**UNITED
      STATES**




**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**Form
      10-K**




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




**For
      the fiscal year ended October 31, 2007**




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




**For
      the transition period from _________ to _________**





**Commission
      file number 000-23401**





**GameTech
      International, Inc.**


*(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***(Address
                of principal executive offices)*
            
            *(Zip
                Code)*





**(775) 850-6000**


*(Registrant’s
      telephone number, including area code)*





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




**Title
                of each class**
            
            **Name
                of each exchange on which 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**





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
þ





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


Yes 
      o No
þ





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




Indicate
      by check mark 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. þ





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 þ Non-accelerated filer o





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


Yes
o No
þ





The
      aggregate market value of common stock held by non-affiliates of the registrant
      based on the closing price of the registrant’s common stock as reported on the
      NASDAQ Global Market on April 30, 2007, which was the last business day of
      the registrant’s most recently completed second fiscal quarter, was
      $103,069,097. 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, 2008, 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, 2007**





**INDEX**





Page**PART
                I**Item
                1.
            
            *Business*
            
            1Item
                1A.
            
            *Risk
                Factors*
            
            13Item
                1B.
            
            *Unresolved
                Staff Comments*
            
            20Item
                2.
            
            *Properties*
            
            20Item
                3.
            
            *Legal
                Proceedings*
            
            20Item
                4.
            
            *Submission
                of Matters to a Vote of Security Holders*
            
            21**PART
                II**Item
                5.
            
            *Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities*
            
            22Item
                6.
            
            *Selected
                Financial Data*
            
            24Item
                7.
            
            *Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operation*
            
            25Item
                7A.
            
            *Quantitative
                and Qualitative Disclosures About Market Risk*
            
            37Item
                8.
            
            *Financial
                Statements and Supplementary Data*
            
            37Item
                9.
            
            *Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure*
            
            37Item
                9A.
            
            *Controls
                and Procedures*
            
            37Item
                9B.
            
            *Other
                Information*
            
            39**PART
                III**Item
                10.
            
            *Directors,
                Executive Officers and Corporate Governance*
            
            39Item
                11.
            
            *Executive
                Compensation*
            
            39Item
                12.
            
            *Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters*
            
            39Item
                13.
            
            *Certain
                Relationships and Related Transactions, and Directors
                Independence*
            
            39Item
                14.
            
            *Principal
                Accountant Fees and Services*
            
            39**PART
                IV**Item
                15.
            
            *Exhibits,
                and Financial Statement Schedules*
            
            39SIGNATURES
            
            43INDEX
                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 2008 and
      thereafter; expansion of products or product development; expansion into new
      domestic and international markets; potential acquisitions or strategic
      alliances; and liquidity and anticipated cash needs and availability. All
      forward-looking statements included in this report are based on information
      available to us as of the filing date of this report, and we assume no
      obligation to update any such forward-looking statements. Our actual results
      could differ materially from the forward-looking statements. Important factors
      that could cause actual results to differ materially from expectations reflected
      in our forward-looking statements include those described in Item 1A, “Risk
      Factors.”*







**PART
      I**





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





**General**





We
      design, develop, and market electronic bingo systems consisting of portable
      and
      fixed based systems, and manufacture and sell video lottery terminals. We
      currently market portable bingo systems, that can be played anywhere within
      a
      bingo hall and fixed-base systems with touch screen activated monitors. We
      have
      portable and fixed-base bingo terminals operating in charitable, Native
      American, commercial, and military bingo halls. Both our portable and fixed-base
      bingo systems display electronic bingo card images for each bingo game. Our
      electronic bingo terminals enable players to play substantially more bingo
      cards
      than they can play on paper cards, typically leading to a greater spend per
      player and higher profits per bingo session for the bingo operator. We install
      the electronic bingo systems, typically at no cost to the operator, and charge
      either a fixed fee per use per terminal 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.





We
      also
      manufacture and sell video lottery terminals (“VLTs”) and related software
      through our Summit Gaming division. We entered the VLT business on March 28,
      2007 with our acquisition of substantially all of the assets of Summit Amusement
      & Distributing, Ltd. (“Summit Gaming”) for $41.7 million in cash. VLTs allow
      a person to play a state’s lottery games on a video terminal. These machines are
      typically sold to VLT route operators, Native American casinos, bar/tavern
      gaming operators, and distributors on both a machine purchase and revenue
      participation basis. We also anticipate utilizing our Summit Gaming division
      to
      develop new platforms to expand into new markets including Class II and Class
      III gaming markets with existing and acquired gaming content from third party
      software developers. Finally, we have developed a wireless server based gaming
      technology into a commercially viable product called the Mini TM that we
      anticipate installing in the upcoming fiscal year. This product will utilize
      existing software developed through Gametech and Summit Gaming.





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





Bingo
      is
      a legal enterprise in 47 states (excluding Arkansas, Hawaii, and Utah) and
      the
      District of Columbia. We believe that in at least 40 of those states electronic
      bingo has been legalized. 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,
      2007, 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 is currently
      played on Native American lands in 30 states. As of October 31, 2007, we had
      terminals in operation in Native American bingo halls in 13 of those states.
      Collectively, as of October 31, 2007, we had products in 38 states, one US
      territory and four non-domestic countries.





VLTs
      are
      a legal enterprise in 12 states and Canada. VLTs are state authorized Class
      III
      gaming machines that are similar to traditional Class III gaming machines with
      the exception of state regulated player buy-in and maximum payout parameters
      and
      in some instances state monitoring systems installed on the machines. They
      are
      operated in casinos, bar/taverns, truck stops, and other gaming approved
      locations that vary from state to state. Summit Gaming sells VLTs and related
      software and equipment primarily in Montana, Louisiana, West Virginia, South
      Dakota, and Native American casinos.





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




1





For
      financial information about our operating segments see Note 15 to our
      consolidated financial statements included in Item 8.





**Business
      Strategy**





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





***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.





***Expand
      Product Offerings and Emphasize Unique Gaming Content***





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





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





Our
      Summit Gaming division manufactures VLTs that are sold primarily in the Montana,
      Louisiana, South Dakota, West Virginia, and Native American markets. These
      games
      are sold on a machine purchase as well as revenue participation basis. The
      gaming content developed for these games includes unique video poker and keno
      games that have allowed us to generate significant market share in the markets
      we compete in. We anticipate developing new gaming platforms to introduce our
      existing and future unique gaming content into the Class II and Class III gaming
      markets.





***Expand
      Internationally***





We
      plan
      to continue to expand our operations outside of the United States. We currently
      have an installed base of bingo terminals in Europe, Canada, Latin America,
      South Pacific, and Asia. International revenue as a percentage of our total
      revenue was 7.7% in fiscal 2007, 8.2% in fiscal 2006, and 5.8% in fiscal 2005.
      We are currently pursuing additional expansion in Latin America, Europe, 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 place additional electronic bingo terminals in bingo clubs. From time to
      time we also evaluate opportunities to expand into other countries.




2





***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
      2007, we developed a commercially viable wireless server based gaming device
      called the GameTech Mini TM. The GameTech Mini TM is a portable gaming device that
      includes Wi-Fi communication capabilities which allows the device to be
      connected to a central server. It includes a seven inch touch screen LCD display
      and control buttons that allow the user to interact with the unit. This unit
      will have the ability to be configured to include bingo, Class II, and Class
      III
      gaming content with the game outcome being made on the central server. We
      anticipate the first installment of this product in the second fiscal quarter
      of
      2008.





Also
      during 2007, we finalized our next generation operating system called the
      GameTech Elite TM. This operating system was designed to perform all the
      functions of previous operating systems as well as the capabilities needed
      to
      move into Class II and Class III markets. These markets demand a higher level
      of
      security and accountability. The GameTech Elite TM system provides GameTech with
      the ability to support traditional bingo applications as well as new cutting
      edge server-based applications for casino and tribal gaming markets. The
      GameTech Elite TM system also addresses international product needs and allows
      GameTech to focus on different variations of the game of Bingo in European
      and
      Latin American markets. The system was redesigned from the ground up based
      on
      the experience of past products as well as emerging technologies not available
      during the design of previous products.





For
      additional information, see “Product and System Software
      Development.”





***Develop
      Strategic Alliances/Acquire Complementary
      Companies***





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





**Products**





***Bingo***





We
      provide bingo operators with a variety of electronic player terminals and
      back-office management systems. One of these systems is 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 have developed a next generation
      operating system called the GameTech Elite TM system. This new operating system
      performs all of the traditional functions of the Diamond TM system and supports
      newer style games and markets.





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




3





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.





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, depending on the device. In
      a
      portable system, the file server, caller unit, and sales units are similar
      to,
      and can be shared with, those of fixed-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
      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 launched 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 our AllTrak2®, the Diamond ® POS system, or the new
      GameTech EliteTM system.





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. 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, the Diamond® POS system, or the new
      GameTech EliteTM system.




4





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 touch screen displays. 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 touch screen. By simply
      touching the screen, the caller enters ball numbers drawn, game number, game
      patterns, and wild numbers. The caller unit connects with each player’s
      fixed-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 touch screen, the
      cashier activates player buy-in choices for the session and the unit
      automatically calculates pricing and totals. The player receives a printed
      receipt itemized by date, session, and quantity of electronic bingo card images
      purchased.





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





***Video
      Lottery Terminals***





Summit
      Gaming’s product line of VLTs consist of a variety of configurations including
      single screen upright and slant top machines as well as our new dual-screen
      Megaplex series that is available in both upright and slant top versions. The
      VLTs are typically configured with multi-game and multi-denomination options
      to
      allow for greater flexibility in attracting a variety of gaming customers as
      one
      machine may offer many different combinations of games by varying
      denominations.




5





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





**Product
      and System Software Development**





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





In
      2007,
      we developed the GameTech Elite TM server-based system. The over-all system is a
      combination of Windows XP PCs, Windows 2003 Servers, and various proprietary
      GameTech devices, such as portable bingo devices. The system offers cutting
      edge
      security and the ability to support large numbers of fixed-base and portables
      devices. The system utilizes the latest in wireless technology, database
      technology, and programming tools. In addition, the system was designed to
      be
      modular which gives GameTech the ability to quickly develop new applications
      and
      games for the system and simplifies the regulatory submittal process necessary
      to place this product into new markets.





In
      2007,
      we developed the newest GameTech portable device called the GameTech MiniTM. The
      GameTech MiniTM provides the latest technology in portable gaming such as Wi-Fi
      networking, High-Definition graphics, increased security, and capability to
      handle next generation gaming and systems requirements. Unlike past GameTech
      portable devices, the GameTech MiniTM was designed with Class II and Class III
      gaming in mind. The device and its software were designed specifically for
      server-based gaming and compliments the new GameTech EliteTM server based system.
      The GameTech Mini TM is anticipated to be installed for the first time in a
      mobile gaming capacity in the second quarter of fiscal 2008.





During
      fiscal 2007, we spent approximately $3.9 million for company-sponsored research
      and development activities compared with approximately $2.9 million during
      fiscal 2006 and approximately $4.1 million during fiscal 2005.





**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 equipment and video
      lottery terminals.





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




6





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.





*VLTs.* Our
      video lottery terminals are sold through an internal sales force that sells
      directly to gaming operators as well as distributors. In Montana, West Virginia,
      and South Dakota we sell primarily directly to the gaming operators through
      our
      internal sales force. In Louisiana, as required by law, we sell to one
      distributor who then sells the product to the gaming operators throughout the
      state. Our marketing strategy is to target both large and small gaming operators
      and demonstrate the benefits of Summit Gaming equipment over our competitors’
product lines. Our high-quality gaming equipment, rich game content, and future
      development pipeline of software upgrades provide for a state-of-the-art VLT
      that we believe can out earn our competitors’ products.





***Target
      Markets***





*Bingo.* We
      target
      the thousands of charities licensed to operate bingo games in the United States
      and Canada. We also target Native American bingo halls and commercial entities
      in the United Sates and foreign markets. As of October 31, 2007, we had
      terminals in over 500 locations serving over 1,000 bingo operators, including
      many charitable bingo halls in which we, or our distributors, have multiple
      customers. For the fiscal year ended October 31, 2007, portable terminals
      generated approximately 80% of our bingo revenue and fixed-based terminals
      generated approximately 20% of our bingo revenue.





As
      of
      October 31, 2007, we operated in 38 states, one US territory and four
      foreign countries. We are actively pursuing additional opportunities in other
      states and countries, as well as increased activity in existing
      states.





*VLTs.* As
      of
      October 31, 2007 we have sold gaming equipment, parts, and related software
      in
      15 states and one US territory, with Montana, Louisiana, South Dakota, West
      Virginia, and Native American casino markets representing 95% of our overall
      Summit Gaming sales. Summit Gaming’s revenue stream and percentage contribution
      consists of the sale of new equipment (63%), used equipment (8%), software
      upgrades (11%), and supplies and other (18%).





**Materials
      and Supplies**





We
      source
      all bingo and VLT system hardware components from various domestic and
      international suppliers. Typically, our bingo components are assembled and
      systems are configured at our facility in Reno, Nevada, while our VLTs are
      manufactured in our facility in Billings, Montana. We occasionally use
      third-party manufacturers to assist with the assembly or refurbishing of bingo
      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,” “Bingo Enhanced Tabs System,” “Blazing
      Quarters,” “Bowling for Cash,” “Cadillac Bingo,” “Club 76,” “Crazy Pays,”
“Crystal Ball,” “Demolition Poker,” “Diamond Bingo,” “Diamond Elite,” “Diamond
      Plus Bingo,” “Diamond TED,” “Firestar,” “GameTech,” “GameTech with design,”
“GameTech Arizona Corporation,” “Goggles Beer,” “High Country Montana Poker,”
“Hot Flush,” “Jukebox Jungle,” “Jokers Jackpot,” “Montana Choppers,” “Montana
      Poker II,” “Nevada Classic,” “Ol’Coots Genuine Potable,” “Oops! All Worm
      Tequila”, “Pay-N-Play,” “Pays All Poker”, “Penny Power,” “Peter Jacobsen
      Challenge Keno,” “Raging Rubies,” “Royal Pays,” “Royal Touch,” “Sands Of Time,”
“Spill Over,” “Sunken Treasure,” “Take It Or Deal,” “TED,” “TED2C,” “The
      Electronic Dauber,” and “Traveler,” “Treasure Hunt Keno,” “Treasure 7’S,” “Vault
      of Gold Keno,” “Wild Biker,” and “Wild Widow Poker.” We have trademark
      applications pending with the U.S. Patent and Trademark Office for the following
      names: “Decorating For Dollars,” “Diamond Pro,” “Diamond VIP,” “Elite Series,”
“Gamblers Edge Keno,” “Gamblers Edge Poker,” “GameTech Elite,” “GameTech Players
      Club,” “Latin 90,” “Mega Plex,” “Miner’s Treasure,” “Players Zone,” “Spies,”
“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,” “GameTech with
      design,” “TED,” “TED2C,” and “The Bingo Players Choice.” We have registered
      Mexican trademarks for the following names: “Gringo Bingo,” “Latin 90,” and
“Loteria Loco.” We have Mexican trademark applications pending for the following
      names: “GameTech,” “Tracker,” “Traveler,” and “GameTech Mexico.” We have
      registered Norwegian trademarks for the following names: “GameTech with design”
and “TED.” We cannot provide assurance that any of our domestic or foreign
      trademark applications will be granted.




