1.0 million of the other component parts
      commitment was remaining. All purchases are expected to occur by the end of
      the
      second quarter of fiscal 2007.




**Litigation**




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, seeking a declaratory judgment that the Company
      is
      not in material breach of the Company’s 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 the Company’s 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 approximately $540,000 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 sums in those accounts now total
      approximately $600,000. In addition, collections of accounts receivable by
      Trend, if any, are also being placed in that account, pending the resolution
      of
      the case. The Company has posted a $450,000 deposit with the court as a bond,
      which is presented as restricted cash on the Company’s condensed consolidated
      balance sheets. The accounts receivable from Trend were fully reserved as of
      October 31, 2006. 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 $735,000 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, pending resolution of the issues on appeal. The court
      setoff the jury awards and entered an amended judgment for Trend on May 12,
      2005, in the amount of $2.8 million, plus interest on that sum at the rate
      of
      3.31% per annum beginning March 30, 2005. 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 stays any action by Trend to collect on the judgment,
      pending appeal. Trend initially sought
      an
      award of $810,000 in legal fees and $26,000 in expenses and costs. In an amended
      request, Trend sought an award of $1.4 million in legal fees and $61,000 in
      expenses and costs. The court awarded Trend $909,000 in legal fees, expenses
      and
      costs plus interest of 3.77% per annum beginning August 5, 2005. The Company
      appealed the fee award to the United StatesCourt
      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 is accounted for
      as
      restricted short-term investments on the Company’s consolidated balance sheets.
      The Company cannot provide assurance that the Company will succeed in setting
      the judgments aside on appeal. Currently, the court has not set a hearing date
      for the appeal. For the year ended October 31, 2004, the Company recorded an
      estimated loss contingency in the Trend litigation of $3.6 million, which was
      estimated based on the amounts of the judgment described above. The Company
      recorded an additional loss contingency of $72,000 in the third quarter of
      fiscal 2005 to account for the increased total award to Trend for legal fees
      and
      expenses and costs of $909,000. In addition, loss contingencies of $133,000
      and
      $65,000 were recorded in the fiscal years ended October 31, 2006 and 2005,
      respectively, to account for interest accrued on the Trend judgment. The Company
      feels the amount recorded is appropriate as of October 31, 2006.




F-16




**GAMETECH
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (** **Continued)**




On
      October 30, 2002, Capital Gaming Supplies (“Capital”) filed Capital Gaming
      Supplies, Inc. v. GameTech International, Inc. Civil Action No. 3:02 CV1636WS
      in
      the United States District Court for the Southern District of Mississippi,
      seeking a judgment that the Company tortiously interfered with alleged existing
      and prospective customer accounts. The Company denied the allegations and filed
      a counter-claim seeking a judgment that Capital tortiously interfered with
      the
      Company’s customer accounts. On April 18, 2003, Capital filed an amended
      complaint, adding other claims against the Company and other defendants,
      including a claim for malicious breach of contract against International Gaming
      Systems, Inc. (“IGS”) and its principals. In November 2002, the Company acquired
      certain assets of IGS and assumed certain claims filed by Capital against IGS
      and its principals. Capital sought compensatory and punitive damages from all
      defendants. On September 30, 2004, the district court entered a summary judgment
      in favor of all defendants dismissing all of Capital’s claims with prejudice.
      Capital appealed the judgment to the United States Court of Appeals for the
      Fifth Circuit, which heard oral argument on the matter on December 5, 2005.
      On
      February 8, 2006 the appellate court affirmed the judgment by the district
      court.




On
      March
      2, 2004, the jury rendered a verdict in the Company’s favor awarding
      compensatory and punitive damages against Trend Gaming, LLC, a Kentucky LLC
      (“Trend Gaming”) (involving a prior distribution agreement in Virginia) in the
      total amount of approximately $1.5 million. The jury also returned a verdict
      against Steven W. and Rhonda Hieronymus awarding compensatory and punitive
      damages of $1.0 million. The court reduced compensatory damages against Trend
      Gaming to $1.1 million. The court affirmed $150,000 in punitive damages against
      Trend Gaming and awarded the Company fees and costs of suit against Trend Gaming
      in the amount of $650,000. Compensatory damages against Mr. and Mrs. Hieronymus
      have been reduced to $762,000 but the punitive damage award against them in
      the
      amount of $150,000 remains unchanged. Of the total compensatory damages of
      $1.1
      million awarded to the Company, $762,000 represents compensation for lost
      profits. The Company can only collect such damages from one of the defendants
      to
      avoid a double recovery. Defendants have appealed the judgment against them.
      The
      Appellate Court heard oral argument on defendant’s appeal on October 17, 2006.
      The Company is awaiting a decision in this matter. Defendants did not post
      a
      supersedeas bond, and the Company is therefore not precluded from pursuing
      collection on the judgment during the appeal. 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 its business. The Company does not believe that any of those
      proceedings will have a material adverse effect on our business, results of
      operations, and financial condition.




