UNITED
STATES




SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form
10-K




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




For
the 53 weeks ended November 2, 2008




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
      registeredCommon
      Stock, par value $.001 per share
              Rights
      to Purchase Series A Junior
              Participating
      Preferred Stock
            
            The
      NASDAQ Stock Market LLC
              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 oNo x
  Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes o No x
  Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes x No o
  Indicate by check
mark 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.   x
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “accelerated filer,” “large accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
  Large
accelerated filer  o 
Accelerated filer  x Non-accelerated
filer  o  Smaller
reporting company o
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes oNo  x
  The
aggregate market value of common stock held by non-affiliates of the registrant
based on the closing price of the registrant’s common stock as reported on the
NASDAQ Global Market on April 30, 2008, which was the last business day of
the registrant’s most recently completed second fiscal quarter, was $54,920,410.
For purposes of this computation, all officers and directors of the registrant
are deemed to be affiliates.  Such determination should not be deemed
to be an admission that such officers and directors are, in fact, affiliates of
the registrant.
  The
number of shares of common stock, $0.001 par value, outstanding as of
January 27, 2009, was 11,706,269 shares.
  Documents
Incorporated By Reference
  Portions
of the registrant’s definitive proxy statement for the 2009 Annual Meeting of
Stockholders are incorporated by reference into Part III of this
report.


GAMETECH INTERNATIONAL,
INC.





ANNUAL
REPORT ON FORM 10-K


53
WEEKS ENDED NOVEMBER 2, 2008





INDEX





PagePART
      IItem
      1.
            Business
            
            1Item
      1A.
            Risk
      Factors
            
            10Item
      1B.
            Unresolved
      Staff Comments
            
            16Item
      2.
            Properties
            
            16Item
      3.
            Legal
      Proceedings
            
            16Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            
            17PART
      IIItem
      5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
            
            17Item
      6.
            Selected
      Financial Data
            
            19Item
      7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
            
            21Item
      7A.
            Quantitative
      and Qualitative Disclosures About Market Risk
            
            30Item
      8.
            Financial
      Statements and Supplementary Data
            
            30Item
      9.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            
            30Item
      9A.
            Controls
      and Procedures
            
            30Item
      9B.
            Other
      Information
            
            31PART
      IIIItem
      10.
            Directors,
      Executive Officers and Corporate Governance
            
            31Item
      11.
            Executive
      Compensation
            
            31Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            
            31Item
      13.
            Certain
      Relationships and Related Transactions, and Directors
      Independence
            
            31Item
      14.
            Principal
      Accountant Fees and Services
            
            31PART
      IVItem
      15.
            Exhibits
      and Financial Statement Schedules
            
            31SIGNATURES
            
            35INDEX
      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 2009 and
thereafter; expansion of products or product development; expansion into new
domestic and international markets; potential acquisitions or strategic
alliances; and liquidity and anticipated cash needs and availability. All
forward-looking statements included in this report are based on information
available to us as of the filing date of this report, and we assume no
obligation to update any such forward-looking statements. Our actual results
could differ materially from the forward-looking statements. Important factors
that could cause actual results to differ materially from expectations reflected
in our forward-looking statements include those described in Item 1A, “Risk
Factors.”







PART I


Item 1.   Business
  General





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





Finally,
we have developed wireless server-based gaming technology into two commercially
viable products, the Mini TM and the EliteTM.  The server-based gaming
system, GameTech EliteTM, was successfully installed domestically in the third
quarter of 2008 and in Europe during the first quarter of fiscal 2009. The
European configuration of GameTech EliteTM supports 450 wireless devices in a
single location and represents our largest installation of the GameTech EliteTM
model to date. Our other server-based gaming product, the MiniTM, was installed
in Europe during the second quarter of 2008.





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 box industries.





The
Company has adopted a fifty-two/fifty-three week fiscal year beginning with the
period ending on the first Sunday in November for 2008.  The fiscal
years ending October 31, 2007 and 2006 were both on a twelve-month calendar
basis.





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 November 2,
2008, 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 November 2, 2008,
we had terminals in operation in Native American bingo halls in 13 of those
states. Collectively, as of November 2, 2008, we had electronic bingo systems in
40 states, one US territory and five non-domestic countries.  For
fiscal 2008, 79.3% of our net revenue came from our bingo equipment
segment.





Box
equipment is legal in 15 states and Canada.  Box equipment includes
VLTs that are state authorized Class III gaming machines, traditional Class III
gaming machines, and related software, licensing, and gaming
content.  They are operated in casinos, bar/taverns, truck stops, and
other gaming approved locations that vary from state to state based upon
jurisdictional legislation or regulations.  GameTech, under the name
of Summit Gaming, sells VLTs, related software and equipment primarily in
Montana, Louisiana, West Virginia, and South Dakota.  GameTech, under
its own name, distributes traditional Class III gaming machines in Native
American casinos, and several states including Nevada.  For fiscal
2008, 20.7% of our revenue came from our box equipment segment, 53.5% of which
was from the sale of VLTs.





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





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












1





Business
Strategy





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





Expand
Product Offerings and Emphasize Unique Gaming Content





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





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





Our Box
division manufacturers VLT and other gaming equipment and software that is 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 where we compete.  We
believe revenue growth will be driven by increasing market share in existing
markets and expanding product placement in new markets.





Develop
New Applications





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





During
2008, we continued development and refinement of our new wireless 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
determined on the central server.





During
2008 we continued development of the GameTech Elite TM server-based gaming system
(“Elite”).  This operating system will enable us to move into Class II
and Class III server-based markets.  These markets demand a higher
level of security and accountability.  The 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 Native American gaming
markets.  The Elite TM system also addresses international product
needs, allowing GameTech to focus on different variations of the game of bingo
in European and Latin American markets.  The system was redesigned
from the ground up based on the experience from past products as well as
emerging technologies not available during the design of previous
products.  During fiscal year 2008, varying applications of the Elite
TM system were installed successfully on a trial basis in the US, Mexico, Germany
and the UK.




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, the South Pacific, and Asia.  International revenue as a
percentage of our total revenue was 9.0% in fiscal 2008, 7.6% in fiscal 2007,
and 8.0% in fiscal 2006.  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 halls and casinos.  From time to
time we also evaluate opportunities to expand into other countries.





Develop
Strategic Alliances/Acquire Complementary Companies





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




Products
- Bingo
 
 We
provide bingo operators with a variety of electronic player terminals and
back-of-office management systems. One of these systems is known as the DiamondTM
system. This operating system includes Point-of-Sale (POS) functionality and
player tracking for bingo operators that allows them to consolidate to one
system for selling bingo paper and electronics, while also loading the
appropriate sales information to electronic player terminals. The DiamondTM
system provides bingo operators a verifier that confirms whether a “BINGO” is
legitimate and has been won on a bingo card (whether electronic or paper) that
was sold during the session.  We have developed a next generation
operating system called the 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.





2





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 software 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 DiamondTM 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 Elite TM
system.





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 cards during one bingo game,
      depending on jurisdictional regulations, which is significantly more than
      can be played on paper;


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


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





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 five variations of portable bingo terminals in
commercial use:





·
            the
      GameTech MiniTM, our newest addition to our portable
  lineup;


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


·
            the
      Traveler terminal, our state-of-the-art 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 TED2C, 12
Traveler, 12 Tracker, and 25 TED terminals, respectively.