7





**Competition**





*Bingo.* The
      electronic bingo industry is characterized by intense competition based on
      various factors, including the ability to enhance bingo hall operations and
      to
      generate incremental revenue for bingo hall operators through product appeal
      to
      players, ease of use, serviceability, customer support and training,
      distribution, name recognition, and price. We compete primarily with other
      companies providing electronic bingo terminals, including Bettina Corp.,
      California Concepts, EZ Bingo, FortuNet, Inc., eQube, Pacific Gaming,
      Planet Bingo and Video King. In addition, we compete with other similar forms
      of
      entertainment, including casino gaming, other forms of Class II gaming, and
      lotteries. Increased competition has and may continue to result in price
      reductions, reduced operating margins, reduced revenue, and loss of market
      share, any of which could materially and adversely affect our business,
      operating results, and financial condition. Furthermore, existing and new
      competitors may expand their operations in our existing or potential new
      markets. We have attempted to counter competitive factors by providing superior
      service, new, innovative, and quality products and software improvements. We
      believe that the quality of our full array of portable and fixed-base bingo
      systems, combined with superior service and customer support, differentiate
      us
      from our competitors.





*Video
      Lottery Terminals.* The
      VLT
      industry is highly competitive and is driven primarily by the ability of
      manufacturers to develop appealing video reel, video poker, and keno game
      content as well as the ability to provide their customers with a stream of
      new
      games to meet ever changing customer needs. The development or acquisition
      of
      new game content is critical to remaining competitive in the VLT industry as
      our
      competitors continue to develop new game content. By providing our customers
      with a variety of game options and configurations, we can differentiate our
      products and services from our competitors as well as provide for a built-in
      loyalty base of customers as conversion and upgrade sales can provide a steady
      stream of recurring revenue. We compete primarily with other VLT manufacturers
      including IGT, Spielo, and Bally Gaming.





**Government
      Regulation**





We
      are
      subject to regulation and oversight by governmental authorities in virtually
      all
      jurisdictions in which we conduct business. As of October 31, 2007, we held
      approximately 110 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, regulations
      result from the laws of each tribe, the provisions of IGRA, and various
      tribal-state compacts. Many jurisdictions have comprehensive licensing,
      reporting, and operating requirements with respect to the manufacture,
      development, assembly, support, distribution, sale, lease, use, and operation
      of
      bingo and bingo-related products, including electronic bingo equipment. These
      requirements have a direct impact on the conduct of our day-to-day operations.
      In substantially all countries in which gaming is legal, the regulatory
      authority imposes operating restrictions on gaming and on the form of business
      relations we can have with the gaming operator entities. Generally, regulatory
      authorities may deny applications for licenses, other approvals, or findings
      of
      suitability for any cause they may deem reasonable. There can be no assurance
      that our company or our hardware or software products, personnel, officers,
      directors, significant stockholders, distributors, vendors, consultants, or
      other associated parties will receive or be able to maintain any necessary
      licenses, other approvals, or findings of suitability. The loss of a license
      or
      a product approval in a particular jurisdiction may prohibit us from realizing
      revenue in that jurisdiction and may adversely impact our license or product
      placements and ability to realize revenue in other jurisdictions. Any change
      in
      law or regulation by a jurisdiction, or an unfavorable interpretation of any
      law
      or regulation, could adversely impact our ability to earn revenue.




8





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




As
      of
      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.




9




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.




10




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




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


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


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


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




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





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


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


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


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




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




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.




11




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




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




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




***Native
      American Regulation***




Gaming
      on
      Native American lands, including the terms and conditions under which gaming
      equipment can be sold or leased to Native American tribes, is or may be subject
      to licensing and regulation under IGRA and other laws of the federal government,
      the tribes, and the host state, where applicable. Under IGRA, gaming activities
      are classified as Class I, II, or III. Class I gaming includes social
      games played solely for prizes of minimal value, or traditional forms of Native
      American gaming engaged in as part of, or in connection with, Native American
      ceremonies or celebrations. Class II gaming includes bingo and other card
      games authorized or not explicitly prohibited and played within the host state,
      but does not include banking card games, such as baccarat or blackjack.
      Class III gaming includes all forms of gaming that are not Class I or
      Class II, including slot machines, casino style games or any other games
      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 of bingo 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.




12




***Federal
      Regulation***




The
      Federal Gambling Devices Act of 1962, also called the Johnson Act, generally
      makes it unlawful for a person to manufacture, deliver, or receive gaming
      machines, gaming machine-type devices, and components across state lines or
      to
      operate gaming machines unless that person has first registered with the U.S.
      Department of Justice. We are registered with the Department of Justice. In
      addition, the Johnson Act imposes various record keeping, annual registration,
      equipment registration, and equipment identification requirements. Violation
      of
      the 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.




***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 40 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 16, 2008, we had approximately 233 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.




13





***Our
      acquisition of Summit Gaming may not produce the results
      we***  ***anticipate.***




On
      August
      30, 2006, we entered into an asset purchase agreement with Summit Amusement
      & Distributing, Ltd. (“Summit Gaming”) to acquire substantially all of its
      assets and assume certain of its liabilities. The closing of the acquisition
      occurred on March 28, 2007. Our acquisition of Summit Gaming was 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 Gaming’s business. Challenges we face include the following:




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


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


·
            the
                potential loss of key employees of Summit Gaming,
                and


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




In
      addition, Summit Gaming’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, West
                Virginia and Native American casinos, and


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





***We
      have incurred significant debt to finance the acquisition of Summit
      Gaming.***





We
      financed the acquisition of Summit Gaming with a $10 million revolving credit
      facility and a $30 million term loan secured by substantially all of our and
      Summit Gaming’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 Gaming’s business and upon other factors some of
      which are beyond our control. The agreement governing the debt contains
      substantial affirmative and restrictive covenants, including the maintenance
      of
      certain financial ratios. A breach of any of our obligations under the debt
      agreement can result in a default allowing the lender to elect to declare all
      amounts outstanding together with accrued interest to be immediately due and
      payable.





***We
      depend on the bingo, electronic bingo, and VLT
      industries.***





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, the continued existence of VLT as a form of legalized gaming
      in the VLT markets, 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 or VLT, those competitors could
      be in a position to outperform us in our ability to exploit developments in
      microprocessor, video technology, or other multimedia technology. The emergence
      of an electronic bingo system or VLT 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.




14




***To
      compete successfully, we must retain and extend our existing relationships
      with
      customers and secure new customers.***




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




***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 in both the bingo and VLT business. Our bingo distributors place
      our products with our customers and often maintain the primary relationship
      with
      the bingo halls. Generally, we, or our distributors enter into one- to
      three-year agreements with customers for the use of our systems and terminals.
      We rely on our distributors exclusively in the states in which the law requires
      us to place our systems and terminals through qualified distributors. Our VLT
      sales in the state of Louisiana are through a distributor as required by
      law **.** 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.




15





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





Our
      bingo
      terminals are operated in many bingo halls located on Native American
      reservations in the United States. We also currently have sales and anticipate
      future sales of VLT, Class II and Class III gaming devices in casinos on Native
      American reservations. 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 or casino seized the bingo terminals or barred entry onto the
      reservation in the event of a contract or other dispute. However, any seizure
      of
      our bingo terminals is likely to result in a capital loss and loss of revenue
      to
      our company. Were it to occur on a large scale, it could 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 18%
      of
      our bingo revenue during fiscal 2007, 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.





***Compliance
      with Nevada regulations is time-consuming and expensive, and failure to comply
      could have a material adverse effect on our
      operations.***





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, 2008 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. Our equipment is subject to evaluation and approval by the state
      of
      Nevada prior to product placement or installation. Each of our products that
      are
      in distribution in Nevada have been submitted to and approved by the state
      of
      Nevada. If we are ever denied a renewal of our Nevada licenses, we may not
      be
      able to place our electronic bingo systems 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.




16





***We
      rely on the Texas and Montana markets for a significant portion of our
      revenue.***




The
      concentration of our revenue in the Texas and Montana markets heightens our
      exposure to regulatory changes or market changes that may prevent or impede
      us
      from doing business in those states. The Texas market generated approximately
      17% of fiscal 2007 bingo revenue and 14% of consolidated revenue, while the
      Montana market generated approximately 50% of VLT revenue and 10% of
      consolidated revenue. 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 and VLT industry are extremely
      competitive.***




The
      electronic bingo industry is characterized by intense competition based on,
      among other things, the ability to enhance the operations of and to generate
      incremental sales for bingo operators through product appeal to players, ease
      of
      use, ease of serviceability, customer support and training, distribution, name
      recognition, and price. Increased competition may result in price reductions,
      reduced operating margins, conversion of terminals from lease to sale, and
      loss
      of market share. The VLT industry is also characterized by intense competition
      that is based upon the ability to develop new gaming content that will appeal
      to
      a variety of gaming customers. Increased competition may result in a need to
      increase game development activity, price reductions, providing extended payment
      terms, or increased commissions to distributors. All of these factors 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,
      our electronic bingo business competes with other similar forms of
      entertainment, including casino gaming and lotteries. In Native American
      casinos, competition for space on the casino and bingo room floor is very
      intense. All forms of gaming compete for square footage at Native American
      casinos. We can make no assurances that Native American casinos currently
      leasing our equipment will not significantly limit the play of bingo or
      eliminate it entirely. Additionally, as we expand into new Class II and Class
      III markets we will face intense competition from existing competitors who
      have
      many years of established track records in those markets. We can make no
      assurances that we can successfully penetrate these markets with our newly
      developed Class II and Class III gaming machines.





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





The
      current executive officers and directors of our company beneficially own
      approximately 23% 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.





***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.




17





***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;


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


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


·
            effectively
                manage regulatory risks in various
                jurisdictions;


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


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





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




18




***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, 2008, we had outstanding 12,516,222 shares of common stock.
      Approximately 9.0 million of such shares are eligible for resale in the public
      market without restriction or further registration. The remaining approximately
      3.5 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 721,550
      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
      or VLT gaming content that have the appearance and functionality that closely
      resemble our systems.





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





***Our
      Stockholders’ Rights Plan may adversely affect existing
      stockholders.***





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





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





19





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




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




We
      have
      identified a significant deficiency in our accounting for revenue related to
      software contracts with multiple delivery elements. In preparing our financial
      statements for 2007, we identified an adjustment to our revenue with respect
      to
      two invoices related to a single non-standard arrangement with multiple delivery
      elements with a customer in our Summit Gaming division. This deficiency
      constituted a significant deficiency in that it could adversely affect our
      ability to record the financial information in accordance with generally
      accepted accounting principles. An adjustment to
      this
      matter has been made and is reflected in our consolidated financial
      statements for fiscal 2007 contained in this Form 10-K. As of the filing of
      this
      report, we have updated our procedures for review of software contracts with
      multiple delivery elements 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
      revenue relating to software contracts with multiple delivery elements,
      including appropriate review and approval.




In
      fiscal
      2005 and 2006, we reported a material weakness and significant deficiency,
      respectively, in our internal controls relating to our tax liability accounts
      and related tax provision. This control issue was remediated as of October
      31,
      2007.




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. Failure to maintain effective internal controls over financial
      reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have
      a
      material adverse effect on our business and stock price.





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





None.





**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 July 31, 2010. We 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 May 31,
      2010, and the Texas lease is a month-to-month lease. We also lease two
      facilities in Billings, Montana for our Summit Gaming operations: a 3,600
      square-foot site and a 9,600 square-foot site, both of which expire August
      31,
      2009. 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***




*Trend
      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
      was
      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, 2007. 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 States Court of Appeals for the Ninth Circuit on August 5, 2005. The
      Company posted an additional supersedeas bond with the court on August 18,
      2005
      in the amount of $1.1 million, thereby staying any action by Trend to collect
      the fees, pending appeal. 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.




20





On
      April
      19, 2007 a three judge panel of the United States Court of Appeals for the
      Ninth
      Circuit heard oral arguments for the appeal. On May 16, 2007, the United States
      Court of Appeals for the Ninth Circuit issued its ruling in our favor upholding
      each of the items we appealed, reversing the trial court’s rulings and remanding
      the matter back to the trial court for a new trial. The
      matter has been returned to the control of the lower court but at this time
      there is no set date as to when the matter will be heard. Additionally, as
      a
      result of this decision, the supersedeas bonds posted by GameTech International
      prior to filling the appeal were released by the lower court as of August 18,
      2007 and we have terminated the supporting insurance polices and have had the
      letters of credit released to us.




*Trend
      Gaming Litigation.* On March
      2, 2004, the jury rendered a verdict in our favor awarding compensatory and
      punitive damages against Trend Gaming, LLC, a Kentucky LLC (“Trend Gaming”)
      (involving a prior distribution agreement in Virginia) in the total amount
      of
      approximately $1.5 million. The jury also returned a verdict against Steven
      W.
      and Rhonda Hieronymus awarding compensatory and punitive damages of $1.0
      million. The court reduced compensatory damages against Trend Gaming to $1.1
      million. The court affirmed $150,000 in punitive damages against Trend Gaming
      and awarded us fees and costs of suit against Trend Gaming in the amount of
      $650,000. Compensatory damages against Mr. and Mrs. Hieronymus have been reduced
      to $762,000 but the punitive damage award against them in the amount of $150,000
      remains unchanged. Of the total compensatory damages of $1.1 million awarded
      to
      us, $762,000 represents compensation for lost profits. We can only collect
      such
      damages from one of the defendants to avoid a double recovery. Defendants
      appealed the judgment against them. On March 5, 2007, the Appellate Court
      entered its ruling affirming the judgment of the lower court in our
      favor. 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.




*Other.* We are
      involved in various other legal proceedings arising in the ordinary course
      of
      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




21





**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, 2006:





**High**
            
            **Low****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
            
            $
            12.90
            
            $
            9.10Second
                Quarter
            
            $
            14.20
            
            $
            9.85Third
                Quarter
            
            $
            12.08
            
            $
            8.69Fourth
                Quarter
            
            $
            8.70
            
            $
            4.88**Year
                Ended October 31, 2008**First
                Quarter (through January 16, 2008)
            
            $
            8.63
            
            $
            5.90




On
      January 16, 2008, the last reported sales price of our common stock was
      $6.60 per share. On January 16, 2008, there were 134 record holders of our
      common stock.




22





**Performance
      Graph**





The
      following graph reflects the cumulative total return (change in stock price
      plus
      reinvested dividends) of a $100 investment in our common stock for the five-year
      period for our fiscal years ended October 31, 2002 through 2007 in comparison
      to
      the NASDAQ Composite Index and the Gaming Activities peer group. This peer
      group
      consists of Bally Technologies, Inc., Canterbury Park Holding Corp., Churchill
      Downs, Inc., Dover Downs Gaming & Entertainment, Great Canadian Gaming
      Corp., Lakes Entertainment, Inc., Magna Entertainment Corp., MTR Gaming Group,
      Inc., Multimedia Games, Inc., Pacific Lottery Corp., Pinnacle Entertainment,
      Inc., Pokertek, Inc., The9 Limited, ESI Entertainment System, Inc., Las Vegas
      from Home.com Entertainment, and Youbet, Inc. The comparisons are not intended
      to forecast or be indicative of possible future performance of our common
      stock.











**10/02**
            
            **10/03**
            
            **10/04**
            
            **10/05**
            
            **10/06**
            
            **10/07**Gametech
                International, Inc.
            
            
            100.00
            
            
            99.72
            
            
            119.18
            
            
            120.11
            
            
            299.51
            
            
            261.58NASDAQ
                Composite
            
            
            100.00
            
            
            144.06
            
            
            149.55
            
            
            161.38
            
            
            182.42
            
            
            221.36Gaming
                Activities Peer Group
            
            
            100.00
            
            
            128.97
            
            
            105.54
            
            
            109.32
            
            
            148.03
            
            
            171.84





**Dividend
      Policy**




During
      December 2003, we announced the initiation of a quarterly dividend after our
      Board of Directors reviewed current business conditions and future prospects.
      We
      declared 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 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.