**7.
      Stockholders' Equity**




**Stock
      Options**




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.




F-17




**GAMETECH
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (** **Continued)**




The
      aggregate intrinsic value represents the difference between the closing price
      of
      our common stock on October 31, 2006, which was $9.95, 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 October 31, 2006. In future
      periods, this amount will change depending on fluctuations in our stock price.
      The aggregate intrinsic value of the options outstanding at October 31, 2006
      was
      $5.1 million. The aggregate intrinsic value of options exercisable at October
      31, 2006 was $4.7 million. During the years ended October 31, 2006, 2005, and
      2004, the aggregate intrinsic value of options exercised under our stock option
      plans were $1.8 million, $35,000, and $161,000, respectively, determined as
      of
      the date of option exercise.




As
      of
      October 31, 2006, options to purchase 847,735 shares of common stock were
      outstanding at exercise prices ranging from $2.85 to $6.99 per share under
      the
      1997 Plan. In addition, as of October 31, 2006, 742,791 shares of common stock
      were available for future grants under the 1997 Plan. In
      November 2006, the Company issued to its new CFO options to buy
      100,000 shares of common stock at an exercise price of $9.32 per share, that
      vest on the fourth year anniversary of the grant date.




A
      summary
      of the activity under the stock option plan and related information is presented
      below:




**Year
                ended October 31,****2006**
            
            **2005**
            
            **2004****Number
                of**
              **Shares**
              **(Options)**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**
            
            **Number
                of**
              **Shares**
              **(Options)**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**
            
            **Number
                of**
              **Shares**
              **(Options)**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**Balance
                at beginning of year
            
            
            1,410,900
            
            $
            3.63
            
            
            970,125
            
            $
            4.25
            
            
            698,575
            
            $
            3.80Options:Granted
            
            
            150,000
            
            $
            6.92
            
            
            827,650
            
            $
            3.12
            
            
            473,600
            
            $
            4.66Forfeited
            
            
            (82,166
            )
            $
            3.81
            
            
            (346,675
            )
            $
            4.16
            
            
            (94,475
            )
            $
            3.84Exercised
            
            
            (630,999
            )
            $
            3.99
            
            
            (40,200
            )
            $
            3.36
            
            
            (107,575
            )
            $
            3.47Balance
                at end of year
            
            
            847,735
            
            $
            3.93
            
            
            1,410,900
            
            $
            3.63
            
            
            970,125
            
            $
            4.25Exercisable
                at end of year
            
            
            722,735
            
            $
            3.40
            
            
            1,410,900
            
            $
            3.63
            
            
            499,900
            
            $
            4.20Weighted
                average grant-date fair value of options granted during the year
            
            
            
            
            $
            4.17
            
            
            
            
            $
            2.16
            
            
            
            
            $
            2.51




As
      of
      October 31, 2006, 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 $296,000. This cost will be amortized on a straight-line basis
      over a weighted average term of 7 months and will be adjusted for subsequent
      changes in estimated forfeitures.