The
GameTech MiniTM unit operates using the latest Wi-Fi technology alongside our
Elite TM server-based gaming system.  The device has a 7-inch wide
aspect ratio touch screen display, which is our first touch screen portable
device.  The unit is durable and has a long 12-hour battery
life.  The unit may be operated as a bingo device or may also be used
in other gaming applications such as poker, keno, and video reels.





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,
with 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 Elite TM
system.





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





The
TED2C
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
TED2C
terminal can display up to 16 cards at one time and plays up to 600 cards in one
game. This easy-to-use device operates using either the AllTrak2® back-office
system or DiamondTM system.





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


3





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.





Products
– Box





Video
Lottery Terminals


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





Slot
Equipment


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





Products
– Server-Based Gaming





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





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 2008
we continued to develop the Elite TM server-based system.  Of the items
that we added this year, the most notable was a new gaming platform for slot
machines.  This platform is based upon the Elite TM system which we
expect will be the basis of all slot machine games we develop in the
future.  Recently we submitted two slot machine applications using
this new platform to regulatory agencies and are awaiting approval.





4


During
fiscal 2008, we spent approximately $5.6 million for company-sponsored research
and development activities compared with approximately $3.9 million during
fiscal 2007 and approximately $2.9 million during fiscal 2006.





Sales,
Marketing, and Distribution





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





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





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





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


·
            training
      sessions for the bingo staff;


·
            promotional
      sessions to introduce players to the
system;


·
            advertising
      and point-of-sale materials; and


·
            an
      ongoing service and maintenance
program.





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





In 2008,
we signed an agreement with Rocky Mountain Industries LLC of Montana, a leader
in the Montana gaming market.  The agreement calls for us to provide
500 initial gaming machines, with an option for the customer to purchase an
additional 500 machines, along with custom developed games.  There is
an initial four year custom software commitment with a customer option for two
additional years.   We are in the process of developing the
software to submit for jurisdictional approval. We expect submittal to occur
during fiscal 2009. We have received a $3.5 million deposit related to this
contract that is classified as deferred revenue on our Consolidated Balance
Sheet.





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





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





Target
Markets





Bingo.We target
the thousands of charities licensed to operate bingo games in the United States
and Canada. We also target Native American bingo halls and commercial entities
in the United States and foreign markets. As of November 2, 2008, we had
terminals in over 560 locations serving over 840 bingo operators.  For
the 53 weeks ended November 2, 2008, portable terminals generated approximately
80% of our bingo revenue and fixed-based terminals generated approximately 20%
of our bingo revenue.





As of
November 2, 2008, we operated in 40 states, one US territory and five foreign
countries.  We are actively pursuing additional opportunities in other
states and countries, as well as increased activity in existing states and
countries.





Box.As of
November 2, 2008, we sold box 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 91.6% of our overall
box sales.  The box revenue stream and percentage contribution in
these major markets consists of the sale of new equipment (51%), used equipment
(2%), software upgrades (27%), and supplies and other (20%).





Materials
and Supplies





We
purchase all bingo and box 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
boxes 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 our personnel,
third-party manufacturers, and suppliers be dedicated to high quality and high
production levels.


5


Intellectual
Property




We regard
our products as proprietary and rely on patent law, copyrights and trademarks to
protect our proprietary rights.  We have registered trademarks with the
U.S. Patent and Trademark Office for the following names: “AllTrak,” “AllTrak2,”
“Bingo Enhanced Tabs System,” “Blazing Quarters,” “Bowling for Cash,” “Club 76,”
“Crazy Pays,” “Crystal Ball,” “Decorating for Dollars,” “Demolition Poker,”
“Diamond Elite,” “Diamond TED,” “Elite Series,” “Firestar,” “Gambler’s Edge
Keno,” “Gambler’s Edge Poker,” “GameTech,” “GameTech with design,” “GameTech
Arizona Corporation,” “GameTech Mini,” “GameTech Elite,” “Goggles Beer,” “High
Country Montana Poker,” “Hot Flush,” “Jukebox Jungle,” “Jokers Jackpot,”
“Montana Choppers,” “MegaPlex,” “Miner’s Magic,” “Miner’s Treasure,” “Montana
Poker II,” “Nevada Classic,” “Pay-N-Play,” “Pays All Poker,” “Penny Power,”
“Peter Jacobsen Challenge Keno,” “Player’s Zone,” “Poker Dogs,” “Raging Rubies,”
“Royal Pays,” “Royal Touch,” “Sands Of Time,” “Spill Over,” “Sunken Treasure,”
“TED,” “TED2C,” “The Electronic Dauber,” “Traveler,” “Treasure Hunt Keno,” “Wild
Biker,” and “Wild Widow Poker.” We have trademark applications pending with the
U.S. Patent and Trademark Office for the following names: “Ol’ Coots Genuine
Potable,” “Oops!  All Worms Tequila,” “Spies” and “Tracker.”  We have
registered Canadian trademarks for the following names: “AllTrak,” “Diamond
Bingo,” “Diamond Elite,” “Diamond Plus Bingo,” “Diamond Pro,” “Diamond TED,”
“Diamond VIP,” “GameTech,” “GameTech with design,” “TED,” “TED2C,” and “The
Bingo Players Choice.” We have registered Mexican trademarks for the following
names: “GameTech,” “GameTech Mexico,” “Gringo Bingo,” “Latin 90,”and “Traveler.”
 We have Mexican trademark applications pending for the following names:
“Loteria Loco” and “Tracker.”  We have registered Norwegian trademarks for
the following names: “GameTech with design” and “TED.” We have Norwegian
trademarks pending for the following names:  “GameTech,” and
“Pay-N-Play.”  We cannot provide assurance that any of our domestic or
foreign trademark applications pending will be granted.




Competition





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





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





Server-based
Gaming.  We believe server-based gaming will be the next
significant technological development in the gaming industry.  The
continuing development of server-based gaming will require additional resources
that could be allocated to other areas, and the failure to effectively bring
server-based gaming to market could have a negative impact on our financial
condition.  We compete primarily with Cantor Gaming.





Government
Regulation





We are
subject to regulation and oversight by governmental authorities in virtually all
jurisdictions in which we conduct business. As of November 2, 2008, 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 10% or greater of our
capital stock. Any person who fails or refuses to comply with these regulatory
requirements could be subject to disciplinary or legal action, which could
adversely impact our company, including the loss of any existing license, the
ability to obtain a future license, and our ability to conduct business in one
or more jurisdictions. The licensing approval and finding of suitability
processes can be lengthy and expensive. On Native American lands, regulations
result from the laws of each tribe, the provisions of IGRA, and various
tribal-state compacts. Many jurisdictions have comprehensive licensing,
reporting, and operating requirements with respect to the manufacture,
development, assembly, support, distribution, sale, lease, use, and operation of
bingo and bingo-related products, including electronic bingo equipment. These
requirements have a direct impact on the conduct of our day-to-day operations.
In substantially all 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.





6
 Nevada Regulation and
Licensing




As of
October 2008, we were successful in obtaining unconditional licenses from 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 our officers and directors
suitable to hold such positions in the company. The foregoing licenses, findings
of suitability, and related approvals are limited only by the annual renewal
process set forth by the Nevada Gaming Commission for all license
holders.




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




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.