23





**Issuer
      Purchases Of Equity Securities**





The
      following table provides information regarding repurchases of our common stock
      made by or on behalf of us, or any “affiliated purchases as defined in SEC
      rules, of our equity securities registered pursuant to Section 12 of the
      Exchange Act, for each month during the fourth quarter of fiscal year 2007,
      in
      the format required by SEC rules:




Total
                Number of Shares Purchased
            
            Average
                Price Paid per Share
            
            Total
                Dollar Amount of Shares Purchased (in thousands) as Part of Publicly
                Announced Plans or
                Programs(1)
            
            Maximum
                Dollar Amount of Shares (in thousands)That May Yet Be Purchased Under
                the
                Plans or Programs (1)August
                1, 2007 - August 31, 2007
            
            
            —
            
            $
            —
            
            $
            —
            
            $
            —September 1,
                2007 - September 30, 2007
            
            
            28,425
            
            $
            6.81
            
            $
            194
            
            $
            4,806October 1,
                2007 - October 31, 2007
            
            
            22,400
            
            $
            7.54
            
            $
            169
            
            $
            4,637Total
            
            
            50,825
            
            $
            7.13
            
            $
            363
            
            $
            4,637




(1)
            On
                September 4, 2007 the Board of Directors announced that it authorized
                expending up to $5.0 million in a share repurchase program. The shares
                reported in the table were acquired in open market transactions pursuant
                to this program. As of October 31, 2007, the shares repurchased were
                conducted by an agent of the company and as of October 31, 2007,
                the stock
                was held by the agent and had yet to be turned over to the company.
                As
                such, the repurchases have been classified as a related party receivable
                and not included in treasury stock. Dollar amount of shares remaining
                for
                repurchase relate to this program, which expires September 4,
                2008.





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




The
      selected consolidated statement of operations data for the fiscal years ended
      October 31, 2007, 2006 and 2005 and the selected consolidated balance sheet
      data set forth below as of October 31, 2007, 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 statement of operations data for
      the
      years ended October 31, 2004 and 2003 and the selected consolidated balance
      sheet data set forth below at October 31, 2005, 2004 and 2003 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,****2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003****(In
                thousands, except per share amounts)****Statements
                of Operations Data:**Net
                revenue
            
            $
            58,805
            
            $
            49,289
            
            $
            49,651
            
            $
            51,490
            
            $
            52,329Cost
                of revenue
            
            
            26,542
            
            
            19,929
            
            
            20,304
            
            
            24,027
            
            
            21,775Gross
                profit
            
            
            32,263
            
            
            29,360
            
            
            29,347
            
            
            27,463
            
            
            30,554Operating
                expenses:General
                and administrative
            
            
            9,538
            
            
            8,303
            
            
            11,406
            
            
            11,154
            
            
            11,426Sales
                and marketing
            
            
            10,519
            
            
            11,041
            
            
            11,952
            
            
            12,561
            
            
            12,323Research
                and development
            
            
            3,865
            
            
            2,885
            
            
            4,058
            
            
            5,179
            
            
            4,692Loss
                contingencies
            
            
            124
            
            
            133
            
            
            137
            
            
            3,628
            
            
            —Gain
                on sale of assets
            
            
            (656
            )
            
            —
            
            
            —
            
            
            —
            
            
            —Impairment
                of goodwill
            
            
            —
            
            
            —
            
            
            —
            
            
            6,625
            
            
            —Total
                operating expenses
            
            
            23,390
            
            
            22,362
            
            
            27,553
            
            
            39,147
            
            
            28,441Income
                (loss) from operations
            
            
            8,873
            
            
            6,998
            
            
            1,794
            
            
            (11,684
            )
            
            2,113Interest
                and other income (expense), net
            
            
            (1,535
            )
            
            346
            
            
            76
            
            
            58
            
            
            3Income
                (loss) before income taxes
            
            
            7,338
            
            
            7,344
            
            
            1,870
            
            
            (11,626
            )
            
            2,116Provision
                for (benefit from) income taxes
            
            
            2,667
            
            
            2,961
            
            
            534
            
            
            (1,720
            )
            
            925Net
                Income (loss)
            
            $
            4,671
            
            $
            4,383
            
            $
            1,336
            
            $
            (9,906
            )
            $
            1,191Diluted
                net income (loss) per share
            
            $
            0.36
            
            $
            0.34
            
            $
            0.11
            
            $
            (0.84
            )
            $
            0.10Shares
                used in the calculation of diluted net income (loss) per
                share
            
            
            12,991
            
            
            12,757
            
            
            11,960
            
            
            11,775
            
            
            11,818Cash
                dividends per common share
            
            $
            0.00
            
            $
            0.00
            
            $
            0.03
            
            $
            0.21
            
            $
            0.00




24




**As
                of October 31,****2007
                (1)**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003****(In
                thousands, except per share amounts)****Balance
                Sheet Data:**Cash,
                cash equivalents and short-term investments
            
            $
            11,393
            
            $
            12,819
            
            $
            6,833
            
            $
            8,706
            
            $
            11,952Restricted
                short-term investments
            
            
            —
            
            
            4,515
            
            
            4,581
            
            
            —
            
            
            —Working
                capital
            
            
            13,954
            
            
            15,412
            
            
            10,824
            
            
            5,209
            
            
            14,806Total
                assets
            
            
            93,882
            
            
            59,214
            
            
            51,130
            
            
            51,679
            
            
            60,175Total
                debt
            
            
            29,599
            
            
            —
            
            
            —
            
            
            —
            
            
            275Total
                stockholders’ equity
            
            
            54,479
            
            
            49,834
            
            
            41,889
            
            
            40,670
            
            
            52,621




1.
            The
                reduction in the restricted short-term investments account in 2007
                was due
                to the release of the funds restricted by the Trend litigation. The
                increase in total assets and debt in 2007 was primarily related to
                the
                acquisition of Summit Gaming in March
                2007.





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




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




**Overview**




We
      design, develop, and market interactive electronic player terminals, bingo
      systems, server-based wireless gaming systems, and video lottery terminals.
      We
      entered the VLT business in March 2007 with our acquisition of Summit Gaming
      for
      $41.7 million in cash. For our three most recent fiscal years ended October
      31,
      2007, 2006, and 2005, our portable bingo terminals, fixed-base bingo terminals,
      and VLT businesses made the following contributions to revenue:





**Revenue
                Contribution****2007**
            
            **2006**
            
            **2005**Portable
                Bingo Terminals
            
            
            64
            %
            
            79
            %
            
            79
            %Fixed
                Base Bing Terminals
            
            
            16
            %
            
            21
            %
            
            21
            %Video
                Lottery Terminals
            
            
            20
            %
            
            0
            %
            
            0
            %




25




As
      of
      October 31, 2007, we had bingo systems in service in 38 states, one US Territory
      and in four foreign countries, and we had sales of VLTs and related software
      and
      equipment in 15 states and one US Territory.




Our
      bingo
      business generates 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, 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 2007 and fiscal year 2006, costs
      of
      $303,000 and $116,000 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
      VLT
      business generates revenue from the sale of video lottery terminals (new and
      used), software conversion kits, content fees, license fees, participation
      fees,
      parts/equipment and services. Over 91% of Summit Gaming’s sales are derived from
      the sale of new and used equipment, conversion kits, and parts/equipment. In
      some instances we may choose to sell new equipment on a participation basis
      thereby recognizing recurring participation revenue in lieu of a one-time
      machine sale. Revenue growth is driven by increasing market share in existing
      markets and expanding product placement into new VLT markets.





Our
      bingo
      and VLT 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, cost
      of
      sales related to Summit Gaming equipment sold, the
      repair/refurbishment/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 or new games themes for our video lottery
      terminals.





**Fiscal
      2007 Highlights**




During
      fiscal 2007, profitability increased $288,000 or 6.6% over 2006 as a result
      of
      various factors, including primarily the following:




·
            inclusion
                of seven full months of Summit Gaming revenues and expenses in
                2007,


·
            a
                one-time gain on sale of assets of $656,000 resulting from the sale
                of
                participation equipment to a customer in
                Montana,


·
            a
                $489,000 reduction in legal and licensing expense as a result of
                the
                resolution of certain matters and the timing of matters under appeal
                as
                well as the completion of our initial licensing in Nevada earlier
                in the
                year,


·
            a
                $760,000 reduction in refurbishment, disposals, and obsolescence
                reserve
                related to bingo equipment,


·
            a
                $467,000 reduction in bingo distributor commissions as a result of
                lower
                bingo revenue,


·
            net
                interest expense increase of $2.1 million related to the acquisition
                of
                Summit Gaming,


·
            increase
                in amortization expense of $660,000 related to the amortization of
                the
                identifiable intangible assets purchased in the Summit Gaming acquisition,
                and


·
            increase
                in bingo unit depreciation expense of $697,000 related to the additional
                rollout of our Traveler and Tracker bingo
                systems.




26




During
      fiscal 2007, our capital expenditures decreased approximately 49%, or $6.4
      million to $6.7 million, from $13.1 million during fiscal 2006, primarily
      related to the approaching completion of the rollout of our Traveler and Tracker
      portable bingo systems.




**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 a consulting agreement. As a result, 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.




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




27




***Revenue
      Recognition***




We
      recognize revenue when the following criteria are met:





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


·
            Delivery
                has occurred or services have been
                rendered,


·
            The
                price is fixed or determinable, and


·
            Collectibility
                is reasonably assured.




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





*Bingo
      Equipment*




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





*Video
      Lottery Terminals*




Our
      product sales revenues are generated from the sale of video lottery terminals,
      conversion kits, content fees, license fees, participation fees, equipment
      and
      services. Revenues are reported net of discounts, sales taxes and other taxes
      of
      a similar nature. Revenues related to contracted production are recognized
      as
      the related work is delivered. We recognize license fee revenues over the term
      of the associated agreement unless the fee is in exchange for products delivered
      or services performed that represent the culmination of a separate earnings
      process. Amounts received prior to completing the earnings process are deferred
      until revenue recognition criteria are met.





Our
      sales
      credit terms are predominately 30 days. In certain limited circumstances,
      we may extend credit terms up to 160 days.





***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.




28




The
      achievement of technological feasibility and the estimate of a products’
economic life require management’s judgment. Any changes in key assumptions,
      market conditions or other circumstances could result in an impairment of the
      capitalized asset and a charge to our operating results.




***Allowance
      for Doubtful Accounts***




*Bingo
      Equipment*




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





*Video
      Lottery Terminals*




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





***Impairment
      of 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 2007 was
      completed as of July 31, 2007 (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.




29




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 6 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.





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 in Note 5 to the financial statements. 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 $124,000 and $133,000
      were
      recorded in fiscal 2007 and fiscal 2006, respectively, to account for interest
      accrued on the Trend judgment. With the United States Court of Appeals for
      the
      Ninth Circuit ruling upholding each of the items we appealed, reversing the
      trial court’s rulings and remanding the matter back to the trial court for a new
      trial, we believe there is no further justification at this time for accruing
      additional loss contingencies.





**Internal
      Control Over Accounting for Taxes**




In
      fiscal
      2005 and fiscal 2006 our Chief Executive Officer and our Chief Financial Officer
      concluded that there was a material weakness and significant deficiency,
      respectively, 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.





We
      have
      taken corrective action that as of October 31, 2007 remediated this weakness.
      Our remediation efforts have included engaging an independent public accounting
      firm to assist in the tax reconciliation and evaluation process, and increasing
      the skill and experience level of senior management. In addition, we have
      developed 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.




30





**Internal
      Control Over Revenue Recognition Related to Software Contracts with Multiple
      Delivery Elements**





We
      have
      identified a significant deficiency in our accounting for revenue recognition
      procedures related to software contracts with multiple delivery elements. In
      preparing our financial statements for fiscal 2007, we identified an adjustment
      to our revenue with respect to two invoices related to a single non-standard
      arrangement with multiple delivery elements with a customer in our Summit Gaming
      division. This deficiency constituted a significant deficiency in that it could
      adversely affect our ability to record the financial information in accordance
      with generally accepted accounting principles. An adjustment to this
      matter has been made and is reflected in our consolidated financial
      statements for fiscal 2007 contained in this Form 10-K. As of the filing of
      this
      report, we have updated our procedures for review of software contracts with
      multiple delivery elements 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
      revenue relating to software contracts with multiple delivery elements,
      including appropriate review and approval.




**Results
      of Operations**





The
      following table sets forth, for the periods indicated, certain consolidated
      statement of operations data for our company by business segment:




**Three
                Months Ended**
              **October
                31,**
            
            **Twelve
                Months Ended**
              **October
                31,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Net
                Revenue:Bingo
                systems
            
            $
            11,141
            
            $
            11,979
            
            $
            47,114
            
            $
            49,289Video
                lottery terminal
            
            
            5,599
            
            
            -
            
            
            11,691
            
            
            -$
            16,740
            
            $
            11,979
            
            $
            58,805
            
            $
            49,289Net
                Cost of Revenue:Bingo
                systems
            
            $
            4,283
            
            $
            5,209
            
            $
            19,683
            
            $
            19,929Video
                lottery terminal
            
            
            3,343
            
            
            -
            
            
            6,859
            
            
            -$
            7,626
            
            $
            5,209
            
            $
            26,542
            
            $
            19,929Net
                Income:Bingo
                systems
            
            $
            (536
            )
            $
            1,036
            
            $
            1,633
            
            $
            4,383Video
                lottery terminal
            
            
            1,849
            
            
            -
            
            
            3,038
            
            
            -$
            1,313
            
            $
            1,036
            
            $
            4,671
            
            $
            4,383





The
      following table sets forth, for the periods indicated, certain consolidated
      statement of operations data for our company both including Summit Gaming’s
      results of operation for fiscal 2007 and excluding Summit Gaming’s results of
      operation for fiscal 2007 for comparative purposes to prior year periods.
      Gametech’s standalone results of operation for fiscal 2007 include the
      amortization of Summit Gaming’s identifiable intangible assets and interest
      expense related to the acquisition of Summit Gaming which were $660,000 and
      $2,217,000, respectively, in fiscal 2007.




**Including
                Summit Gaming**
            
            **Twelve
                Months Ended October 31,**
              **(in
                thousands)**
              **Excluding
                Summit Gaming****Statements
                of Operations Data:**
            
            **2007**
            
            **2007**
            
            **2006**
            
            **2005**Net
                revenue
            
            $
            58,805
            
            $
            47,114
            
            $
            49,289
            
            $
            49,651Cost
                of revenue
            
            
            26,542
            
            
            19,683
            
            
            19,929
            
            
            20,304Gross
                profit
            
            
            32,263
            
            
            27,431
            
            
            29,360
            
            
            29,347Operating
                expenses:General
                and administrative
            
            
            9,538
            
            
            8,580
            
            
            8,303
            
            
            11,406Sales
                and marketing
            
            
            10,519
            
            
            10,027
            
            
            11,041
            
            
            11,952Research
                and development
            
            
            3,865
            
            
            2,837
            
            
            2,885
            
            
            4,058Loss
                contingencies
            
            
            124
            
            
            124
            
            
            133
            
            
            137Gain
                on sale of assets
            
            
            (656
            )
            
            —
            
            
            —
            
            
            —Total
                operating expenses
            
            
            23,390
            
            
            21,568
            
            
            22,362
            
            
            27,553Income
                (loss) from operations
            
            
            8,873
            
            
            5,863
            
            
            6,998
            
            
            1,794Interest
                and other income (expense), net
            
            
            (1,535
            )
            
            (1,563
            )
            
            346
            
            
            76Income
                (loss) before income taxes
            
            
            7,338
            
            
            4,300
            
            
            7,344
            
            
            1,870Provision
                for (benefit from) income taxes
            
            
            2,667
            
            
            2,667
            
            
            2,961
            
            
            534Net
                Income (loss)
            
            $
            4,671
            
            $
            1,633
            
            $
            4,383
            
            $
            1,336




31




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,****2007**
            
            **2006**
            
            **2005****Statements
                of Operations Data:**Net
                revenue
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Cost
                of revenue
            
            
            45.1
            
            
            40.4
            
            
            40.9Gross
                profit
            
            
            54.9
            
            
            59.6
            
            
            59.1Operating
                expenses:General
                and administrative
            
            
            16.2
            
            
            16.8
            
            
            23.0Sales
                and marketing
            
            
            17.9
            
            
            22.4
            
            
            24.1Research
                and development
            
            
            6.6
            
            
            5.9
            
            
            8.2Loss
                contingency
            
            
            0.2
            
            
            0.3
            
            
            0.2Gain
                on sale of assets
            
            
            (1.1
            )
            
            —
            
            
            —Total
                operating expenses
            
            
            39.8
            
            
            45.4
            
            
            55.5Income
                (loss) from operations
            
            
            15.1
            
            
            14.2
            
            
            3.6Interest
                and other income, net
            
            
            (2.7
            )
            
            0.7
            
            
            0.2Income
                (loss) before provision for (benefit from) income taxes
            
            
            12.4
            
            
            14.9
            
            
            3.8Provision
                for (benefit from) income taxes
            
            
            4.5
            
            
            6.0
            
            
            1.1Net
                Income (loss)
            
            
            7.9
            %
            
            8.9
            %
            
            2.7
            %




**Year
      Ended October 31, 2007 Compared with Year Ended October 31,
      2006**





*Revenue.* Revenue
      for fiscal 2007 increased $9.5 million, or 19.3%, to $58.8 million compared
      to
      revenue of $49.3 million in fiscal 2006. The increase in revenue for fiscal
      2007
      is primarily a result of the acquisition of Summit Gaming which contributed
      $11.7 million in revenue in fiscal 2007. Our bingo business revenue declined
      $2.2 million in fiscal 2007 which was caused by 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,
      Louisiana, Oklahoma and other key states, increased expansion in the United
      Kingdom, and the continued popularity and rollout of our Tracker and Traveler
      terminals.