F-18


**GAMETECH
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (** **Continued)**




The
      following table summarizes information regarding stock options outstanding
      and
      exercisable as of October 31, 2006:




**Options
                Outstanding**
            
            **Options
                Exercisable****Range
                of****Exercise
                Prices**
            
            **Number
                Outstanding**
            
            **Weighted-**
              **Average**
              **Remaining**
              **Contractual
                Life (in years)**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**
            
            **Number
                Exercisable**
            
            **Weighted-**
              **Average**
              **Remaining**
              **Contractual
                Life (in years)**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**$2.85
                - $2.97
            
            
            326,000
            
            
            8.59
            
            $
            2.87
            
            
            326,000
            
            
            8.59
            
            $
            2.87$3.10
                - $3.19
            
            
            89,500
            
            
            8.43
            
            $
            3.13
            
            
            89,500
            
            
            8.43
            
            $
            3.13$3.44
                - $3.63
            
            
            134,535
            
            
            6.93
            
            $
            3.50
            
            
            134,535
            
            
            6.93
            
            $
            3.50$3.85
                - $4.29
            
            
            117,700
            
            
            6.80
            
            $
            3.99
            
            
            117,700
            
            
            6.80
            
            $
            3.99$4.62
                - $6.99
            
            
            180,000
            
            
            8.99
            
            $
            6.53
            
            
            55,000
            
            
            2.35
            
            $
            5.50847,735
            
            
            8.15
            
            $
            3.93
            
            
            722,735
            
            
            6.74
            
            $
            3.40




**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 that attempts to acquire the Company
      on terms not approved by the Board of Directors. The rights may be redeemed
      by
      the shares of common stock at 50% of the then-current market price. The rights
      will cause substantial dilution to a person or group 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.




**8.
      Income Taxes**




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


**Year
                  ended October 31,****2006**
              
              **2005**
              
              **2004**Current:Federal
              
              $
              2,947
              
              $
              565
              
              $
              —State
              
              
              365
              
              
              109
              
              
              90Foreign
              
              
              345
              
              
              52
              
              
              —Deferred:Federal
              
              
              (576
              )
              
              (243
              )
              
              (1,526
              )State
              
              
              16
              
              
              51
              
              
              (284
              )Foreign
              
              
              (136
              )
              
              —
              
              
              —$
              2,961
              
              $
              534
              
              $
              (1,720
              )




F-19


**GAMETECH
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (** **Continued)**




The
      significant components of the Company's deferred income tax assets and
      liabilities as of October 31, 2006 and 2005 are as follows (in
      thousands):




**October
                31, 2006****Current**
            
            **Non-Current**Deferred
                income tax assets:Amortization
                of intangible assets
            
            $
            —
            
            $
            806Allowance
                for doubtful accounts
            
            
            838
            
            
            —Reserve
                for obsolete terminals
            
            
            —
            
            
            80Loss
                contingencies
            
            
            1,461
            
            
            —Accrued
                vacation
            
            
            126
            
            
            —Stock
                option expense
            
            
            96
            
            
            —Foreign
                tax credit carryforward
            
            
            17
            
            
            —Capital
                loss carryforward
            
            
            —
            
            
            12Total
                deferred income tax assets
            
            
            2,538
            
            
            898Deferred
                income tax liability:Depreciation
            
            
            (80
            )
            
            (1,370
            )Net
                deferred income tax asset (liability)
            
            $
            2,458
            
            $
            (472
            )




**October
                  31, 2005****Current**
              
              **Non-Current**Deferred
                  income tax assets:Amortization
                  of intangible assets
              
              $
              —
              
              $
              914Allowance
                  for doubtful accounts
              
              
              890
              
              
              —Loss
                  contingencies
              
              
              1,412
              
              
              —Accrued
                  vacation
              
              
              137
              
              
              —Various
                  accruals
              
              
              110
              
              
              —Capital
                  loss carryforward
              
              
              —
              
              
              12Total
                  deferred income tax assets
              
              
              2,549
              
              
              926Deferred
                  income tax liability:Depreciation
              
              
              —
              
              
              (2,185
              )Net
                  deferred income tax asset (liability)
              
              $
              2,549
              
              $
              (1,259
              )




F-20


**GAMETECH
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (** **Continued)**




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:




**Year
                ended October 31,****2006**
            
            **2005**
            
            **2004**Income
                tax provision (benefit) at the statutory rate
            
            
            34.0
            %
            
            34.0
            %
            
            (34.0
            )%State
                income taxes, net
            
            
            3.4
            
            
            4.0
            
            
            (1.1
            )Foreign
                income taxes, net of credits
            
            
            —
            
            
            (0.7
            )
            
            —Revisions
                to income tax payable due to closure of statute of
                limitations
            
            
            —
            
            
            (11.4
            )
            