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 deemed to be consistent with holding voting
securities for investment purposes only include:


7


1.
            voting
      on all matters voted on by
stockholders;


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


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




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




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




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


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


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


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




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





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


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


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


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




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




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




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




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


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


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




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




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




8


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




Native
American Regulation




Gaming on
Native American lands, including the terms and conditions under which gaming
equipment can be sold or leased to Native American tribes, is or may be subject
to licensing and regulation under IGRA and other laws of the federal government,
the tribes, and the host state, where applicable. Under IGRA, gaming activities
are classified as Class I, II, or III. Class I gaming includes social
games played solely for prizes of minimal value, or traditional forms of Native
American gaming engaged in as part of, or in connection with, Native American
ceremonies or celebrations. Class II gaming includes bingo and other card
games authorized or not explicitly prohibited and played within the host state,
but does not include banking card games, such as baccarat or blackjack.
Class III gaming includes all forms of gaming that are not Class I or
Class II, including slot machines, casino style games or any other games
not prohibited by the host state. A Native American tribe typically conducts
Class II gaming under IGRA without having entered into a written compact
with its host state if the host state permits similar forms of gaming, but must
enter into a separate written compact with the state in order to conduct
Class III gaming activities. Under IGRA, tribes are required to regulate
all gaming under ordinances approved by the Chairman of the National Indian
Gaming Commission, or NIGC. These ordinances may impose standards and technical
requirements on gaming hardware and software, and may impose registration,
licensing, and background check requirements on gaming equipment manufacturers
and suppliers and their personnel, officers, directors, stockholders,
distributors, vendors, and consultants. The NIGC has undertaken an effort to
provide further clarity with respect to game classification and technical
standards, and this effort continues. The NIGC’s final work product may have a
material adverse effect on our business, results of operations, and financial
condition.




Federal
Regulation




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





Regulation
of Electronic Bingo Systems




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




Application
of Future or Additional Regulatory Requirements




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




9


Employees




As of
January 28, 2009, we had approximately 208 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.
 
 Our
business is vulnerable to changing economic conditions and current unfavorable
economic conditions have and could continue to negatively impact the play levels
of our bingo and box equipment, our product sales, and our ability to collect
outstanding receivables from our customers.
  Existing
unfavorable domestic and international general economic conditions reduce
disposable income of bingo and casino patrons and result in fewer
patrons.  This decline in disposable income likely results in reduced
play levels on our bingo and box equipment, causing our cash flows and revenues
from our recurring revenue products to decline.  Current unfavorable
economic conditions have also resulted in a tightening in credit markets,
decreased liquidity in many financial markets, and resulted in significant
volatility in the credit and equity markets.  A decline in the
relative health of the gaming industry and the difficulty or inability of our
customers to obtain adequate levels of capital to finance their ongoing
operations would reduce their resources available to purchase our products and
services, which would adversely affect our revenues.  Current
unfavorable economic conditions could impact the ability of our customers to
make timely payments to us.  If that were to occur, we may incur
additional provisions for bad debt.
  Economic
factors beyond our control may adversely affect our investments and we may incur
additional impairment charges to our investment portfolio.
  As of
November 2, 2008, we had $3.9 million of principal invested in Auction Rate
Securities (“ARS”), representing interests in collateralized debt obligations
supported by pools of residential and commercial mortgages or credit cards,
insurance securitizations and other structured credits, including corporate
bonds. Some of the underlying collateral for the ARS held by us consists of
sub-prime mortgages. The estimated market value of our ARS holdings at November
2, 2008, was $0.6 million, which reflected a $3.3 million adjustment to the
principal amount of $3.9 million.
  Although
seven of the eight ARS continue to pay interest according to their stated terms,
based on the fair value of the investments and an analysis of
other-than-temporary impairment factors, we have recorded an impairment charge
of approximately $3.3 million in the 53 weeks ended November 2, 2008. This
impairment charge reflects the portion of ARS holdings that is an
other-than-temporary decline in value.
  The
credit and capital markets could continue to deteriorate in 2009. If
uncertainties in these markets deteriorate further or we experience any
additional rating downgrades on any investments in our portfolio (including
ARS), we may incur additional impairment charges to our investment portfolio,
which could negatively affect our financial condition, cash flow and reported
earnings.
 
 Compliance
with Nevada regulations is time-consuming and expensive and failure to comply
could have a material adverse effect on our operations.
 
 As of
November 2, 2008, we were successful in obtaining unconditional licenses from
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 our officers and directors
suitable to hold such positions in the company. The foregoing licenses, findings
of suitability, and related approvals are subject to an annual renewal process
set forth by the Nevada Gaming Commission for all license holders. Under Nevada
gaming law all directors, officers and 10% or greater shareholders of companies
seeking registration and licensing by the Commission are required to file a
licensing application and receive a finding of suitability at the discretion of
the Commission on the recommendation of the Gaming Board.  Our
equipment is subject to evaluation and approval by the state of Nevada prior to
product placement or installation. Each of our products that are in distribution
in Nevada have been submitted to and approved by the state of Nevada. If we are
ever denied a renewal of our Nevada licenses, we may not be able to place our
electronic bingo systems or slot machines with Nevada customers and, depending
upon the reason for the denial, may be required to relocate our operations
outside the state, which may have a material adverse effect or our business,
results of operations, and financial condition.
 
 10
 If
our electronic bingo units were  classified as Class III bingo
systems under the Indian Gaming Regulatory Act, we may not be able to obtain the
necessary approvals to operate our business, or we may have to modify our
systems to remain classified as Class II bingo systems.
 Our
operations in Native American gaming halls, which generated approximately 12.5%
of our bingo revenue during fiscal 2008, 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.
 
 Our
compliance with several governmental and other regulations is costly and
subjects our company to significant risks.
  We must
maintain the existing licenses and approvals necessary to operate in our
existing markets and obtain the necessary licenses, approvals, findings of
suitability, and product approvals in all additional jurisdictions in which we
intend to distribute our products.  The licensing and approval
processes can involve extensive investigation into our company and our products,
officers, directors, certain personnel, significant stockholders, and other
associated parties, all of which can require significant expenditures of time
and resources.  We must also comply with applicable regulations for
our activities in any international jurisdiction into which we conduct
business.  We may not receive licensing or other required approvals in
a timely manner in the jurisdictions in which we are currently seeking such
approval.  The regulations relating to company and product licensing
are subject to statutory amendment and/or change in interpretation, and other
jurisdictions, including the federal government, may elect to regulate or tax
bingo, box or other gaming products.  We cannot predict the nature of
any such changes or the impact that such changes would have on our
business.  The loss of a license in a particular jurisdiction may
prohibit us from generating revenue in that jurisdiction, may prohibit us from
installing or maintaining our terminals in other jurisdictions, and may have a
material adverse effect on our business, results of operations, and financial
condition.
 
 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. (“box business”) 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 the box business was
the largest acquisition undertaken by our company.  The success of
this strategic acquisition will depend in large part on our management’s ability
to integrate, maintain and grow the box 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 maintaining adequate internal
      controls, and
 ·
              maintaining
      the box business’ customers and growing the customer base and
      markets.
  In
addition, our box 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.
 
 If
deterioration of the economy continues, this could cause additional financial
and stock market declines, which could lead to reduced earnings and could result
in future goodwill impairments .
 