*Cost
      of Revenue.* Cost of
      revenue increased $6.6 million or 33.2%, to $26.5 million for fiscal 2007
      compared to $19.9 million for fiscal 2006 primarily as a result of the
      acquisition of Summit Gaming. Cost of revenue as a percentage of revenue for
      fiscal 2007 was 45.1% compared to 40.4% for fiscal 2006. Key components of
      our
      bingo 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
      bingo intangibles for fiscal 2007 increased by approximately $697,000 over
      fiscal 2006, primarily because of the rollout of new bingo equipment including
      our Tracker and Traveler terminals. Additionally, overall expense for
      refurbishments, disposals, and obsolescence of bingo equipment declined $760,000
      from fiscal 2006. Key components of our VLT cost of revenue include, among
      other
      items, expenses associated with the technical and operational support of our
      gaming machines placed in service and the cost of equipment and parts sold.




32





*General
      and Administrative.* General
      and administrative expenses increased $1.2 million or 14.9%, to
      $9.5 million for fiscal 2007 compared to $8.3 million for fiscal 2006.
      General and administrative costs as a percentage of revenue for fiscal 2007
      were
      16.2% compared to 16.8% for fiscal 2006. Summit Gaming’s contribution to general
      and administrative expenses totaled $958,000 in fiscal 2007. Additionally,
      the
      amortization of the identifiable intangible assets acquired in the purchase
      of
      Summit Gaming amounted to $660,000 in 2007. Prior to fiscal fourth quarter
      2007,
      this expense had been presented as an element of GameTech’s cost of revenue and
      is now being recorded on the financial results of GameTech as general and
      administrative expenses. Helping to offset the increase in general and
      administrative expenses was a reduction of $489,000 in legal and licensing
      expenses, as well as a $261,000 reduction in compensation expense related to
      the
      reversal of stock option expense related to the departure of certain key
      executives.





*Sales
      and Marketing.* Sales
      and marketing expenses decreased $522,000, or 4.7%, to $10.5 million for
      fiscal 2007 compared to $11.0 million for fiscal 2006. Sales and marketing
      costs as a percentage of revenue for fiscal 2007 were 17.9% compared to 22.4%
      for fiscal 2006. Sales and marketing includes distributor commissions and
      personnel, travel, promotional, and support costs for our internal sales force.
      Distributor commissions decreased $467,000 to $6.7 million or 11.2% of
      consolidated revenue for fiscal 2007 compared to 14.5% of revenue for fiscal
      2006.





*Research
      and Development.* Research
      and development expenses increased $980,000 or 34.0% to $3.9 million for
      fiscal 2007 compared to $2.9 million for fiscal 2006. Research and
      development costs as a percentage of revenue for fiscal 2007 were 6.6% compared
      to 5.9% for fiscal 2006. The increase in research and development costs are
      related to the inclusion of Summit Gaming research and development
      expenses.





During
      fiscal 2007 and fiscal 2006 we capitalized internally developed software costs
      of approximately $0 and $88,000, 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 $9,000, or 6.8% to $124,000 for fiscal year 2007
      compared to $133,000 for fiscal 2006. Loss contingencies for 2007 and 2006
      consisted of interest accrued on a legal judgment; however, effective June
      30,
      2007 the accrual of interest ceased in connection with the reversal of the
      Trend
      lawsuit.





*Provision
      for Income Taxes.* Our
      effective income tax rate was approximately 36.3% and 40.3% for the fiscal
      years
      ended October 31, 2007 and 2006, respectively. The change in effective tax
      rate
      reflects lower nondeductible expenses for income tax purposes and an increase
      in
      a Section 199 tax deduction.





*Net
      Interest Expense.* Net
      interest expense increased $2.1 million for fiscal 2007 compared to fiscal
      2006
      when the Company recorded net interest income of $325,000. The increase was
      driven by the interest expense related to the financing used to acquire Summit
      Gaming. The outstanding balance due on the loans as of October 31, 2007 was
      approximately $29.4 million, consisting of a $22.0 million balance on a term
      loan facility and $7.4 million balance on a revolving loan facility. The
      weighted average interest rate was 9.4% as of October 31, 2007. Partially
      offsetting the interest expense is interest income earned from excess cash
      on
      hand.




33




**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.





*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.





*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.




34




**Liquidity
      and Capital Resources**





Operating
      activities provided $14.8 million of cash during fiscal 2007 compared to
      $14.5 million during fiscal 2006. The $14.8 million consisted primarily of
      net income of $4.7 million, adjusted positively by $11.7 million for
      depreciation, amortization, obsolescence, and loss on disposal of bingo
      terminals and related equipment provisions, release of restricted cash of $4.5
      million, and a net use of funds of $6.1 million from changes in other operating
      assets and liabilities and other items, primarily related to the post
      acquisition activity related to Summit Gaming. During fiscal 2006, 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 $0.9 million from changes in other operating assets and
      liabilities and other items.





We
      used
      approximately $46.1 million of cash in investing activities during fiscal
      2007 compared to $18.7 million of cash used during fiscal 2006. The
      $46.0 million consisted of $41.4 million of expenditures for the
      acquisition of the assets of Summit Gaming, $6.2 million of capital
      expenditures and $1.5 million in proceeds from the sale of assets. During fiscal
      2006, 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 $0.3 million of expenditures for the acquisition of Summit
      Gaming.





Financing
      activities provided $29.5 million during fiscal 2007 compared to the cash
      provided of $3.2 million during fiscal 2006. The $29.5 million provided during
      fiscal 2007 included the issuance of $38.9 million in long-term debt offset
      by
      the subsequent repayment of long term debt consisting of $8.0 million to the
      term loan and $1.5 million to the revolver loan. The $3.2 million provided
      during fiscal 2006 was from proceeds from stock option exercises of $2.5 million
      and $0.7 million from the tax benefit from stock options
      exercised.





As
      of
      October 31, 2007, we had cash, cash equivalents, and unrestricted short-term
      investments of approximately $11.4  million.





In
      March
      2007, we acquired substantially all of the assets of Summit Gaming for $41.7
      million in cash. The acquisition of Summit Gaming was financed primarily by
      a
      credit facility consisting of a term loan of $30.0 million and a revolving
      line
      of credit with a limit of $10.0 million. In October 2007, the court decision
      in
      our favor on the Trend lawsuit allowed for access to the funds that were
      restricted pending the outcome of the lawsuit. In accordance with the financing
      agreement with our lender, those proceeds of approximately $4.5 million were
      used to pay down the term loan facility. Another $5.0 million of excess cash
      from operations were also used in October 2007 to pay down $3.5 million towards
      the term loan facility and $1.5 million towards the revolver facility. We
      incurred a pre-payment penalty of $80,000 on the pre-payment of the term loan
      facility.





As
      of
      October 31, 2007, the interest rate on our term loan was 9.75% and on our
      revolving credit facility was 8.50%. We incurred interest expense of $2.3
      million for the fiscal year ended October 31, 2007 compared to minimal
      interest expense for 2006. As a result of the debt incurred in March 2007 to
      finance the Summit Gaming acquisition, we expect our interest expense to remain
      high in future periods.





Our
      credit facility agreement contains numerous restrictive covenants. These
      restrictions could result in a curtailment of our capital expenditures including
      those for bingo devices, and related equipment. In the event we were unable
      to
      raise additional capital if needed, further measures could be necessary,
      including the delay or reduction of our operations, research and development
      and
      other activities. Certain of such measures may require third-party consent
      or
      approvals, including the financial institution under the credit facility,
      certain regulatory bodies, and others, and there are no assurances such consent
      or approvals could be obtained.




35





We
      believe that cash flows from operations and cash, cash equivalents, short-term
      investments and amounts available under our revolving credit facility will
      be
      sufficient to support our operations, provide for budgeted capital expenditures,
      and meet liquidity requirements through the remainder of fiscal 2008. 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, we may pursue strategic opportunities that could
      require us to fund our portion of operating expenses of such ventures and may
      require us to advance additional amounts should any partners in such ventures
      be
      unable to meet unanticipated capital requirements or similar funding events.
      To
      the extent that the funds generated from the sources described above are
      insufficient to fund our activities in the long term, we may be required to
      raise additional funds through public or private financing. No assurance can
      be
      given that the additional financing will be available or that, if it is
      available, it will be on terms acceptable to us.





On
      September 4, 2007 the Company announced that the Board of Directors authorized
      expending up to $5.0 million in a share repurchase program.  The shares
      from the new $5.0 million authorization are expected to be acquired through
      open
      market transactions over a period of up to the next 12 months.  The actual
      amount and timing of dollars expended and shares repurchased will be subject
      to
      business and market conditions and applicable SEC rules. We plan to use excess
      operating cash to fund this share repurchase program. A related party to the
      Company is acting as the Company’s agent in conducting this stock repurchase
      program, and through January 4, 2008, the Company had repurchased 281,906 shares
      under this stock repurchase program at a total cost of approximately $2.0
      million.




**Contractual
      Obligations**




The
      following table presents information on contractual obligations held as of
      October 31, 2007:




**Payments
                Due by Period****Total**
            
            **Less
                than 1 year**
            
            **1
                - 3 years**
            
            **3
                - 5 years**
            
            **More
                than 5 years**Term
                Loan Facility
            
            $
            22,000
            
            $
            4,400
            
            $
            8,800
            
            $
            8,800
            
            $
            —Revolver
                Loan Facility
            
            
            7,445
            
            
            —
            
            
            —
            
            
            7,445
            
            
            —Operating
                Leases
            
            
            2,246
            
            
            853
            
            
            1,393
            
            
            —
            
            
            —Other
                Long Term Obligations
            
            
            210
            
            
            30
            
            
            72
            
            
            36
            
            
            72Total
                Contractual Cash Obligations
            
            $
            31,901
            
            $
            5,283
            
            $
            10,265
            
            $
            16,281
            
            $
            72




**Purchase
      Commitments**




From
      time
      to time, we enter into commitments with our vendors to purchase VLT parts,
      bingo
      terminals and support equipment at fixed prices and/or guaranteed quantities.
      During the fiscal year ended October 31, 2006, we entered into seven agreements
      with the same vendor to provide an additional $5.4 million in Traveler terminals
      and $1.1 million in Tracker parts. As of July 31, 2007, we had fulfilled all
      these purchase commitments. During the fiscal year ending October 31, 2007,
      we
      entered into various additional agreements for component parts for VLTs, Tracker
      and Traveler as well as component parts for the GameTech Mini TM. As of October
      31, 2007, approximately $2.9 million of these commitments were outstanding.
      All
      purchases are expected to occur by the end of the third quarter in fiscal
      2008.




**Off
      Balance Sheet Arrangements**





None.




36





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





As
      described in Note 8 to our Consolidated Financial Statements, as of October
      31,
      2007, we maintained an investment portfolio of approximately $7.8 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.





On
      March
      28, 2007, we entered into a credit facility which consists of a term note for
      $30 million and a revolving line of credit in the amount of $10 million relating
      to the acquisition of Summit Gaming. Additional information about our credit
      facility is contained in Note 4 (Credit Agreement) to our consolidated financial
      statements included herein.





Our
      exposure to changes in interest rates relates primarily to our portfolio of
      investments and interest payable on our credit facility. 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, 2007 would have had an immaterial impact on the fair value of our
      portfolio. Annual interest income would have increased by approximately $39,000
      given a hypothetical 50-basis-point increase in interest rates.





Because
      the interest rate on the 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 interest rates increase. Assuming the $29.4
      million balance outstanding as of October 31, 2007 and the actual blended
      average rate of interest rate of 9.43%, our monthly interest payment, if the
      rate stayed constant, would be $231,487. If the prime rate increased 375 basis
      points to 11.25%, which assumes an unusually large increase, our monthly payment
      would be $311,235. A more likely increase of 1.0% or 2.0% would result in a
      monthly payment of $243,756 or $268,294, respectively.





**Item
              8.**
            ***Financial
                Statements and Supplementary
                Data***





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




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





Not
      applicable.




**Item
              9A.**
            ***Controls
                and Procedures***




**Evaluation
      of Disclosure Controls and Procedures**




We
      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, 2007. 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, 2007 to ensure that the information
      required to be disclosed by us in the reports we file or submit under the
      Securities Exchange Act of 1934 is recorded, processed, summarized and reported
      within the time periods specified in the SEC’s rules and forms, including that
      such information is accumulated and communicated to our management, including
      our Chief Executive Officer and Chief Financial Officer, or persons performing
      similar functions, as appropriate to allow timely decisions regarding required
      disclosure.




**Internal
      Control over Financial Reporting**




*Management’s
      Report on Internal Control Over Financial Reporting*




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




37





In
      accordance with the SEC’s published guidance, our assessment of internal control
      over financial reporting excludes our Summit Gaming division, which we acquired
      on March 28, 2007. Our Summit Gaming division represents approximately 11%
      and
      20% of our total assets and liabilities as of October 31, 2007, respectively,
      and approximately 20% of our net revenue from continuing operations for the
      year
      ended October 31, 2007.




We
      have
      evaluated the effectiveness of our internal control over financial reporting
      as
      of October 31, 2007. This evaluation was performed using the *Internal
      Control — Integrated Framework* developed
      by the Committee of Sponsoring Organizations of the Treadway Commission. Based
      on such evaluation, management has concluded that, as of such date, our internal
      control over financial reporting was effective. The attestation report issued
      by
      Grant Thornton, LLP on our internal control over financial reporting is included
      elsewhere in this report.




*Changes
      in Internal Control Over Financial Reporting*




As
      a part
      of our normal operations, we update our internal controls as necessary to
      accommodate any modifications to our business processes or accounting
      procedures. No change occurred during the most recent fiscal quarter that
      materially affected, or is reasonably likely to materially affect, our internal
      control over financial reporting, except as indicated below.





*Accounting
      for Income Taxes and Other Matters*





In
      connection with the evaluation described above, in fiscal 2005 and fiscal 2006
      our Chief Executive Officer and our Chief Financial Officer concluded that
      there
      was a material weakness and significant deficiency, respectively, 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.





We
      have
      taken corrective action that as of October 31, 2007 remediated this control
      issue. Our remediation efforts have included engaging an independent public
      accounting firm to assist in the tax reconciliation and evaluation process,
      and
      increasing the skill and experience level of senior management. In addition,
      we
      have developed 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.