            —Meals
                and entertainment
            
            
            0.7
            
            
            2.3
            
            
            0.3Non
                deductible lobbying expenses
            
            
            0.4
            
            
            2.3
            
            
            0.8Impairment
                of goodwill
            
            
            —
            
            
            —
            
            
            19.4Other,
                net
            
            
            1.8
            
            
            (2.0
            )
            
            (0.2
            )Income
                tax provision (benefit) at its effective rate
            
            
            40.3
            %
            
            28.5
            %
            
            (14.8
            )%




**9.
      Short Term Investments**




The
      Company currently invests in only investment grade, short-term investments
      which
      it classifies as available-for-sale. As such, there were no significant
      differences between amortized cost and estimated fair value at October 31,
      2006
      or October 31, 2005. Additionally, because investments are short-term and are
      generally allowed to mature, realized gains and loss for fiscal 2006 and 2005
      are minimal.




The
      following table presents the estimated fair value breakdown of investment by
      category (in thousands):




**October
                31,****2006**
            
            **2005**Corporate
                securities
            
            $
            3,608
            
            $
            —Auction
                rate securities
            
            
            3,800
            
            
            —U.S.
                Treasury agency securities
            
            
            —
            
            
            503Total
                short-term investments
            
            $
            7,408
            
            $
            503




**10.
      Accrued Severance**




The
      Company has incurred expenses connected with severance agreements. These amounts
      are recorded in accrued payroll. In fiscal 2006, the total severance expense
      was
      $170,000 in research and development. In fiscal 2005, total severance expenses
      of $1.0 million consisted of $45,000 in cost of revenue, $626,000 in general
      and
      administrative, $353,000 in sales and marketing, and $15,000 in research and
      development.




Accrued
      severance consisted of the following as of October 31, 2006 and 2005 (in
      thousands):




**October
                31,****2006**
            
            **2005**Beginning
                balance
            
            $
            359
            
            $
            704Severance
                expenses
            
            
            170
            
            
            1,039Less
                severance paid
            
            
            (485
            )
            
            (1,384
            )Ending
                Balance
            
            $
            44
            
            $
            359




F-21




**GAMETECH
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (** **Continued)**




**11.
      Other Accrued Liabilities**




Other
      accrued liabilities consist of (in thousands):




**October
                31,****2006**
            
            **2005**Accrued
                professional fees
            
            $
            592
            
            $
            870Accrued
                legal settlement
            
            
            —
            
            
            200Accrued
                distributor commissions
            
            
            442
            
            
            412Deferred
                revenue
            
            
            —
            
            
            2Accrued
                property tax
            
            
            139
            
            
            141Other
            
            
            408
            
            
            435$
            1,581
            
            $
            2,060




**12.
      Net Income (Loss) Per Share**




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




**Year
                ended October 31,****2006**
            
            **2005**
            
            **2004**Basic
                weighted average shares outstanding
            
            
            12,181
            
            
            11,868
            
            
            11,775Effect
                of dilutive securities:Stock
              options
            
            
            576
            
            
            92
            
            
            —Diluted
            
            
            12,757
            
            
            11,960
            
            
            11,775




Employee
      stock options to purchase approximately 125,000, 832,000, and 970,000 shares
      in
      fiscal years ending October 31, 2006, 2005, and 2004, respectively, were
      outstanding, but were not included in the computation of diluted earnings per
      share because the effect would have been antidilutive.




**13.
      Valuation and Qualifying Accounts (in thousands)**




**Description**
            
            **Balance
                at Beginning of Period**
            
            **Additions
                Charged to Costs and Expenses**
            
            **Net
                Deductions (Write-offs, Net of Collections)**
            
            **Balance
                at End of Period**Allowance
                for accounts receivableYear
                ended October 31, 2004:Allowance
            
            $
            2,287
            
            $
            281
            
            $
            (114
            )
            $
            2,454Year
                ended October 31, 2005:Allowance
            
            $
            2,454
            
            $
            43
            
            $
            (123
            )
            $
            2,374Year
                ended October 31, 2006:Allowance
            
            $
            2,374
            
            $
            277
            
            $
            (421
            )
            $
            2,230




F-22




**GAMETECH
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (** **Continued)**




The
      balance of the allowance for accounts receivable for fiscal years ended 2006,
      2005, and 2004 included a combined allowance of $1.6 million for Trend Gaming
      Systems, LLC and Trend Gaming, LLC consisting of the entire accounts receivable
      balance (see Note 6).