 In the
fourth quarter of fiscal year 2008, we recorded a goodwill impairment charge of
$10.8 million related to our acquisition of Summit.  As of November 2,
2008, the remaining goodwill amounted to $25.9 million of which $10.2 million is
the bingo division and $15.7 million is the box division. Factors we consider
important that could trigger an impairment review include significant
underperformance relative to historical or projected future operating results,
significant changes in the manner of the use of our assets or the strategy for
our overall business and significant negative industry or economic
trends.  If current economic conditions worsen causing decreased
revenues and increased costs we may have further goodwill
impairments.  For additional information see Item 7 “Impairment of Long –lived Assets,
Goodwill and Intangible Assets”.
 
     11
 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.
  As of
July 31, 2008, we carried out an evaluation under the supervision of our
management including the CEO and CFO, and with the participation of an outside
accounting firm, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e).
Based on this evaluation, the CEO and CFO determined that there existed
significant deficiencies and possible material weaknesses in our internal
control over financial reporting, particularly regarding sufficient
documentation issues found in our initial review of the internal controls
relative to Summit revenue and other controls, which required remediation. Our
management developed and implemented the remediation plan and effectively
remediated the possible material weaknesses and the significant deficiencies
prior to November 2, 2008.
  In fiscal
2007, we identified a significant deficiency in our accounting for revenue
related to software contracts with multiple delivery elements which could
adversely affect our ability to record the financial information in accordance
with generally accepted accounting principles. An adjustment to our revenue
related to a single non-standard arrangement with multiple delivery elements was
reflected in our consolidated financial statements for fiscal 2007.  
Our procedures for review of software contracts with multiple delivery elements
were updated and we continued to increase the skill and experience level of
senior management.  In addition, we developed 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 in fiscal
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.  We cannot guarantee that we will not identify significant
deficiencies and/or material weaknesses in our internal controls in the future,
and our failure to maintain effective internal controls over financial reporting
in accordance with Section 404 of the Sarbanes-Oxley Act could have a material
adverse effect on our business and stock price.
  We have incurred
significant debt in connection with our New Credit Facility and acquired real
property.
  On August
22, 2008, we entered into a Senior Secured Credit Facility (the “New Credit
Facility”) with U.S. Bank N.A. as lender, lead arranger and administrative
agent, and Bank of the West as lender (collectively “Lenders”) that provides up
to $40.0 million of financing.  The New Credit Facility is being used
(i) to refinance our prior credit facility, (ii) acquire real property as
described below, and (iii) for general corporate purposes.
  The New
Credit Facility also provided for a Senior Secured Term Credit Facility (the
“Term Loan”) of $38.0 million that required monthly interest payments beginning
September 30, 2008, and quarterly principal payments of approximately $1.1
million beginning October 31, 2008, until its maturity on August 28, 2013, when
the balance will be due in full. The interest rate for the term loan varies
based upon the one-month LIBOR rate plus 2.80%. In connection with the Term Loan
agreement, the Company also entered into an interest rate swap agreement with
U.S. Bank N. A., which exchanged the variable one-month LIBOR rate of the
Term Loan for a fixed LIBOR rate of 3.99% per annum effective August 22,
2008, through the maturity of the Term Loan. As of November 2, 2008, there was
$36.9 million outstanding under the Term Loan at an average interest rate of
6.79% and the value of the interest rate swap was ($0.7) million.
  The New
Credit Facility provides a Senior Secured Revolving Credit Facility (the
“Revolver”) of $2.0 million, maturing on August 31, 2010, with monthly
interest-only payments due on the last day of each month beginning September 30,
2008. The Company selects the interest rate calculation for each advance under
the Revolver from two allowable interest rate calculations. The first allowed
interest rate calculation is the higher of the Agent’s prime rate or the Federal
Funds rate plus 0.50% (a “Base Rate Loan”) minus 0.25%.  The second
allowed interest rate calculation is the 1, 2, 3, 6, or 12-month LIBOR rate plus
2.0%. As of November 2, 2008, there were no outstanding borrowings under the
Revolver.
  On August
22, 2008, and concurrent with the closing of the New Credit Facility, we
purchased from RKD Holdings, L.L.C. certain real property in southwest Reno,
Nevada for an aggregate purchase price of $7.2 million.  The real
property includes an approximately 100,000 square foot building that will be
used as our new headquarters.  Pursuant to the New Credit Facility, we
will invest approximately $2.7 million in additional improvements to the
interior of the building to add office space, and provide for the manufacturing
and assembly needs of bingo, box and slot equipment.  The building
improvements are being funded by proceeds from the New Credit Facility and are
held in a construction control account with U.S. Bank N.A.
  12
 Servicing
this debt will require a significant amount of cash, and our ability to generate
the required cash depends on our ability to successfully manage our business and
upon other factors some of which are beyond our control.  The
agreement governing the debt contains substantial affirmative and restrictive
covenants, including the maintenance of certain financial ratios.  A
breach of any of our obligations under the debt agreement can result in a
default allowing the Lenders to elect to declare all amounts outstanding
together with accrued interest to be immediately due and payable.  At
November 2, 2008, the fixed charge coverage ratio did not meet the minimum
requirement specified in the New Credit Facility.  On January 28,
2009, the Company entered into an amendment with both lenders of the New Credit
Facility (“Amendment”).  The Amendment waives the fixed charge
coverage ratio requirement for the fiscal 2008 year end.  The
Amendment also reduces the minimum fixed charge coverage ratio for the first
fiscal quarter of 2009, increases the base rate on the Revolver by 0.25%, and
increases the LIBOR spread on the Revolver from 2.0% to 2.5%.  At
November 2, 2008, we were in compliance with all the covenants as
amended.
  We
must continue to meet NASDAQ Global Market continued listing requirements or we
risk delisting.
  Our
common stock is listed on the NASDAQ Global Market.  In order to maintain
that listing, we are required to satisfy minimum financial and other continued
listing requirements, including, without limitation, maintaining a $1.00 per
share minimum closing bid price for our common stock.  In response to
current market conditions, NASDAQ has temporarily suspended the enforcement
rules requiring the minimum $1.00 closing bid price through April 19,
2009.
  If the
closing bid price of our common stock is below $1.00 for 30 consecutive business
days after April 19, 2009, we could receive notice from NASDAQ stating that the
minimum bid price of our common stock is below continued listing
standards.  To regain compliance, our common stock would need to close at
$1.00 or more for any 10 consecutive business days during the 180 calendar days
following our receipt of the notice.  If we are unable to regain compliance
within 180 calendar days, NASDAQ would determine whether we meet the initial
listing criteria for the NASDAQ Capital Market other than the bid price
requirement.  If we met such criteria, we would be afforded an additional
180 calendar days to regain compliance with the minimum bid price
rule.
  Given
current economic conditions and the volatility of our stock price, there is no
guarantee that we will be in compliance with the NASDAQ Global Market’s minimum
bid requirement when the suspension is lifted.  If we are unable to meet
the minimum bid when the temporary suspension is lifted, or if we fail to
satisfy any other continued listing standard under the NASDAQ Global Market
rules, NASDAQ may commence delisting proceedings against us. If we were to be
delisted, the market liquidity of our common stock would likely be adversely
affected and the market price of our common stock would likely decrease. 
In addition, our stockholders’ ability to trade or obtain quotations on our
shares could be severely limited because of lower trading volumes and
transaction delays.  These factors could contribute to lower prices and
larger spreads in the bid and ask price of our common stock.
  Our
success depends on our ability to respond to rapid market changes and product
enhancements.
  Our
products utilize hardware components developed primarily for the personal
computer industry, which is characterized by rapid technological change and
product enhancements.  Should any of our current or potential
competitors succeed in developing a better electronic bingo system or box, those
competitors could be in a position to outperform us in our ability to exploit