*Accounting
      for Revenue Recognition Related to Software Contracts with Multiple Delivery
      Elements.*




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 revenue related to software contracts with
      multiple delivery elements. In preparing our financial statements for fiscal
      year 2007, we identified an adjustment to our revenue with respect to two
      invoices related to a single non-standard arrangement involving multiple
      delivery elements with a customer in our Summit Gaming division. This deficiency
      constituted a significant deficiency in that it could adversely affect our
      ability to record the financial information in accordance with generally
      accepted accounting principles. An adjustment to correct this
      matter has been made and is reflected in our consolidated financial
      statements for fiscal 2007 and is contained in this Form 10-K.





As
      of the
      filing of this report, we have updated our procedures for review of software
      contracts with multiple delivery elements 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 revenue relating to software contracts with
      multiple delivery elements, including appropriate review and
      approval




38





**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 2008 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 2008 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 2008 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 2008 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 2008 Annual Meeting of Stockholders.




**PART
      IV**





**Item
              15.**
            ***Exhibits
                and Financial Statement
                Schedules***





**(a)** ***Financial
      Statements and Financial Statement Schedules***




(1)
            Consolidated
                Financial Statements.




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




(2)
            Consolidated
                Financial Statement Schedules.




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




39




**(b)** ***Exhibits***





**Exhibit**
              **Number**
            
            **Description
                of Exhibit**2.1
            
            Asset
                Purchase Agreement dated August 30, 2006 between GameTech International,
                Inc. and Summit Amusement & Distributing Ltd. (13)3.1
            
            Certificate
                of Incorporation of the Registrant, as amended (1)3.2
            
            Certificate
                of Designation of Series A Junior Participating Preferred Stock of
                the
                Registrant (6)3.3
            
            Second
                Amended and Restated Bylaws of the Registrant (7)4.1
            
            GameTech
                International, Inc. Registration Rights
                Agreement (2)4.2
            
            Rights
                Agreement, dated as of March 7, 2003, between GameTech International,
                Inc.
                and Mellon Investor Services, LLC, as rights agent (5)4.3
            
            Specimen
                Common Stock Certificate (6)10.1
            
            GameTech
                International, Inc. 1997 Incentive Stock Plan (1)10.2
            
            GameTech
                International, Inc. 2001 Restricted Stock Plan (3)10.3
            
            Amended
                and Restated 1997 Incentive Stock Plan  (10)10.4
            
            Form
                of Restricted Stock Agreement (10)10.5
            
            Form
                of Stock Option Agreement (10)10.6
            
            Form
                of Stock Unit Award Agreement (10)10.7
            
            Letter
                of agreement by and between the Registrant and Donald Tateishi dated
                June
                26, 2007 (8)10.8
            
            Release
                and Severance Agreement by and between the Registrant and James C.
                Wilson,
                dated as of August 25, 2006 (14)10.9
            
            Letter
                of Agreement by and between the Registrant and Nick Greenwood date
                as of
                July 23, 2007 (9)10.10
            
            Letter
                Agreement by and between the Registrant and John McCafferty, dated
                as of
                May 22, 2006 (12)10.11
            
            Release
                Agreement by and between the Registrant and John McCafferty, dated
                as of
                April 2, 2007 (16)10.12
            
            Letter
                Agreement by and between the Registrant and Tracy Pearson, dated
                as of
                October 31, 2006 (15)




40




10.13
            
            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)10.14
            
            Credit
                Agreement, dated April 3, 2006, by and between the Registrant and
                Wells
                Fargo Bank, National Association (11)10.15
            
            Revolving
                Line of Credit Note, dated April 3, 2006 in favor of Wells Fargo
                Bank,
                National Association (11)10.16
            
            Financing
                Agreement, dated as of March 28, 2007 by and between GameTech
                International, Inc. and the lenders names therein, and Ableco Finance,
                LLC, as collateral and administrative agent. (17)10.17
            
            Amendment
                Number One to Financing Agreement, dated effective August 24, 2007.
                (18)10.18
            
            Amendment
                Number Two to Financing Agreement, dated effective October 3, 2007.
                (19)21
            
            List
                of Subsidiaries23.1
            
            Consent
                of Grant Thornton 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
                amended32.1
            
            Certification
                of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                200232.2
            
            Certification
                of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002





41





(1)
            Incorporated
                by reference to Exhibits 2.1 and 10.1 to the Registrant’s Registration
                Statement on Form S-1 (Registration No. 333-34967) as filed with
                the Commission on or about September 4, 1997.(2)
            Incorporated
                by reference to Exhibit 4.1 to Amendment No. 1 to the Registrant’s
                Registration Statement on Form S-1 (Registration No. 333-34967)
                as filed with the Commission on or about October 17,
                1997.(3)
            Incorporated
                by reference to Exhibit 10.1 to the Registrant’s Registration Statement on
                Form S-8 (Registration No. 333-72886) as filed with the
                Commission on or about November 7, 2001.(4)
            Incorporated
                by reference to Exhibit 10.16 to the Registrant’s Annual Report on
                Form 10-K for the fiscal year ended October 31, 2001 as filed
                with the Commission on or about January 29, 2002, Commission File No.
                000-23401.(5)
            Incorporated
                by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K
                dated March 7, 2003 as filed with the Commission on or about March
                10,
                2003, Commission File No. 000-23401.(6)
            Incorporated
                by reference to Exhibits 3.3 and 4.4 to the Registrant’s Quarterly Report
                on Form 10-Q for the quarterly period ended January 31, 2003 as filed
                with
                the Commission on or about March 17, 2003, Commission File No.
                000-23401.(7)
            Incorporated
                by reference to Exhibit 3.4 to the Registrant’s Quarterly Report on Form
                10-Q for the quarterly period ended January 31, 2004, as filed with
                the
                Commission on or about March 16, 2004.(8)
            Incorporated
                by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form
                10-Q for the quarterly period ended July 31, 2007 as filed with the
                Commission on or about September 17, 2007.(9)
            Incorporated
                by reference to Exhibits 10.4 to the Registrant’s Quarterly Report on Form
                10-Q dated June 30, 2007 as filed with the Commission on or about
                July 17,
                2007.(10)
            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.(11)
            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.(12)
            Incorporated
                by reference to Exhibits 10.37 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.(13)
            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.(14)
            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.(15)
            Incorporated
                by reference to Exhibit 10.13 to the Registrant’s annual Report on Form
                10-K for the period ended October 31, 2006 as filed with the Commission
                on
                or about January 29, 2007.(16)
            Incorporated
                by reference to Item 5.02(b) to the Registrant’s Current Report on Form
                8-K dated April 2, 2007 as filed with the Commission on or about
                April 4,
                2007.(17)
            Incorporated
                by reference to Exhibit 10.1 to the Registrant's Quarterly Report
                on Form
                10-Q for the quarterly period ended April 30, 2007 as filed with
                the
                Commission on or about June 14, 2007.(18)
            Incorporated
                by reference to Exhibit 10.2 to the Registrant's Quarterly Report
                on Form
                10-Q for the quarterly period ended July 31, 2007 as filed with the
                Commission on or about September 17, 2007.(19)
            Incorporated
                by reference to Exhibit 99.1 to the Registrant's Current Report on
                Form
                8-K dated October 3, 2007, as filed with the Commission on or about
                October 4, 2007.




42




**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.




GAMETECHINTERNATIONAL,
                INC.By:
            /s/
                JAY M. MEILSTRUPJay
                M. Meilstrup*President,
                Chief Executive Officer, and Director*
              *(Principal
                Executive Officer)*


Dated:
        January 21, 2008




Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the registrant and in the
      capacities and on the dates indicated.





**Signature**
            
            **Title**
            
            **Date**/s
                / RICHARD T. FEDOR
            
            Executive
                Chairman of the Board of Directors
            
            January
                21, 2008Richard
                T. Fedor/s/
                JAY M. MEILSTRUP
            
            President,
                Chief Executive Officer and Director
            
            January
                21, 2008Jay
                M. Meilstrup
            
            (Principal
                Executive Officer )/s/
                DONALD N. TATEISHI
            
            Chief
                Financial Officer, Treasurer, and Secretary
            
            January
                21, 2008Donald
                N. Tateishi
            
            (Principal
                Financial Officer and Principal Accounting Officer)/s
                / RICHARD H. IRVINE
            
            Director
            
            January
                21, 2008Richard
                H. Irvine/s/
                SCOTT H. SHACKELTON
            
            Director
            
            January
                21, 2008Scott
                H. Shackelton/s/
                DONALD K. WHITAKER
            
            Director
            
            January
                21, 2008Donald
                K. Whitaker




43


**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. (13)3.1
            
            Certificate
                of Incorporation of the Registrant, as amended (1)3.2
            
            Certificate
                of Designation of Series A Junior Participating Preferred Stock of
                the
                Registrant (6)3.3
            
            Second
                Amended and Restated Bylaws of the Registrant (7)4.1
            
            GameTech
                International, Inc. Registration Rights
                Agreement (2)4.2
            
            Rights
                Agreement, dated as of March 7, 2003, between GameTech International,
                Inc.
                and Mellon Investor Services, LLC, as rights agent (5)4.3
            
            Specimen
                Common Stock Certificate (6)10.1
            
            GameTech
                International, Inc. 1997 Incentive Stock Plan (1)10.2
            
            GameTech
                International, Inc. 2001 Restricted Stock Plan (3)10.3
            
            Amended
                and Restated 1997 Incentive Stock Plan  (10)10.4
            
            Form
                of Restricted Stock Agreement (10)10.5
            
            Form
                of Stock Option Agreement (10)10.6
            
            Form
                of Stock Unit Award Agreement (10)10.7
            
            Letter
                of agreement by and between the Registrant and Donald Tateishi dated
                June
                26, 2007 (8)10.8
            
            Release
                and Severance Agreement by and between the Registrant and James C.
                Wilson,
                dated as of August 25, 2006 (14)10.9
            
            Letter
                of Agreement by and between the Registrant and Nick Greenwood date
                as of
                July 23, 2007 (9)10.10
            
            Letter
                Agreement by and between the Registrant and John McCafferty, dated
                as of
                May 22, 2006 (12)10.11
            
            Release
                Agreement by and between the Registrant and John McCafferty, dated
                as of
                April 2, 2007 (16)10.12
            
            Letter
                Agreement by and between the Registrant and Tracy Pearson, dated
                as of
                October 31, 2006 (15)




44




10.13
            
            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)10.14
            
            Credit
                Agreement, dated April 3, 2006, by and between the Registrant and
                Wells
                Fargo Bank, National Association (11)10.15
            
            Revolving
                Line of Credit Note, dated April 3, 2006 in favor of Wells Fargo
                Bank,
                National Association (11)10.16
            
            Financing
                Agreement, dated as of March 28, 2007 by and between GameTech
                International, Inc. and the lenders names therein, and Ableco Finance,
                LLC, as collateral and administrative agent. (17)10.17
            
            Amendment
                Number One to Financing Agreement, dated effective August 24, 2007.
                (18)10.18
            
            Amendment
                Number Two to Financing Agreement, dated effective October 3, 2007.
                (19)21
            
            List
                of Subsidiaries23.1
            
            Consent
                of Grant Thornton 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
                amended32.1
            
            Certification
                of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                200232.2
            
            Certification
                of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002






45





(1)
            Incorporated
                by reference to Exhibits 2.1 and 10.1 to the Registrant’s Registration
                Statement on Form S-1 (Registration No. 333-34967) as filed with
                the Commission on or about September 4, 1997.(2)
            Incorporated
                by reference to Exhibit 4.1 to Amendment No. 1 to the Registrant’s
                Registration Statement on Form S-1 (Registration No. 333-34967)
                as filed with the Commission on or about October 17,
                1997.(3)
            Incorporated
                by reference to Exhibit 10.1 to the Registrant’s Registration Statement on
                Form S-8 (Registration No. 333-72886) as filed with the
                Commission on or about November 7, 2001.(4)
            Incorporated
                by reference to Exhibit 10.16 to the Registrant’s Annual Report on
                Form 10-K for the fiscal year ended October 31, 2001 as filed
                with the Commission on or about January 29, 2002, Commission File No.
                000-23401.(5)
            Incorporated
                by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K
                dated March 7, 2003 as filed with the Commission on or about March
                10,
                2003, Commission File No. 000-23401.(6)
            Incorporated
                by reference to Exhibits 3.3 and 4.4 to the Registrant’s Quarterly Report
                on Form 10-Q for the quarterly period ended January 31, 2003 as filed
                with
                the Commission on or about March 17, 2003, Commission File No.
                000-23401.(7)
            Incorporated
                by reference to Exhibit 3.4 to the Registrant’s Quarterly Report on Form
                10-Q for the quarterly period ended January 31, 2004, as filed with
                the
                Commission on or about March 16, 2004.(8)
            Incorporated
                by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form
                10-Q for the quarterly period ended July 31, 2007 as filed with the
                Commission on or about September 17, 2007.(9)
            Incorporated
                by reference to Exhibits 10.4 to the Registrant’s Quarterly Report on Form
                10-Q dated June 30, 2007 as filed with the Commission on or about
                July 17,
                2007.(10)
            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.(11)
            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.(12)
            Incorporated
                by reference to Exhibits 10.37 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.(13)
            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.(14)
            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.(15)
            Incorporated
                by reference to Exhibit 10.13 to the Registrant’s annual Report on Form
                10-K for the period ended October 31, 2006 as filed with the Commission
                on
                or about January 29, 2007.(16)
            Incorporated
                by reference to Item 5.02(b) to the Registrant’s Current Report on Form
                8-K dated April 2, 2007 as filed with the Commission on or about
                April 4,
                2007.(17)
            Incorporated
                by reference to Exhibit 10.1 to the Registrant's Quarterly Report
                on Form
                10-Q for the quarterly period ended April 30, 2007 as filed with
                the
                Commission on or about June 14, 2007.(18)
            Incorporated
                by reference to Exhibit 10.2 to the Registrant's Quarterly Report
                on Form
                10-Q for the quarterly period ended July 31, 2007 as filed with the
                Commission on or about September 17, 2007.(19)
            Incorporated
                by reference to Exhibit 99.1 to the Registrant's Current Report on
                Form
                8-K dated October 3, 2007, as filed with the Commission on or about
                October 4, 2007.





46


**GameTech
      International, Inc.**


**Index
      to Consolidated Financial Statements**




Report
                of Independent Registered Public Accounting Firm
            
            
            F-2Report
                of 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 Shareholders**


**GameTech
      International, Inc.**





We
      have
      audited the accompanying balance sheets of GameTech International, Inc. as
      of
      October 31, 2007 and 2006, and the related statements of operations,
      stockholders’ equity, and cash flows for each of the three years in the period
      ended October 31, 2007. 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. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes 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 financial statements referred to above present fairly, in all
      material respects, the financial position of GameTech International, Inc. as
      of
      October 31, 2007 and 2006, and the results of its operations and its cash
      flows for each of the three years in the period ended October 31, 2007 in
      conformity with accounting principles generally accepted in the United States
      of
      America.





We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the effectiveness of GameTech International,
      Inc.’s internal control over financial reporting as of October 31, 2007,
      based on criteria established in Internal Control-Integrated Framework issued
      by
      the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
      and
      our report dated January 21, 2008 expressed an unqualified opinion on the
      effectiveness of the Company’s internal control over financial
      reporting.