**Description**
            
            **Balance
                at Beginning of Period**
            
            **Additions
                Charged to Costs and Expenses**
            
            **Deductions
                (Disposal of Assets)**
            
            **Balance
                at End of Period**Allowance
                for property and equipmentYear
                ended October 31, 2004:Allowance
            
            $
            3,172
            
            $
            355
            
            $
            (143
            )
            $
            3,384Year
                ended October 31, 2005:Allowance
            
            $
            3,384
            
            $
            —
            
            $
            (506
            )
            $
            2,878Year
                ended October 31, 2006:Allowance
            
            $
            2,878
            
            $
            249
            
            $
            (2,913
            )
            $
            214





**14.
      Agreement to Acquire Assets**




On
      August
      30, 2006, the Company entered into an asset purchase agreement with Summit
      Amusement & Distributing, Ltd. (“Summit”) to purchase substantially all of
      Summit’s assets and assume certain of its liabilities. The purchase price is $37
      million in cash, subject to adjustment, up or down, based on Summit’s working
      capital as of the closing date, plus an earn-out of up to $2 million in cash
      based on EBITDA goals for 2006. The Company plans to finance the acquisition
      with a $10 million revolving line of credit and a $30 million term loan. The
      transaction is subject to a number of customary closing conditions. Under
      certain circumstances, if the transaction fails to close, the Company would
      be
      required to pay Summit a $1 million termination fee, including if the Company
      is
      unable to obtain required financing and licenses. The Company incurred $302,000
      of expense in connection with this agreement, which is recorded as other assets
      on the balance sheet. In the event this agreement is not consummated, the
      Company will expense the costs incurred with this acquisition.




**15.
      Quarterly Financial Information (Unaudited)**




Summarized
      unaudited quarterly financial information for the years 2006 and 2005 are noted
      below (in thousands, except per share amounts):




**Year
                ended October 31, 2006****First**
              **Quarter**
            
            **Second**
              **Quarter**
            
            **Third**
              **Quarter**
            
            **Fourth**
              **Quarter**Revenue
            
            $
            12,347
            
            $
            12,533
            
            $
            12,430
            
            $
            11,979Gross
                profit
            
            $
            7,695
            
            $
            7,578
            
            $
            7,317
            
            $
            6,770Income
                (loss) from operations
            
            $
            1,308
            
            $
            1,864
            
            $
            2,105
            
            $
            1,721Net
                income
            
            $
            839
            
            $
            1,186
            
            $
            1,322
            
            $
            1,036Net
                income per share:Basic
            
            $
            0.07
            
            $
            0.10
            
            $
            0.11
            
            $
            0.08Diluted
            
            $
            0.07
            
            $
            0.09
            
            $
            0.10
            
            $
            0.08





F-23


**GAMETECH
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (** **Continued)**




During
      the fourth quarter ended October 31, 2006, the Company recorded the
      following expenses:




·
            $285,000
                was credited to general and administrative expenses in the Statement
                of
                Operations due to the adjustment in accrued bonus liability as the
                fourth
                quarter results did not meet the criteria as established in the Board
                approved bonus plan.




**Year
                ended October 31, 2005****First**
              **Quarter**
            
            **Second**
              **Quarter**
            
            **Third**
              **Quarter**
            
            **Fourth**
              **Quarter**Revenue
            
            $
            12,320
            
            $
            12,746
            
            $
            12,444
            
            $
            12,141Gross
                profit
            
            $
            6,850
            
            $
            7,600
            
            $
            7,674
            
            $
            7,223Income
                (loss) from operations
            
            $
            (33
            )
            $
            687
            
            $
            159
            
            $
            981Net
                income (loss)
            
            $
            1
            
            $
            303
            
            $
            85
            
            $
            947Net
                income per share:Basic
            
            $
            0.00
            
            $
            0.03
            
            $
            0.01
            
            $
            0.07Diluted
            
            $
            0.00
            
            $
            0.03
            
            $
            0.01
            
            $
            0.07




During
      the fourth quarter ended October 31, 2005 the Company recorded the
      following expenses:




·
            $360,000
                was credited to provision for taxes in the Statement of Operations
                due to
                adjustments in income tax
                liabilities.




F-24