developments in microprocessor, video technology, or other multimedia
technology.  The emergence of an electronic bingo system or box that
is superior to ours in any respect could substantially diminish our revenue and
limit our ability to grow.  Any failure of our company to respond to
rapid market changes and product enhancements could have a material adverse
effect on our business, results of operations, and financial
condition.
  We
must retain and extend our existing relationships with customers and secure new
customers.
  We derive
all of our revenue and cash flow from our portfolio of contracts to lease
electronic bingo products to customers as well as from our relationships with
established customers in our box markets.  Our bingo lease contracts
are primarily for terms ranging from one to three years and not all contracts
preclude customers from using electronic bingo products of our
competitors.  Upon the expiration of a contract, a customer may decide
to use a competitive bidding process to award a new contract.  We may
be unsuccessful in winning the new contract or be forced to reduce the pricing
structure in the new contract.  Our box customers have multiple
choices of suppliers of gaming equipment, and we may be unable to attract and
retain customers in those markets.  Our inability to attract new and
retain existing box customers at terms acceptable to us, could, depending on the
circumstances, have a material adverse effect on our business, results of
operations, and financial condition.
  We
depend on our relationships with our distributors.
  We derive
a significant portion of our revenue from customers serviced through
distributors in both the bingo and box business.  Our bingo
distributors place our products with our customers and often maintain the
primary relationship with the bingo halls.  Generally, we, or our
distributors
 13
 enter
into one- to three-year agreements with customers for the use of our systems and
terminals.  We rely on our distributors exclusively in the states in
which the law requires us to place our systems and terminals through qualified
distributors.  The loss of our relationship with one or more of our
distributors may require us to develop our internal sales force or engage new
distributors to place our systems and terminals, which could be time consuming
and expensive.  The loss of one or more of our significant
distributors may have a material adverse effect on our business, results of
operations, and financial condition.
  We
rely on the Texas, Montana, and Louisiana markets for a significant portion of
our revenue.
  The
concentration of our revenue in the Texas, Montana, and Louisiana 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 16% of fiscal 2008 bingo revenue and 13% of consolidated
revenue; the Montana market generated approximately 44% of box revenue and 9% of
consolidated revenue, while the Louisiana market generated approximately 44% of
box revenue and 11% of consolidated revenue. Furthermore, the loss of or
inability of our company to find suitable distributors in Texas and Louisiana,
where state law requires electronic bingo devices and systems to be placed
through qualified distributors, could cause a material adverse effect on our
business, results of operations, and financial condition.
  The
electronic bingo, box, and server-based gaming industries are extremely
competitive.
  The
electronic bingo industry is characterized by intense competition based on,
among other things, the ability to enhance the operations of and to generate
incremental sales for bingo operators through product appeal to players, ease of
use, ease of serviceability, customer support and training, distribution, name
recognition, and price.  Increased competition may result in price
reductions, reduced operating margins, conversion of terminals from lease to
sale, and loss of market share.  The box industry is also
characterized by intense competition that is based upon the ability to develop
new gaming content that will appeal to a variety of gaming
customers.  Increased competition may result in a need to increase
game development activity, price reductions, providing extended payment terms,
or increased commissions to distributors.  We believe server-based
gaming will be the next significant technological development in the gaming
industry.  The continuing development of server-based gaming will
require additional resources that could be allocated to other areas, and the
failure to effectively bring server-based gaming to market could have a negative
impact on our financial condition.  All of these factors could
materially and adversely affect our business, operating results and financial
condition.
  Additionally,
many of our competitors do not face the same level of public company costs and
administrative costs that we face.  Furthermore, existing and new
competitors may expand their operations in our existing or potential new
markets.  In addition, our electronic bingo business competes with
other similar forms of entertainment, including casino gaming and
lotteries.  In Native American casinos, competition for space on the
casino and bingo room floor is very intense.  All forms of gaming
compete for square footage at Native American casinos.  We can make no
assurances that Native American casinos currently leasing our equipment will not
significantly limit the play of bingo or eliminate it
entirely.  Additionally, as we expand into new Class II and Class III
markets we will face intense competition from existing competitors who have many
years of established track records in those markets.  We can make no
assurances that we can successfully penetrate these markets with our newly
developed Class II and Class III gaming machines.
  Investors
may not be able to exercise control over our company as a result of our
Chairman’s ownership.
  Our
Chairman of the Board, Richard Fedor, beneficially owns approximately 16% of our
outstanding common stock.  As a result, the Chairman of our company
can significantly influence the management and affairs of our company and all
matters requiring stockholder approval, including the election of directors and
approval of significant corporate transactions.  This concentration of
ownership could have the effect of delaying or preventing a change in control of
our company, even when such change of control is in the best interests of
stockholders.  This concentration of ownership might also adversely
affect the market price of the common stock and the voting and other rights of
the company’s other stockholders.
  We
must be able to attract and retain skilled employees.
  Our
success depends largely on recruiting and retaining talented
employees.  The market for qualified executives and highly skilled,
technical workers is intensely competitive.  The loss of key employees
or an inability to hire a sufficient number of technical staff could have a
material adverse effect on our business, financial condition, and results of
operations.
      14
 Acquisitions
could divert management’s time and attention, dilute the voting power of
existing stockholders, and have a material adverse effect on our
business.
 As part
of our growth strategy, we may acquire complementary businesses and
assets.  Acquisitions that we may make in the future could result in
the diversion of time and personnel from our existing business.  We
also may issue shares of common stock or other securities in connection with acquisitions,
which could result in the dilution of the voting power of existing stockholders
and could dilute earnings per share.  Any acquisitions would be
accompanied by other risks commonly encountered in such transactions, including
the following:
 ·
                difficulties
      integrating the products, operations, and personnel of acquired
      companies;
 ·
                the
      additional financial resources required to fund the operations of acquired
      companies;
 ·
                the
      potential disruption of our
business;
 ·
                our
      ability to maximize our financial and strategic position by the
      incorporation of acquired technology or businesses with our product
      offerings;
 ·
                the
      difficulty of maintaining uniform standards, controls, procedures, and
      policies;
 ·
                the
      potential loss of key employees of acquired
  companies;
 ·
                the
      impairment of employee and customer relationships as a result of changes
      in management;
 ·
                significant
      expenditures to consummate acquisitions;
and
 ·
                difficulties
      in meeting applicable regulatory requirements, including obtaining
      necessary licenses.
  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.
  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 27, 2009, we had 11,706,269 outstanding shares of common stock.
Approximately 9.5 million of such shares are eligible for resale in the public
market without restriction or further registration. The remaining approximately
2.2 million shares of common stock outstanding are held by affiliates of our
company and may be sold without registration only in compliance with the volume
and other limitations of Rule 144. Sales of substantial amounts of common
stock by stockholders in the public market, or even the potential for such
sales, are likely to adversely affect the market price of the common stock and
could impair our ability to raise capital by selling equity securities.
Moreover, the shares of common stock issuable upon exercise of 612,150
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.
     