**/S/
      GRANT THORNTON LLP**





Reno,
      Nevada


January
      21, 2008





F-2


**Report
      of Independent Registered Public Accounting Firm**




**Board
      of Directors and Stockholders**




**GameTech
      International, Inc.**




We
      have
      audited GameTech International, Inc.’s (a Delaware Corporation) internal control
      over financial reporting as of October 31, 2007, based on criteria established
      in *Internal
      Control—Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
      GameTech International Inc.’s management is responsible for maintaining
      effective internal control over financial reporting and for its assessment
      of
      the effectiveness of internal control over financial reporting, included in
      the
      accompanying Management’s Report on Internal Control over Financial Reporting.
      Our responsibility is to express an opinion on GameTech International, Inc.’s
      internal control over financial reporting 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 effective
      internal control over financial reporting was maintained in all material
      respects. Our audit included obtaining an understanding of internal control
      over
      financial reporting, assessing the risk that a material weakness exists, testing
      and evaluating the design and operating effectiveness of internal control based
      on the assessed risk, and performing such other procedures as we considered
      necessary in the circumstances. We believe that our audit provides a reasonable
      basis for our opinion.




A
      company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles. A company’s internal control over
      financial reporting includes those policies and procedures that (1) pertain
      to
      the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the company; (2)
      provide reasonable assurance that transactions are recorded as necessary to
      permit preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company are
      being made only in accordance with authorizations of management and directors
      of
      the company; and (3) provide reasonable assurance regarding prevention or timely
      detection of unauthorized acquisition, use, or disposition of the company’s
      assets that could have a material effect on the financial
      statements.




Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.




In
      our
      opinion, GameTech International, Inc. maintained, in all material respects,
      effective internal control over financial reporting as of October 31, 2007,
      based on criteria established in *Internal
      Control—Integrated Framework* issued
      by COSO *.*




We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated balance sheets of GameTech
      International, Inc. and it’s subsidiaries as of October 31, 2007 and 2006, and
      the related consolidated statements of operations, stockholders’ equity, and
      cash flows for each of the three years in the period ended October 31, 2007
      and
      our report dated January 21, 2008 expressed an unqualified opinion.




We
      do not
      express an opinion or any other form of assurance on controls over the Company’s
      Summit business segment purchased on March 28, 2007.




**/S/
      GRANT THORNTON LLP**




Reno,
      Nevada


January
      21, 2008





F-3


**GAMETECH
      INTERNATIONAL, INC.**


**CONSOLIDATED
      BALANCE SHEETS**


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





**October
                31,****2007**
            
            **2006****ASSETS:**Current
                assets:Cash
                and cash equivalents
            
            $
            3,630
            
            $
            5,411Short-term
                investments
            
            
            7,763
            
            
            7,408Accounts
                receivable, net of allowances of $2,429 in 2007 and $2,230 in
                2006
            
            
            8,585
            
            
            3,734Inventory
            
            
            4,298
            
            
            —Deposits
            
            
            14
            
            
            17Refundable
                income taxes
            
            
            76
            
            
            64Restricted
                short-term investments
            
            
            —
            
            
            4,515Prepaid
                expenses and other current assets
            
            
            818
            
            
            377Deferred
                income taxes
            
            
            2,651
            
            
            2,458Total
                current assets
            
            
            27,835
            
            
            23,984Bingo
                equipment, furniture and other equipment, net
            
            
            19,902
            
            
            22,868Goodwill,
                net
            
            
            37,519
            
            
            10,184Intangibles,
                less accumulated amortization of $4,634 in 2007 and $4,071 in
                2006
            
            
            7,766
            
            
            1,217Restricted
                cash
            
            
            502
            
            
            483Deferred
                income taxes, long term
            
            
            226
            
            
            176Other
                assets
            
            
            132
            
            
            302Total
                assets
            
            $
            93,882
            
            $
            59,214**LIABILITIES
                AND STOCKHOLDERS' EQUITY:**Current
                liabilities:Accounts
                payable
            
            $
            2,094
            
            $
            1,819Accrued
                payroll and related obligations
            
            
            1,074
            
            
            980Accrued
                loss contingencies
            
            
            —
            
            
            3,898Income
                taxes payable
            
            
            126
            
            
            294Current
                portion of long-term debt
            
            
            4,400
            
            
            —Other
                accrued liabilities
            
            
            2,292
            
            
            1,581Total
                current liabilities
            
            
            13,882
            
            
            8,572Non-current
                employment obligations
            
            
            98
            
            
            160Note
                payable
            
            
            154
            
            
            —Deferred
                income taxes
            
            
            224
            
            
            648Long
                term obligations net of current portion
            
            
            25,045
            
            
            —Commitments
                and contingencies
            
            
            —
            
            
            —Stockholders'
                equity:Common
                stock: $0.001 par value; 40,000,000 shares authorized; 14,472,732
                shares
                issued in 2007 and 14,371,547 issued in 2006
            
            
            14
            
            
            14Additional
                paid in capital
            
            
            51,355
            
            
            50,881Retained
                earnings
            
            
            11,706
            
            
            7,035Treasury
                stock, at cost. 1,855,325 shares in 2007 and 2006
            
            
            (8,096
            )
            
            (8,096
            )Related
                Party Receivable
            
            
            (500
            )
            
            —Total
                stockholders' equity
            
            
            54,479
            
            
            49,834Total
                liabilities and stockholders' equity
            
            $
            93,882
            
            $
            59,214




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,****2007**
            
            **2006**
            
            **2005**Net
                revenue
            
            $
            58,805
            
            $
            49,289
            
            $
            49,651Cost
                of revenue
            
            
            26,542
            
            
            19,929
            
            
            20,304Gross
                profit
            
            
            32,263
            
            
            29,360
            
            
            29,347Operating
                expenses:General
                and administrative
            
            
            9,538
            
            
            8,303
            
            
            11,406Sales
                and marketing
            
            
            10,519
            
            
            11,041
            
            
            11,952Research
                and development
            
            
            3,865
            
            
            2,885
            
            
            4,058Loss
                contingencies
            
            
            124
            
            
            133
            
            
            137Gain
                on sale of assets
            
            
            (656
            )
            
            —
            
            
            —Total
                operating expenses
            
            
            23,390
            
            
            22,362
            
            
            27,553Income
                from operations
            
            
            8,873
            
            
            6,998
            
            
            1,794Interest
                and other income (expense), net
            
            
            (1,535
            )
            
            346
            
            
            76Income
                before income taxes
            
            
            7,338
            
            
            7,344
            
            
            1,870Provision
                for income taxes
            
            
            2,667
            
            
            2,961
            
            
            534Net
                income
            
            $
            4,671
            
            $
            4,383
            
            $
            1,336Net
                income per share:Basic
            
            $
            0.37
            
            $
            0.36
            
            $
            0.11Diluted
            
            $
            0.36
            
            $
            0.34
            
            $
            0.11Shares
                used in calculating net income per share:Basic
            
            
            12,566
            
            
            12,181
            
            
            11,868Diluted
            
            
            12,991
            
            
            12,757
            
            
            11,960Dividends
                declared per share
            
            $
            0.00
            
            $
            0.00
            
            $
            0.03




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**
              
              **Related
                  Party****Shares**
              
              **Amount**
              
              **value**
              
              **Earnings**
              
              **Shares**
              
              **Amount**
              
              **Receivable**
              
              **Total**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
              )
              
              —
              
              
              49,834Issuance
                  of common stock upon exercise of stock options
              
              
              101,185
              
              
              —
              
              
              350
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              350Stock
                  based compensation
              
              
              —
              
              
              —
              
              
              (128
              )
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (128
              )Tax
                  benefit of stock option exercises
              
              
              —
              
              
              —
              
              
              252
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              252Related
                  Party Receivable
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (500
              )
              
              (500
              )Net
                  income
              
              
              —
              
              
              —
              
              
              —
              
              
              4,671
              
              
              —
              
              
              —
              
              
              —
              
              
              4,671Balances
                  at October 31, 2007
              
              
              14,472,732
              
              $
              14
              
              $
              51,355
              
              $
              11,706
              
              
              1,855,325
              
              $
              (8,096
              )
              $
              (500
              )
              $
              54,479




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,****2007**
            
            **2006**
            
            **2005****Cash
                flows from operating activities:**Net
                income
            
            $
            4,671
            
            $
            4,383
            
            $
            1,336Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            11,544
            
            
            10,317
            
            
            11,427Obsolescence
                and loss on disposal of bingo terminals and related
                equipment
            
            
            175
            
            
            681
            
            
            493Loss
                on disposal of furniture and other equipment
            
            
            65
            
            
            12
            
            
            35Loss
                on disposal of intangible assets
            
            
            —
            
            
            —
            
            
            35Issuance
                of note receivable for sale of inventory
            
            
            (247
            )
            
            —
            
            
            —Gain
                on sale of participation equipment
            
            
            (656
            )
            
            —
            
            
            —Stock
                compensation expense
            
            
            (124
            )
            
            330
            
            
            103Deferred
                income taxes
            
            
            (667
            )
            
            (696
            )
            
            379Accrued
                loss contingencies
            
            
            124
            
            
            133
            
            
            137Accrued
                interest on short-term investments
            
            
            (365
            )
            
            (187
            )
            
            (36
            )Accrued
                interest on restricted cash
            
            
            (19
            )
            
            (33
            )
            
            —Other
                changes in operating assets and liabilities:Accounts
                receivable, net
            
            
            (2,206
            )
            
            (161
            )
            
            (89
            )Deposits
            
            
            3
            
            
            4
            
            
            8Inventory
            
            
            (986
            )
            
            —
            
            
            —Refundable
                income taxes
            
            
            (13
            )
            
            678
            
            
            (642
            )Restricted
                short-term investments
            
            
            4,515
            
            
            66
            
            
            (4,581
            )Prepaid
                expenses and other current assets
            
            
            (115
            )
            
            (51
            )
            
            324Accounts
                payable
            
            
            (1,332
            )
            
            (393
            )
            
            (702
            )Accrued
                payroll and related obligations
            
            
            134
            
            
            (355
            )
            
            (206
            )Other
                accrued liabilities
            
            
            670
            
            
            (479
            )
            
            (332
            )Income
                taxes payable
            
            
            (294
            )
            
            294
            
            
            (1,214
            )Non-current
                employment obligations
            
            
            (61
            )
            
            (21
            )
            
            (21
            )Net
                cash provided by operating activities
            
            
            14,816
            
            
            14,522
            
            
            6,454





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




F-7


**GAMETECH
      INTERNATIONAL, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS (Continued)**


**(In
      thousands)**




**Year
                Ended October 31,****2007**
            
            **2006**
            
            **2005****Cash
                flows from investing activities:**Proceeds
                from sale of short-term investments
            
            
            18,034
            
            
            24,945
            
            
            2,638Payments
                for purchase of short-term investments
            
            
            (18,027
            )
            
            (31,662
            )
            
            (500
            )Capital
                expenditures for bingo equipment, furniture and other
                equipment
            
            
            (6,211
            )
            
            (11,541
            )
            
            (7,359
            )Payment
                for the acquisition of Summit Amusement & Distributing,
                Ltd
            
            
            (41,401
            )
            
            (302
            )
            
            —Proceeds
                from sale of assets
            
            
            1,523
            
            
            —
            
            
            17Payments
                for acquisitions of intangible assets
            
            
            —
            
            
            (113
            )
            
            (801
            )Net
                cash used in investing activities
            
            
            (46,082
            )
            
            (18,673
            )
            
            (6,005
            )**Cash
                flows from financing activities:**Proceeds
                from issuance of long-term obligations
            
            
            38,946
            
            
            —
            
            
            —Payments
                on long-term obligations
            
            
            (9,563
            )
            
            —
            
            
            —Payment
                of dividends
            
            
            —
            
            
            —
            
            
            (355
            )Tax
                benefit from stock options exercised
            
            
            252
            
            
            714
            
            
            —Cash
                paid to related party for stock repurchase
            
            
            (500
            )
            
            —
            
            
            —Proceeds
                from issuance of common stock
            
            
            350
            
            
            2,518
            
            
            135Net
                cash (used in) provided by financing activities
            
            
            29,485
            
            
            3,232
            
            
            (220
            )Net
                increase (decrease) in cash and cash equivalents
            
            
            (1,781
            )
            
            (919
            )
            
            229Cash
                and cash equivalents at beginning of year
            
            
            5,411
            
            
            6,330
            
            
            6,101Cash
                and cash equivalents at end of year
            
            $
            3,630
            
            $
            5,411
            
            $
            6,330**Supplemental
                cash flow information:**Cash
                paid out in the year for:Interest
            
            $
            2,282
            
            $
            10
            
            $
            13Income
                taxes
            
            $
            2,164
            
            $
            1,895
            
            $
            2,051**Non-cash
                investing and financing activities:**Acquisition
                of fixed assets included in:Accounts
                payable
            
            $
            485
            
            $
            1,517
            
            $
            —Note
                payable for the purchase of a patent
            
            $
            250
            
            $
            —
            
            $
            —




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




F-8


**GAMETECH
      INTERNATIONAL, INC.**


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


**October
      31, 2007, 2006 and 2005**




**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 two business segments: the design,
      development, and marketing of interactive electronic bingo systems consisting
      of
      portable and fixed-based systems under contractual arrangements with terms
      generally ranging from month-to-month to three years with bingo hall customers;
      and the design, development, manufacturing, and marketing of video lottery
      terminals, related software, related parts and equipment, and game content.
      As
      of October 31, 2007, the company had bingo systems in service in 38 states,
      one
      US Territory and in four foreign countries and sales of Video Lottery Terminals
      (“VLTs”) and related software and equipment in 15 states and one US
      Territory.





**Consolidation
      Principles**





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




**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, software development capitalization, impairment of goodwill and
      intangible assets, share-based compensation, 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





F-9


**GAMETECH
      INTERNATIONAL, INC.**


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




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.





**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**




We
      recognize revenue when the following criteria are met:





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


·
            Delivery
                has occurred or services have been
                rendered,


·
            The
                price is fixed or determinable, and


·
            Collectibility
                is reasonably assured.




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




F-10


**GAMETECH
        INTERNATIONAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS -
        (Continued)**


*Bingo
      Equipment*




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





*Video
      Lottery Terminals*




Our
      product sales revenues are generated from the sale of video lottery terminals,
      conversion kits, content fees, license fees, participation fees, equipment
      and
      services. Revenues are reported net of discounts, sales taxes and other taxes
      of
      a similar nature. Revenues related to contracted production are recognized
      as
      the related work is delivered. We recognize license fee revenues over the term
      of the associated agreement unless the fee is in exchange for products delivered
      or services performed that represent the culmination of a separate earnings
      process. Amounts received prior to completing the earnings process are deferred
      until revenue recognition criteria are met.





Our
      sales
      credit terms are predominately 30 days. In certain limited circumstances,
      we may extend credit terms up to 160 days.





**Accounts
      Receivable and Allowance for Doubtful Accounts**





*Bingo
      Equipment*




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





*Video
      Lottery Terminals*




The
      Company estimates the possible losses resulting from non-payment of outstanding
      accounts receivables arising from the sale of video lottery terminals and
      related equipment. The Company’s customer base consists of casinos located in
      various states and Native American casinos. The Company performs ongoing
      evaluations of its 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.




F-11


**GAMETECH
        INTERNATIONAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS -
        (Continued)**


**Inventories**





Inventories
      at our Summit Gaming division are stated at the lower of cost or market. Our
      raw
      material is valued using the first-in, first-out method and our finished goods
      are valued using standard costing that approximates the first-in, first-out
      method. Management periodically reviews inventory balances, using recent and
      future expected sales to identify slow-moving or obsolete items. Inventories
      consist of the following at October 31:





**2007**
            
            **2006**
            
            **2005**Finished
                Goods
            
            $
            1,408
            
            $
            —
            
            $
            —Raw
                Materials
            
            
            2,890
            
            
            —
            
            
            —$
            4,298
            
            $
            —
            
            $
            —




**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
      2007, 2006, and 2005 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 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 years 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.