 15
 We
have limited protection of our intellectual property.
 
 We regard
our products as proprietary and rely primarily on a combination of patent law,
copyrights, trademarks, trade secret laws, licensing agreements, and employee
and third-party non-disclosure agreements to protect our proprietary rights.
Defense of intellectual property rights can be difficult and costly, and we may
not be able to protect our technology from misappropriation by competitors or
others. In addition, the protections offered by trademark, copyright, and trade
secret laws may not prevent a competitor from designing electronic bingo systems
or box gaming content that have the appearance and functionality that closely
resemble our systems.
 
 As the
number of electronic bingo terminals and boxes increase and the functionality of
these products further overlaps, we may become subject to infringement claims,
with or without merit. Intellectual property-related claims or litigation can be
costly and can result in a significant diversion of management’s attention. Any
settlement of such claims or adverse determinations in such litigation could
also have a material adverse impact on our business, results of operations, and
financial condition.
 
 Our
Stockholders’ Rights Plan may adversely affect existing
stockholders.
 
 Our
Stockholders’ Rights Plan may have the effect of deterring, delaying, or
preventing a change in control that might otherwise be in the best interests of
our stockholders. Under the Rights Plan, we issued a dividend of one Preferred
Share Purchase Right for each share of our common stock held by stockholders of
record as of the close of business on March 17, 2003.
 
 In
general, subject to certain limited exceptions, the stock purchase rights become
exercisable when a person or group acquires 15% or more of our common stock or a
tender offer or exchange offer for 15% or more of our common stock is announced
or commenced. After any such event, our other stockholders may purchase
additional shares of our common stock at 50% of the then-current market price.
The rights will cause substantial dilution to a person or group that attempts to
acquire us on terms not approved by our board of directors. The rights may be
redeemed by us at $0.01 per stock purchase right at any time before any person
or group acquires 15% or more of our outstanding common stock. The rights should
not interfere with any merger or other business combination approved by our
board of directors. The rights expire on March 17, 2013.
  Item 1B. Unresolved Staff
Comments
  None.
 Item
2.   Properties
 
 On August
22, 2008, we purchased from RKD Holdings, L.L.C. certain real property in
southwest Reno, Nevada.  The real property consists of approximately 5
acres with a building of approximately 100,000 square feet that will be used as
our new headquarters and for manufacturing operations.  We have
invested in additional improvements to the interior of the building to add
office space, and provide for the manufacturing and assembly needs of bingo and
box equipment.  Please see Note 4 “Credit Agreements and Acquisition of
Real Property” to our Consolidated Financial Statements contained herein
for further discussion of the financing for this purchase.  The loan
we obtained to finance the purchase is secured by a first mortgage on this real
property.  We expect to complete the building improvements and
relocate to our new corporate headquarters by the beginning of our second fiscal
quarter in 2009.
 
 Presently,
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 are
currently working with our landlord regarding sub-lease
opportunities.
 
 We
operate two regional facilities for our bingo operations: an 8,080 square-foot
site in Broadview Heights, Ohio, and a 1,790 square-foot site in Southlake,
Texas. The Ohio lease expires May 31, 2010, and the Texas lease expires December
31, 2010. We also lease two facilities in Billings, Montana for our box
operations: a 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. With the addition of our new headquarters,
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, we filed GameTech
International, Inc. v. Trend Gaming Systems, LLC, CIV 01-0540 PHX LOA, a claim
in the United States District Court for the District of Arizona, seeking a
declaratory judgment that we were not in material breach of our November 1, 1999
Distribution Agreement with Trend Gaming Systems, LLC (“Trend”) (involving a
distribution agreement in Texas), and seeking damages for past due payments and
wrongful withholdings by Trend. Trend counterclaimed, alleging that its payments
were in compliance with its contractual obligations. Trend also contended that
we were in breach of certain of our contractual obligations to Trend, including
that we had wrongfully terminated Trend. On December 16, 2002, the court
entered, at our request, an order enjoining Trend from using approximately
$540,000 in funds it had collected on our behalf, pending a trial on our
ownership interest in those funds. The money was placed in two bank
accounts/constructive trusts, subject to the court’s control. The sums in those
accounts now total approximately $600,000. In addition, collections of accounts
receivable by Trend, if any, are also being placed in that account, pending the
resolution of the case. We had posted a $450,000 deposit with the court as a
bond, which is presented as restricted cash on our condensed consolidated
balance sheets. The accounts receivable from Trend were fully reserved as of
October 31, 2007.
     16
  During
the quarter ended April 30, 2008, we wrote off all receivables and related
reserves. Trial in this matter commenced October 4, 2004. On November 1,
2004, the jury returned a verdict in favor of Trend against us in the amount of
$3.5 million in compensatory damages. The jury also awarded us $735,000 in
compensatory damages against Trend for funds Trend collected on our behalf but
failed to remit to us. The court denied all of our post-trial motions, except
that it maintained the injunction imposing a constructive trust, pending
resolution of the issues on appeal. The court setoff the jury awards and entered
an amended judgment for Trend on May 12, 2005, in the amount of $2.8 million,
plus interest on that sum at the rate of 3.31% per annum beginning March 30,
2005. We appealed to the United States Court of Appeals for the Ninth Circuit on
April 8, 2005. We posted a supersedeas bond on April 8, 2005 in the
court-appointed amount of $3.4 million, which bond stays any action by Trend to
collect on the judgment, pending appeal. Trend initially sought an award of
$810,000 in legal fees and $26,000 in expenses and costs. In an amended request,
Trend sought an award of $1.4 million in legal fees and $61,000 in expenses and
costs. The court awarded Trend $909,000 in legal fees, expenses and costs plus
interest of 3.77% per annum beginning August 5, 2005. We appealed the fee award
to the United States Court of Appeals for the Ninth Circuit on August 5, 2005.
We posted an additional supersedeas bond with the court on August 18, 2005 in
the amount of $1.1 million, thereby staying any action by Trend to collect the
fees, pending appeal. For the year ended October 31, 2004, we recorded an
estimated loss contingency in the Trend litigation of $3.6 million, which was
estimated based on the amounts of the judgment described above. We also 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.
 
 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 as pre-trial motions and issues are currently
being addressed.  Additionally, as a result of this decision, the
supersedeas bonds posted by GameTech International prior to filing 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. The rights to the judgments in this matter have
now been assigned to a third party collection entity for them to
pursue.  The assignment provides we are to receive forty percent of
whatever is collected after they deduct their reasonable out-of-pocket
collection costs.  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
 PART
II


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


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


High
              
              
              LowYear
      Ended October 31, 2007First
      Quarter
              
              $
              12.90
              
              
              $
              9.10Second
      Quarter
              
              $
              14.20
              
              
              $
              9.85Third
      Quarter
              
              $
              12.08
              
              
              $
              8.69Fourth
      Quarter
              
              $
              8.70
              
              
              $
              4.8853
      Weeks Ended November 2, 2008First
      Quarter
              
              $
              8.63
              
              
              $
              5.33Second
      Quarter
              
              $
              7.19
              
              
              $
              4.95Third
      Quarter
              
              $
              6.21
              
              
              $
              3.75Fourth
      Quarter
              
              $
              4.49
              
              
              $
              2.01


17
 On
January 27, 2009, the last reported sales price of our common stock was
$1.24 per share. On January 27, 2009, there were 132 record holders of our
common stock.





Performance
Graph




The
following graph reflects the cumulative total return (change in stock price plus
reinvested dividends) of a $100 investment in our common stock for the five-year
period for our fiscal years ended October 31, 2004 through 2007 and 53 weeks
ended November 2, 2008 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, ESI Entertainment Systems, Inc., Great
Canadian Gaming Corp., Lakes Entertainment, Inc., Las Vegas From Home.com
entertainment, Magna Entertainment Corp., MTR Gaming Group, Inc., Multimedia
Games, Inc., Pacific Lottery Corp., Pinnacle Entertainment, Inc., Pokertek,
Inc., The9 Limited, and Youbet, Inc.  The comparisons are not intended
to forecast or be indicative of possible future performance of our common
stock.


10/31/03
            10/31/04
            10/31/05
            10/31/06
            10/31/07
            11/2/08GameTech
      International, Inc.
            100.00
            119.52
            120.45
            300.37
            262.33
            71.24NASDAQ
      Composite
            100.00
            103.83
            112.24
            127.86
            155.38
            90.90Gaming
      Activities Industry
            100.00
            95.16
            97.61
            123.32
            147.39
            60.39






18







Dividend
Policy




During
2008 and 2007, the Company did not declare or pay any dividends.  We
are prohibited from paying cash dividends under the terms of our current credit
facility.  Any payment of dividends in the future 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.


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 purchasers” 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 2008, in
the format required by SEC rules:




Total
      Number
            
            
            Maximum
      Dollarof
      Shares
            
            
            Amount
      ofPurchased
            
            
            Shares(in
      thousands) as
            
            
            (in
      thousands)Total
            
            
            Average
            
            
            Part
      of Publicly
            
            
            That
      May Yet BeNumber
      of
            
            
            Price
            
            
            Announced
            
            
            PurchasedShares
            
            
            Paid
      per
            
            
            Plans
      or
            
            
            Under
      the PlansPurchased
            
            
            Share
            
            
            Programs(1)
            
            
            Programs(1)August
      1, 2008 – August 31, 2008
            
            
            —
            
            
            $
            —
            
            
            
            —
            
            
            $
            1,335September 1,
      2008 – September 30, 2008
            
            
            9,400
            
            
            $
            3.02
            
            
            
            9,400
            
            
            $
            1,307October 1,
      2008 – November 2, 2008
            
            
            332,568
            
            
            $
            2.92
            
            
            
            332,568
            
            
            $
            337Total
            
            
            341,968
            
            
            $
            2.92
            
            
            
            341,968
            
            
            $
            337






(1)
            On
      September 4, 2007 the Board of Directors announced that it authorized
      expending up to $5.0 million in a share repurchase program.  On
      September 16, 2008, this program was extended through close of the trading
      day December 31, 2008.  The actual amount and timing of dollars
      expended and shares repurchased are subject to business and market
      conditions and applicable SEC rules.  As of December 31, 2008,
      we had acquired 918,943 shares at a cost of approximately $4.7
      million.  This program is now expired, with no additional shares
      purchased.




Item 6.   Selected
Financial Data




The
selected consolidated statement of operations data for the 53 weeks ended
November 2, 2008 and fiscal years ended October 31, 2007, and 2006 and the
selected consolidated balance sheet data set forth below as of November 2, 2008
and October 31, 2007, 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,
2005 and 2004 and the selected consolidated balance sheet data set forth below
at October 31, 2006, 2005 and 2004 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.



















19





53
      Weeks Ended November 2
            
            
            Fiscal
      Years Ended October 31,2008
      (1)
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004(In
      thousands, except per share amounts)Statements
      of Operations Data:Net
      revenue
            
            $
            55,447
            
            
            $
            58,805
            
            
            $
            49,289
            
            
            $
            49,651
            
            
            $
            51,490Cost
      of revenue
            
            
            25,365
            
            
            
            26,542
            
            
            
            19,929
            
            
            
            20,304
            
            
            
            24,027Gross
      profit
            
            
            30,082
            
            
            
            32,263
            
            
            
            29,360
            
            
            
            29,347
            
            
            
            27,463Operating
      expenses:General
      and administrative
            
            
            11,017
            
            
            
            9,538
            
            
            
            8,303
            
            
            
            11,406
            
            
            
            11,154Sales
      and marketing
            
            
            10,519
            
            
            
            10,519
            
            
            
            11,041
            
            
            
            11,952
            
            
            
            12,561Research
      and development
            
            
            5,591
            
            
            
            3,865
            
            
            
            2,885
            
            
            
            4,058
            
            
            
            5,179Goodwill
      impairment
            
            ­­10,780
            
            
            ­­—
            
            
            
            —
            
            
            
            —
            
            
            
            6,625Gain
      on sale of assets
            
            
            —
            
            
            
            (656
            )
            
            
            —
            
            
            
            —
            
            
            
            —Loss
      contingencies
            
            
            —
            
            
            
            124
            
            
            
            133
            
            
            
            137
            
            
            
            3,628Total
      operating expenses
            
            
            37,907
            
            
            
            23,390
            
            
            
            22,362
            
            
            
            27,553
            
            
            
            39,147Income
      (loss) from operations
            
            
            (7,825
            )
            
            
            8,873
            
            
            
            6,998
            
            
            
            1,794
            
            
            
            (11,684
            )Interest
      Expense
            
            
            (4,624
            )
            
            
            (2,342
            )
            
            
            (10
            )
            
            
            (13
            )
            
            
            (31
            )Impairment
      of investments
            
            
            (3,306
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Other
      income (expense), net
            
            
            181
            
            
            
            807
            
            
            
            356
            
            
            
            89
            
            
            
            89Income
      (loss) before income taxes
            
            
            (15,574
            )
            
            
            7,338
            
            
            
            7,344
            
            
            
            1,870
            
            
            
            (11,626
            )Provision
      for (benefit from) income taxes
            
            
            (4,411
            )
            
            
            2,667
            
            
            
            2,961
            
            
            
            534
            
            
            
            (1,720
            )Net
      Income (loss)
            
            $
            (11,163
            )
            
            $
            4,671
            
            
            $
            4,383
            
            
            $
            1,336
            
            
            $
            (9,906
            )Net
      income (loss) per share:Basic
            
            $
            (0.92
            )
            
            $
            0.37
            
            
            $
            0.36
            
            
            $
            0.11
            
            
            $
            (0.84
            )Diluted
            
            $
            (0.92
            )
            
            $
            0.36
            
            
            $
            0.34
            
            
            $
            0.11
            
            
            $
            (0.84
            )Shares
      used in the calculation of net income (loss) per shareBasic
            
            
            12,190
            
            
            
            12,566
            
            
            
            12,181
            
            
            
            11,868
            
            
            
            11,775Diluted
            
            
            12,190
            
            
            
            12,991
            
            
            
            12,757
            
            
            
            11,960
            
            
            
            11,775Cash
      dividends per common share
            
            $
            0.00
            
            
            $
            0.00
            
            
            $
            0.00
            
            
            $
            0.03
            
            
            $
            0.21





53
      Weeks Ended November 2
                
                
                Fiscal
      Years Ended October 31,2008(1)
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004(In
      thousands, except per share amounts)Balance
      Sheet Data:Cash,
      cash equivalents and short-term
                  investments
                