F-12


**GAMETECH
        INTERNATIONAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS -
        (Continued)**


For
      the
      fiscal years ended October 31, 2007 and 2006 the Company recognized compensation
      expense (benefit) of ($128,000) and $330,000, respectively, which is included
      in
      general and administrative expenses in the accompanying Consolidated Statement
      of Operations. The related tax benefit (expense) was ($43,000) and $111,000
      for
      a net cost (benefit) of ($85,000) and $219,000, respectively. For the fiscal
      years ended October 31, 2007 and 2006 diluted and basic earnings per share
      were
      increased by $.01 in fiscal year 2007 and reduced by $0.02 in fiscal year 2006
      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).





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, 2005****(in
                thousands except per share amounts)**Net
                income as reported
            
            $
            1,336Stock-based
                employee compensation expense included in reported net income, net
                of
                related tax benefits
            
            
            39Stock-based
                employee compensation expense determined under fair value method
                for all
                awards, net of related tax effects
            
            
            (1,285
            )Pro
                forma net income
            
            $
            90Net
                Income per shareBasic:As
                reported
            
            $
            0.11Pro
                forma
            
            $
            0.01Diluted:As
                reported
            
            $
            0.11Pro
                forma
            
            $
            0.01





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.




F-13


**GAMETECH
        INTERNATIONAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS -
        (Continued)**


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,****2007**
            
            **2006**
            
            **2005**Risk-free
                interest rate
            
            
            4.81
            %
            
            5.08
            %
            
            3.98
            %Dividend
                yield
            
            
            —
            
            
            —
            
            
            —Volatility
                factor
            
            
            61.6
            %
            
            63.9
            %
            
            64.4
            %Expected
                life (in years)
            
            
            6.4
            
            
            5.5
            
            
            8.0




**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 2007, 2006 and 2005. However, the Company conducts a substantial
      amount of its business through distributor relationships, many of which act
      as a
      collection agent.  As of October 31, 2007, there was one customer that
      represented 19.5% of the consolidated accounts receivable balance.





**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.
      The long-term debt approximates fair value based on the Company’s ability to
      obtain other debt with the same terms and current maturity.




**Significant
      Market Revenue Concentration**




A
      significant portion of the Company’s revenue is concentrated in the Texas and
      Montana markets. For the fiscal year 2007, Texas represented approximately
      17%
      of our bingo revenue and 14% of consolidated revenue compared to more than
      15%
      of bingo revenue for fiscal years 2006 and 2005. State law requires electronic
      bingo devices and systems to be placed through qualified distributors. For
      the
      fiscal year 2007, the Montana market represented approximately 50% of VLT
      revenue and 10% of consolidated revenue.




**Recent
      Accounting Pronouncements**




In
      December 4, 2007, the FASB issued SFAS No. 141(R), *“Business
      Combinations”* ,
      and
      SFAS No. 160, *“Accounting
      and Reporting of Noncontrolling interest in Consolidated Financial Statements,
      an amendment of ARB No. 51”* (SFAS
      No. 160). These new standards will significantly change  the
      financial accounting and reporting of business combination transactions and
      noncontrolling (or minority) interests in consolidated financial statements.
      The Company will be required to adopt SFAS No.141(R) and 160 on or after December 15,
      2008 (2010
      for the Company). The Company has not yet determined the effect, if any, that
      the adoption of SFAS 141(R) and 160 will have on its consolidated financial
      statements.




F-14


**GAMETECH
        INTERNATIONAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS -
        (Continued)**


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 believes the potential impact of FIN No. 48 on its financial
      position, cash flows and results of operations is not material.





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 adoption of SAB No. 108 did not have a material impact
      on
      our financial position, results of operation, and cash flows.




**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 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 International Gaming Systems (“IGS”) added $1,849,000 to goodwill for fiscal
      2003. In fiscal 2007, the Company acquired the assets of Summit Gaming and
      added
      $27,335,000 to goodwill and $7,720,000 in identifiable intangible assets which
      will be amortized over 5 to 10 years. The Company assessed the value of its
      goodwill as of July 31, 2005, 2006 and 2007 (its annual review date) and
      concluded that goodwill was not impaired.




Intangible
      assets consisted of the following as of October 31, 2007 (in
      thousands):




**Stated
                Value**
            
            **Accumulated
                Amortization**
            
            **Net
                Carrying Value**
            
            **Weighted
                Average Amortization Period (in years)**Intellectual
                property (software)
            
            $
            4,173
            
            $
            (3,676
            )
            $
            497
            
            
            1.2Copyrights/trademarks
            
            
            247
            
            
            (38
            )
            
            209
            
            
            11.8Distributor
                buyouts
            
            
            260
            
            
            (260
            )
            
            —
            
            
            —Summit
                Gaming identifiable intangible assets:Customer
                relationships
            
            
            3,600
            
            
            (420
            )
            
            3,180
            
            
            4.4Patent
                applications
            
            
            520
            
            
            (30
            )
            
            490
            
            
            9.4Game
                software library
            
            
            3,600
            
            
            (210
            )
            
            3,390
            
            
            9.4$
            12,400
            
            $
            (4,634
            )
            $
            7,766




F-15





**GAMETECH
      INTERNATIONAL, INC.**


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




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




Intangibles
      are being amortized over the respective useful lives of the assets ranging
      from
      two to ten years. Amortization expense related to the intangibles in fiscal
      years 2007, 2006 and 2005 was $1,389,000, $710,000 and $721,000, respectively
      (including amortization of intellectual property software developed under SFAS
      86 of $669,000, $656,000 and $485,000, respectively).





Estimated
      aggregate amortization expense for intangible assets subject to amortization
      as
      of October 31, 2007 is as follows (in thousands):





2008
            
            $
            1,5682009
            
            
            1,2322010
            
            
            1,1562011
            
            
            1,1522012
            
            
            732After
                2012
            
            
            1,926$
            7,766




**3.
      Bingo Equipment, Furniture and Other Equipment**




Bingo
      equipment, furniture and other equipment consisted of the following as of
      October 31, 2007 and 2006 (in thousands):





**October
                31,****2007**
            
            **2006**Bingo
                equipment
            
            $
            55,307
            
            $
            56,241Office
                furniture and equipment
            
            
            4,716
            
            
            4,246Leasehold
                improvements
            
            
            864
            
            
            75460,887
            
            
            61,241Less
                accumulated depreciation and amortization
            
            
            44,639
            
            
            42,038Less
                reserve for excess or obsolete terminals
            
            
            142
            
            
            21416,106
            
            
            18,989Add
                bingo component parts
            
            
            3,796
            
            
            3,879Bingo
                equipment, furniture and other equipment, net
            
            $
            19,902
            
            $
            22,868




F-16





**GAMETECH
      INTERNATIONAL, INC.**


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




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, 2007, 2006 and 2005
      amounted to approximately $10.2 million, $9.6 million and
      $10.7 million, respectively. In addition, during fiscal years ended
      October 31, 2007, 2006 and 2005, the Company reserved $38,000, $249,000 and
      $0, respectively for bingo terminals and parts not expected to be
      re-used.





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





**4.
      Credit Agreements**




On
      March
      28, 2007, the Company entered into a credit facility, which consists of a term
      note for $30.0 million and a revolving line of credit in the amount of $10.0
      million relating to the acquisition of Summit Gaming. The term note bears
      interest at the prime rate plus 1.75%, with a minimum annual rate of 9.75%.
      As
      of October 31, 2007 the interest rate was 9.75% and the balance of the term
      note
      was $22.0 million. Interest payments are due monthly and beginning January
      1,
      2008, principal payments of $1.1 million are due quarterly with the remainder
      due March 28, 2012. The revolving line of credit bears interest based on the
      prime rate plus 0.50%, with a minimum annual rate of 8.50%. As of October 31,
      2007 the interest rate was 8.50% and the outstanding balance of the revolver
      was
      $7.4 million. The revolving line of credit requires monthly payments of interest
      only and the outstanding balance is due on March 28, 2012. The Company can
      give
      no assurance that the revolving credit facility will be renewed. The
      Company ’ s
      obligations under the agreement are secured by substantially all of its assets.
      In October 2007, in accordance with the financing agreement with our lender,
      formerly restricted funds that were released in connection with the Trend
      litigation (see Note 5) of approximately $4.5 million were used to pay down
      the
      term loan facility. Another $5.0 million of excess cash from operations was
      also
      used in October 2007 to pay down $3.5 million towards the term loan facility
      and
      $1.5 million towards the revolver facility. We incurred a pre-payment penalty
      of
      $80,000 on the pre-payment of the term loan facility.





The
      credit facility provides for a prepayment premium of 1% in the first year and
      0.5% in the second year under specified circumstances. The credit facility
      provides for mandatory prepayments under specified circumstances, including
      a
      requirement to prepay an amount equal to 50% of Excess Cash Flow, as defined,
      if
      the ratio of Consolidated Funded Indebtedness to Consolidated EBITDA less
      Capital Expenditures, as defined, is greater than or equal to 2 to 1.





The
      credit facility contains numerous affirmative and negative covenants, including
      restrictions on liens, limitations on indebtedness, prohibitions on fundamental
      changes, restrictions on investments, prohibition of dividends or redemptions
      and limitations on capital expenditures. The Company must maintain qualified
      cash, as defined, of at least $6.0 million. The credit facility also contains
      specified financial covenants, including a leverage ratio, fixed charge coverage
      ratio and a minimum trailing twelve month EBITDA covenant. Upon an event of
      default, the lenders under the credit facility can accelerate all obligations
      under the agreement and terminate the revolving credit commitment. The Company
      was in compliance with all terms and covenants of the agreement as of October
      31, 2007.





On
      March
      28, 2007, the Company terminated its prior revolving line-of-credit as part
      of
      the requirements of its new credit facility. Future minimum term loan payments
      as of October 31, 2007 are as follows (in thousands):





2008
            
            $
            4,4002009
            
            
            4,4002010
            
            
            4,4002011
            
            
            4,4002012
            
            
            4,400$
            22,000




F-17


**GAMETECH
        INTERNATIONAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**




**5.
      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, 2007, 2006 and 2005 was $847,000, $836,000 and $863,000,
      respectively.





Future
      minimum lease payments under these leases as of October 31, 2007 are as follows
      (in thousands):




2008
            
            $
            8532009
            
            
            8202010
            
            
            572$
            2,245




**Purchase
      Commitments**




From
      time
      to time, we enter into commitments with our vendors to purchase VLT parts,
      bingo
      terminals and support equipment at fixed prices and/or guaranteed quantities.
      During the fiscal year ended October 31, 2006, we entered into seven agreements
      with the same vendor to provide an additional $5.4 million in Traveler terminals
      and $1.1 million in Tracker parts. As of July 31, 2007, we had fulfilled all
      these purchase commitments. During the fiscal year ending October 31, 2007,
      we
      entered into various additional agreements for component parts for VLTs, Tracker
      and Traveler as well as component parts for the GameTech Mini TM. As of October
      31, 2007, approximately $2.9 million of these commitments were outstanding.
      All
      purchases are expected to occur by the end of the third quarter in fiscal
      2008.





**Litigation**





*Trend
      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
      was
      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, 2007. 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 States Court of Appeals for the Ninth Circuit on August 5, 2005. The
      Company posted an additional supersedeas bond with the court on August 18,
      2005
      in the amount of $1.1 million, thereby staying any action by Trend to collect
      the fees, pending appeal. 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.




F-18


**GAMETECH
        INTERNATIONAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS -
        (Continued)**


On
      April
      19, 2007 a three judge panel of the United States Court of Appeals for the
      Ninth
      Circuit heard oral arguments for the appeal. On May 16, 2007, the United States
      Court of Appeals for the Ninth Circuit issued its ruling in our favor upholding
      each of the items we appealed, reversing the trial court’s rulings and remanding
      the matter back to the trial court for a new trial. The
      matter has been returned to the control of the lower court but at this time
      there is no set date as to when the matter will be heard. Additionally, as
      a
      result of this decision, the supersedeas bonds posted by GameTech International
      prior to filling the appeal were released by the lower court as of August 18,
      2007 and we have terminated the supporting insurance polices and have had the
      letters of credit released to us.




*Trend
      Gaming Litigation.* On March
      2, 2004, the jury rendered a verdict in our favor awarding compensatory and
      punitive damages against Trend Gaming, LLC, a Kentucky LLC (“Trend Gaming”)
      (involving a prior distribution agreement in Virginia) in the total amount
      of
      approximately $1.5 million. The jury also returned a verdict against Steven
      W.
      and Rhonda Hieronymus awarding compensatory and punitive damages of $1.0
      million. The court reduced compensatory damages against Trend Gaming to $1.1
      million. The court affirmed $150,000 in punitive damages against Trend Gaming
      and awarded us fees and costs of suit against Trend Gaming in the amount of
      $650,000. Compensatory damages against Mr. and Mrs. Hieronymus have been reduced
      to $762,000 but the punitive damage award against them in the amount of $150,000
      remains unchanged. Of the total compensatory damages of $1.1 million awarded
      to
      us, $762,000 represents compensation for lost profits. We can only collect
      such
      damages from one of the defendants to avoid a double recovery. Defendants
      appealed the judgment against them. On March 5, 2007, the Appellate Court
      entered its ruling affirming the judgment of the lower court in our
      favor. 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.




*Other.* We are
      involved in various other legal proceedings arising in the ordinary course
      of
      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.




**6.
      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.





The
      aggregate intrinsic value represents the difference between the closing price
      of
      our common stock on October 31, 2007, which was $8.69, 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, 2007. 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, 2007
      was
      $3.3 million. The aggregate intrinsic value of options exercisable at October
      31, 2007 was $3.3 million. During the years ended October 31, 2007, 2006, and
      2005, the aggregate intrinsic value of options exercised under our stock option
      plans were $578,000, $1.8 million, and $35,000, respectively, determined as
      of
      the date of option exercise.




F-19


**GAMETECH
        INTERNATIONAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS -
        (Continued)**


As
      of
      October 31, 2007, options to purchase 721,550 shares of common stock were
      outstanding at exercise prices ranging from $2.85 to $11.46 per share under
      the
      1997 Plan. In addition, as of October 31, 2007, 767,791 shares of common stock
      were available for future grants under the 1997 Plan.





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





**Year
                ended October 31,****2007**
            
            **2006**
            
            **2005****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
            
            
            847,735
            
            $
            3.93
            
            
            1,410,900
            
            $
            3.63
            
            
            970,125
            
            $
            4.25Options:Granted
            
            
            300,000
            
            $
            10.44
            
            
            150,000
            
            $
            6.92
            
            
            827,650
            
            $
            3.12Forfeited
            
            
            (325,000
            )
            $
            9.09
            
            
            (82,166
            )
            $
            3.81
            
            
            (346,675
            )
            $
            4.16Exercised
            
            
            (101,185
            )
            $
            3.46
            
            
            (630,999
            )
            $
            3.99
            
            
            (40,200
            )
            $
            3.36Balance
                at end of year
            
            
            721,550
            
            $
            4.38
            
            
            847,735
            
            $
            3.93
            
            
            1,410,900
            
            $
            3.63Exercisable
                at end of year
            
            
            621,550
            
            $
            3.39
            
            
            722,735
            
            $
            3.40
            
            
            1,410,900
            
            $
            3.63Weighted
                average grant-date fair value of options granted during the
                year
            
            
            
            
            $
            6.88
            
            
            
            
            $
            4.17
            
            
            
            
            $
            2.16





As
      of
      October 31, 2007, 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 $568,000. This cost will be amortized for fiscal years ended
      October 31, 2008, 2009, 2010, and 2011 at $205,000, $180,000, $132,000, and
      $51,000, respectively, and will be adjusted for subsequent changes in estimated
      forfeitures.





The
      following table summarizes information regarding stock options outstanding
      and
      exercisable as of October 31, 2007:





**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
            
            
            313,500
            
            
            7.58
            
            $
            2.87
            
            
            313,500
            
            
            7.58
            
            $
            2.87$3.10
                - $3.19
            
            
            79,000
            
            
            7.58
            
            $
            3.13
            
            
            79,000
            
            
            7.58
            
            $
            3.13$3.44
                - $3.63
            
            
            80,350
            
            
            5.54
            
            $
            3.53
            
            
            80,350
            
            
            5.54
            
            $
            3.53$3.85
                - $4.29
            
            
            93,700
            
            
            5.43
            
            $
            4.01
            
            
            93,700
            
            
            5.43
            
            $
            4.01$4.62
                - $6.99
            
            
            55,000
            
            
            6.70
            
            $
            5.50
            
            
            55,000
            
            
            6.70
            
            $
            5.50$9.51
                - $11.46
            
            
            100,000
            
            
            9.47
            
            $
            10.49
            
            
            —
            
            
            —
            
            $
            —721,550
            
            
            7.27
            
            $
            4.38
            
            
            621,550
            
            
            6.92
            
            $
            3.39




F-20


**GAMETECH
        INTERNATIONAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS -
        (Continued)**


**Stockholder
      Rights Agreement**




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





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





**7.
      Income Taxes**





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





**Year
                ended October 31,****2007**
            
            **2006**
            
            **2005**Current:Federal
            
            $
            2,587
            
            $
            2,947
            
            $
            565State
            
            
            378
            
            
            365
            
            
            109Foreign
            
            
            387
            
            
            345
            
            
            52Deferred:Federal
            
            
            (500
            )
            
            (576
            )
            
            (243
            )State
            
            
            (130
            )
            
            16
            
            
            51Foreign
            
            
            (55
            )
            
            (136
            )
            
            —$
            2,667
            
            $
            2,961
            
            $
            534




The
      significant components of the Company's deferred income tax assets and
      liabilities as of October 31, 2007 and 2006 are as follows (in thousands):




**October
                31, 2007****Current**
            
            **Non-Current**Deferred
                income tax assets:Amortization of intangible assets
            
            $
            —
            
            $
            499Allowance for doubtful accounts
            
            
            947
            
            
            —Reserve for obsolete terminals
            
            
            —
            
            
            54Loss contingencies
            
            
            1,447
            
            
            —Accrued vacation
            
            
            172
            
            
            —Stock option expense
            
            
            45
            
            
            —Deferred
                Revenue
            
            
            40
            
            
            —Foreign tax credit carry-forward
            
            
            —
            
            
            36Capital loss carry-forward
            
            
            —
            
            
            13Total
                deferred income tax assets
            
            
            2,651
            
            
            602Deferred
                income tax liability:Depreciation
            
            
            —
            
            
            (600
            )Net
                deferred income tax asset (liability)
            
            $
            2,651
            
            $
            2




F-21


**GAMETECH
        INTERNATIONAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS -
        (Continued)**


**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
            )





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,****2007**
            
            **2006**
            
            **2005**Income
                tax provision (benefit) at the statutory rate
            
            
            34.0
            %
            
            34.0
            %
            
            34.0
            %State
                income taxes, net
            
            
            3.1
            
            
            3.4
            
            
            4.0Foreign
                income taxes, net of credits
            
            
            —
            
            
            —
            
            
            (0.7
            )Revisions
                to income tax payable due to closure of statute of
                limitations
            
            
            —
            
            
            —
            
            
            (11.4
            )Meals
                and entertainment
            
            
            0.6
            
            
            0.7
            
            
            2.3Non
                deductible lobbying expenses
            
            
            0.1
            
            
            0.4
            
            
            2.3Impairment
                of goodwill
            
            
            —
            
            
            —
            
            
            —Other,
                net
            
            
            (1.5
            )
            
            1.8
            
            
            (2.0
            )Income
                tax provision (benefit) at its effective rate
            
            
            36.3
            %
            
            40.3
            %
            
            28.5
            %




**8.
      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,
      2007
      or October 31, 2006. Additionally, because investments are short-term and are
      generally allowed to mature, realized gains and loss for fiscal 2007 and 2006
      are minimal.




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





**October
                31,****2007**
            
            **2006**Corporate
                securities
            
            $
            1,300
            
            $
            3,608Auction
                rate securities
            
            
            6,463
            
            
            3,800Total
                short-term investments
            
            $
            7,763
            
            $
            7,408




F-22





**GAMETECH
      INTERNATIONAL, INC.**


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




**9.
      Accrued Severance**




The
      Company has incurred expenses connected with severance agreements. These amounts
      are recorded in accrued payroll. In fiscal 2007, the total severance expense
      was
      $111,000 recorded in sales, general and administrative expenses. As of October
      31, 2007, all outstanding severance expense had been paid. In fiscal 2006,
      total
      severance expenses of $170,000 were recorded in research and development
      expense.




Accrued
      severance consisted of the following as of October 31, 2007 and 2006 (in
      thousands):





**October
                31,****2007**
            
            **2006**Beginning
                balance
            
            $
            44
            
            $
            359Severance
                expenses
            
            
            111
            
            
            170Less
                severance paid
            
            
            (155
            )
            
            (485
            )Ending
                Balance
            
            $
            —
            
            $
            44





**10.
      Other Accrued Liabilities**





Other
      accrued liabilities consist of (in thousands):





**October
                31,****2007**
            
            **2006**Accrued
                professional fees
            
            $
            176
            
            $
            592Accrued
                distributor commissions
            
            
            401
            
            
            442Deferred
                revenue
            
            
            767
            
            
            —Accrued
                property tax
            
            
            145
            
            
            139Other
            
            
            803
            
            
            408$
            2,292
            
            $
            1,581





**11.
      Net Income Per Share**





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




**Year
                ended October 31,****2007**
            
            **2006**
            
            **2005**Basic
                weighted average shares outstanding
            
            
            12,566
            
            
            12,181
            
            
            11,868Effect
                of dilutive securities:Stock
                options
            
            
            425
            
            
            576
            
            
            92Diluted
            
            
            12,991
            
            
            12,757
            
            
            11,960





Employee
      stock options to purchase approximately 100,000, 125,000, and 832,000 shares
      in
      fiscal years ending October 31, 2007, 2006, and 2005, respectively, were
      outstanding, but were not included in the computation of diluted earnings per
      share because the effect would have been antidilutive.





**12.
      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, 2005:Allowance
            
            $
            2,454
            
            $
            43
            
            $
            (123
            )
            $
            2,374Year
                ended October 31, 2006:Allowance
            
            $
            2,374
            
            $
            277
            
            $
            (421
            )
            $
            2,230Year
                ended October 31, 2007:Allowance
            
            $
            2,230
            
            $
            561
            
            $
            (362
            )
            $
            2,429




F-23





**GAMETECH
      INTERNATIONAL, INC.**


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




The
      balance of the allowance for accounts receivable for fiscal years ended 2007,
      2006, and 2005 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 5).





**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, 2005:Allowance
            
            $
            3,384
            
            $
            —
            
            $
            (506
            )
            $
            2,878Year
                ended October 31, 2006:Allowance
            
            $
            2,878
            
            $
            249
            
            $
            (2,913
            )
            $
            214Year
                ended October 31, 2007:Allowance
            
            $
            214
            
            $
            38
            
            $
            (113
            )
            $
            139





**13.
      Agreement to Acquire Assets**





On
      March
      28, 2007, we acquired essentially all of the assets of Summit Gaming for $41.7
      million in cash. Summit Gaming is a leading developer and manufacturer of
      entertainment driven gaming devices, including primarily video lottery terminal
      equipment and related software, headquartered in Billings, Montana.





Under
      the
      purchase method of accounting, the total purchase price is allocated to Summit
      Gaming’s tangible and intangible assets based on their fair values as of the
      date of the closing of the acquisition. The preliminary estimated purchase
      price
      has been allocated based on the preliminary estimates that are described
      below.




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





Cash
                paid for Summit Gaming
            
            $
            39,745Estimated
                direct transaction costs
            
            
            1,954Total
                preliminary purchase price
            
            $
            41,699





The
      preliminary purchase price includes approximately $1 million in working capital
      that is in dispute. The dispute is being arbitrated and should be resolved
      in
      the next fiscal year. The allocation of the preliminary purchase price and
      estimated useful lives and first year amortization associated with certain
      assets is as follows (in thousands):





Accounts
                receivable
            
            $
            2,645Prepaid
                expenses and other assets
            
            
            211Inventory
            
            
            3,312Property
                plant and equipment
            
            
            1,598Identifiable
                depreciable intangibles assets
            
            
            7,720Trade
                name
            
            
            1,600Goodwill
            
            
            25,735
            *Accounts
                payable and other accrued expenses
            
            
            (1,122
            )Total
                cash purchase price
            
            $
            41,699




*
      Includes the excess of the purchase price over the estimated fair value of
      assets and liabilities assumed.




F-24


**GAMETECH
        INTERNATIONAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS -
        (Continued)**


Unaudited
      pro forma results of operations, assuming the acquisition of Summit Gaming
      had
      been completed at the beginning of each period are summarized below. The results
      reflect adjustments to amortization, interest expense, and income tax expense.
      The interest rates used in determining the pro forma adjustments are related
      to
      the credit facility and approximate a blended average rate of 9.54% for the
      twelve months ended October 31, 2007. The pro forma adjustment for the income
      tax expense is based on an effective rate of 40%. The pro forma earnings per
      share are based on the Company’s shares outstanding, as no shares were issued
      for the acquisition.





**For
                the Twelve Months Ended**
              **(in
                thousands, Except for Per Share Amounts)****October
                31, 2007**Net
                sales
            
            $
            66,510Net
                earnings
            
            
            2,623Basic
                earnings per share
            
            $
            0.21Diluted
                earnings per share
            
            $
            0.20





In
      the
      above acquisition, the Company acquired various intangible assets listed below:





**Acquired
                Intangible Assets (in thousands)****October
                31, 2007****Amortized
                Intangible Assets**
            
            **Fair
                Market Value**
            
            **Estimated**
              **Lives**
            
            **Accumulated
                Amortization**
            
            **Net
                Fair Market Value**Customer
                relationships
            
            $
            3,600
            
            
            5
                years
            
            $
            420
            
            $
            3,180Patent
                application
            
            
            520
            
            
            10
                years
            
            
            30
            
            
            490Game
                library
            
            
            3,600
            
            
            10
                years
            
            
            210
            
            
            3,390Total
                amortizable intangible assets
            
            $
            7,720
            
            
            
            
            $
            660
            
            $
            7,060Unamortized
                Intangible Assets:Goodwill
            
            $
            25,735Summit
                Gaming trade name
            
            
            1,600Total
            
            $
            27,335





Amortization
      expense related to the acquisition of Summit Gaming for the twelve-months ended
      October 31, 2007 was $660,000. Estimated future aggregate amortization expense
      for intangible assets associated with the Summit Gaming acquisition subject
      to
      amortization as of October 31, 2007 is as follows (in thousands):





2008
            
            $
            1,1322009
            
            
            1,1322010
            
            
            1,1322011
            
            
            1,1322012
            
            
            712After
                2012
            
            
            1,820$
            7,060





**14.
      Related Party Transactions**





On
      March
      28, 2007, we acquired essentially all of the assets of Summit Gaming. Since
      that
      time, we have sold video lottery terminals to Amusement Services, LLC, which
      is
      owned by the person who was at the time also President of Summit Gaming, a
      division of the Company. For the three and twelve-month period ended October
      31,
      2007, we sold $447,607 and $639,364 to Amusement Services, LLC, respectively.
      As
      of October 31, 2007, the amount due from Amusement Services, LLC was $92,585
      and
      is included in our accounts receivable balance.




F-25


**GAMETECH
        INTERNATIONAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS -
        (Continued)**


We
      have
      also purchased equipment from Ceronix, Inc., which is controlled by one of
      our
      board members. For the three and twelve-month period ended October 31, 2007,
      we
      bought $1,884 and $9,016 from Ceronix, Inc., respectively. As of October 31,
      2007, there was no amount due.





A
      member
      of our board is acting as our agent for the stock repurchase plan. During the
      twelve months ended October 31, 2007, the Company had advanced $500,000 for
      stock repurchases. As of October 31, 2007 the amount due from the board member
      was $500,000 and is included as a related party receivable which is being
      treated as a contra-equity account. As of January 16, 2007, the receivable
      has
      been settled in the Company’s common stock and the balance of this related party
      receivable was $0. Through December 28, 2007, the Company has repurchased
      281,906 shares under this stock repurchase program at a total cost of
      approximately $2.0 million.





**15.
      Business Segment Information**





During
      the fiscal quarter ended April 30, 2007, management reviewed the Company’s
      operating segments in accordance with SFAS 131, “Disclosure about Segments of an
      Enterprise and Related Information.” Based upon the changes beginning in March
      2007, with the acquisition of Summit Gaming, in the manner in which management
      manages the Company, as well as the current economic characteristics of its
      operating segments, management has determined that a new operating segment
      is
      appropriate. Therefore, the segment discussion outline below represents the
      adjusted segment structure as determined by management in accordance with SFAS
      131.





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





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





No
      significant inter-company revenue is realized in these reporting segments.
      Interest income and expense and amortization of identifiable intangibles are
      not
      allocated but are included in bingo systems in the measurement of reporting
      segments profits reviewed by management. The provision for income taxes is
      also
      not included in the measure of reporting segment operating profits reviewed
      by
      management.





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




**Twelve
                Months Ended**
              **October
                31,****2007**
            
            **2006**
            
            **2005**Net
                Revenue:Bingo
                systems
            
            $
            47,114
            
            $
            49,289
            
            $
            49,651Video
                lottery terminals
            
            
            11,691
            
            
            —
            
            
            —$
            58,805
            
            $
            49,289
            
            $
            49,651Net
                Cost of Revenue:Bingo
                systems
            
            $
            19,683
            
            $
            19,929
            
            $
            20,304Video
                lottery terminals
            
            
            6,859
            
            
            —
            
            
            —$
            26,542
            
            $
            19,929
            
            $
            20,304Net
                Income:Bingo
                systems
            
            $
            1,633
            
            $
            4,383
            
            $
            1,336Video
                lottery terminals
            
            
            3,038
            
            
            —
            
            
            —$
            4,671
            
            $
            4,383
            
            $
            1,336




F-26


**GAMETECH
        INTERNATIONAL, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**




**October
                31,**
              **2007**
            
            **October
                31, 2006**Identifiable
                Assets:Bingo
                systems
            
            $
            83,131
            
            $
            59,214Video
                lottery terminal
            
            
            10,751
            
            
            —$
            93,882
            
            $
            59,214




**16.
      Quarterly Financial Information (Unaudited)**





Summarized
      unaudited quarterly financial information for the years 2007 and 2006 are noted
      below (in thousands, except per share amounts):




**Year
                ended October 31, 2007****First**
              **Quarter**
            
            **Second**
              **Quarter
                (1)**
            
            **Third**
              **Quarter
                (1)**
            
            **Fourth**
              **Quarter
                (1)**Revenue
            
            $
            12,016
            
            $
            13,411
            
            $
            16,637
            
            $
            16,740Gross
                profit
            
            
            7,094
            
            
            7,465
            
            
            8,590
            
            
            9,114Income
                (loss) from operations
            
            
            1,566
            
            
            1,616
            
            
            2,537
            
            
            2,757Net
                income
            
            $
            1,072
            
            $
            1,207
            
            $
            1,079
            
            $
            1,313Net
                income per share:Basic
            
            $
            0.09
            
            $
            0.10
            
            $
            0.09
            
            $
            0.10Diluted
            
            $
            0.08
            
            $
            0.09
            
            $
            0.08
            
            $
            0.10






**Year
                ended October 31, 2006****First**
              **Quarter**
            
            **Second**
              **Quarter**
            
            **Third**
              **Quarter**
            
            **Fourth**
              **Quarter
                (2)**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 (loss)
            
            $
            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





1.
            Results
                for the second, third, and fourth quarters of fiscal 2007 reflect
                the
                acquisition of the assets of Summit Gaming.2.
            During
                the fourth quarter ended October 31, 2006, $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.




F-27