                $
                6,076
                
                
                $
                11,393
                
                
                $
                12,819
                
                
                $
                6,833
                
                
                $
                8,706Restricted
      cash
                
                
                3,158
                
                
                
                502
                
                
                
                4,515
                
                
                
                4,581
                
                
                
                —Working
      capital
                
                
                9,123
                
                
                
                13,954
                
                
                
                15,412
                
                
                
                10,824
                
                
                
                5,209Total
      assets
                
                
                89,495
                
                
                
                93,882
                
                
                
                59,214
                
                
                
                51,130
                
                
                
                51,679Total
      debt
                
                
                37,161
                
                
                
                29,759
                
                
                
                —
                
                
                
                —
                
                
                
                —Total
      stockholders’ equity
                
                $
                39,410
                
                
                $
                54,479
                
                
                $
                49,834
                
                
                $
                41,889
                
                
                $
                40,670
  1.
                The
      decrease in total assets in 2008 was primarily due to the impairment
      charge related to goodwill of $10.8 million associated with our
      acquisition of Summit and the impairment charge of $3.3 million related to
      our investments in auction rate securities, offset by the purchase of real
      property from RKD Holdings.  For additional information see Note
      1 “Business and Summary
      of significant Accounting Policies” and Note 4 “Credit Agreements and
      Acquisition of Real Property” to our Consolidated Financial
      Statements contained herein.The
      increase in restricted investments in 2008 was due to proceeds from our
      new credit agreement that are restricted for construction use only on the
      real property mentioned above.The
      increase in the total debt in 2008 was due to our incurrence of long-term
      debt to finance the purchase of real property from RKD
      Holdings.  For additional information, see Note 4 “Credit Agreements and
      Acquisition of Real Property” to our Consolidated Financial
      Statements contained herein.2.
                The
      reduction in the restricted cash 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.
 20
   Item 7.   Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
  The
following discussion should be read in conjunction with our consolidated
financial statements and notes thereto included elsewhere in this report. The
following discussion contains certain forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from the
expectations reflected in these forward-looking statements as a result of the
factors set forth in this report, including those set forth under Item 1A, “Risk
Factors.”
  Overview
  We
design, develop, and market bingo systems, VLT’s, slot machines and related
software, and server-based wireless gaming systems.  VLT’s, slot
machines and related software are collectively referred to as “box business”. We
entered the box business in March 2007 with our acquisition of Summit Gaming for
$40.9 million in cash. For the 53 weeks ended November 2, 2008 and our fiscal
years ended October 31, 2007 and 2006, our portable bingo terminals, fixed-base
bingo terminals, and box businesses made the following contributions to
revenue:
   
 Revenue
      Contribution2008
                2007
                2006Portable
      Bingo Terminals
                63%
                64%
                79%Fixed
      Base Bingo Terminals
                16%
                16%
                21%Box
      Equipment
                21%
                20%
                0%
   As of
November 2, 2008, we had bingo systems in service in 40 states, one US
territory, various Native American locations and in five foreign
countries.  We had box sales in 15 states, one US territory, and
various Native American locations.  We are marketing new server-based
wireless gaming systems where users play a range of games including bingo, video
poker, keno and other slot machine games.  The MiniTM wireless
server-based gaming system was installed in Europe during the second quarter of
2008.  The Elite TM server-based gaming system, was installed
domestically in the third quarter of 2008 and in Europe during the first quarter
of fiscal 2009.  The European configuration supports wireless bingo
and fast action gaming for the European bingo market.
 
 We
generate revenue by placing electronic bingo systems in bingo halls under
contracts based on (1) a fixed fee per use per session; (2) a fixed
weekly fee per terminal; or (3) a percentage of the revenue generated by
each terminal. Revenue growth for our bingo systems is affected by player
acceptance of electronic bingo as an addition or an alternative to paper
bingo.  Additionally, our revenue growth is dependent on our ability
to expand operations into new markets and our ability to increase our market
share in our current markets. Fixed-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 the 53 weeks ending November 2, 2008 and fiscal
year ended October 31, 2007, costs of $53,000 and $105,000 were capitalized,
respectively, and amortization occurs over the expected term of the contract. We
record depreciation of bingo equipment over either a three- or five-year
estimated useful life using the straight-line method of
depreciation.
 
 Our box
business generates revenue from the sale of boxes (new and used), software
conversion kits, content fees, license fees, participation fees, parts, and
services. For the 53 weeks ending November 2, 2008 and fiscal year ended October
31, 2007, 95.6% and 91.9%, respectively, of our box business sales were derived
from the sale of new and used equipment, conversion kits, and
parts.  In some instances, we recognize recurring participation
revenue in lieu of a one-time machine sale. Increasing market share in existing
markets and expanding product placement into new markets drives revenue
growth.
 
 Our bingo
and box expenses consist primarily of cost of revenue, general and
administrative expense, sales and marketing expense, and research and
development expense.  Cost of revenue consists of expenses associated
with technical and operational support of the bingo systems in bingo halls,
depreciation and amortization of bingo terminals, cost of sales related to
equipment sold, and repair/refurbishment/disposal costs of bingo terminals and
related support equipment.  General and administrative costs consist
of expenses associated with management of our company and the related support;
including finance and accounting, legal, compliance, information systems, human
resources, allowance for doubtful accounts receivable, and amortization of
intangible assets acquired from the Summit acquisition.  Sales and
marketing expenses consist primarily of commissions paid to distributors for
promoting and supporting our products, and compensation paid to our internal
sales force to manage existing customers, to generate new customers, and sell
additional and upgraded equipment.  Research and development costs
consist of company-sponsored activities to provide customers with new or
enhanced games or game themes for our VLT and slot machines, improved bingo
terminals, and to develop and test new wireless server-based
systems.
 
 
 21
 Fiscal
2008 Highlights
  During
the 53 weeks ended November 2, 2008, we incurred a net loss of $11.2 million,
compared to net income of $4.7 million in fiscal 2007 as a result of various
factors, including primarily the following:
  ·
                $10.8
      million goodwill impairment charge;
 ·
                $3.4
      million decrease in revenue due to a declining economy, increased regional
      competition and pricing pressures;
 ·
                decreased
      total cost of revenue of $1.2 million primarily due to $1.5 million
      decrease in depreciation related primarily to certain assets becoming
      fully depreciated, a decrease of $0.6 million in cost of goods sold
      related directly to decreased revenue, offset by an increase of $0.9
      million in refurbishment, disposals, and obsolescence reserve related to
      bingo equipment as a result of write-offs of units and/or parts on older
      product lines;
 ·
                approximately
      $3.3 million in pre-tax impairment of the value of our investment in
      auction rate securities;
 ·
                net
      interest expense increase of $2.3 million related to the acquisition of
      our box division as well as $0.8 million in debt retirement costs
      associated with the refinancing of our credit facility, $0.4 million in
      prepayment penalties and a $0.7 million charge due to our interest rate
      swap agreement related to the New Credit
  Facility;
 ·
                $1.7
      million increase in research and development expense primarily due to the
      inclusion of 53 weeks reported for 2008 for our box division compared to
      seven months in fiscal 2007;
 ·
                $0.5
      million increase in amortization of the identifiable intangible assets
      purchased in the Summit Gaming acquisition due to the inclusion of 53
      weeks reported for 2008.
  During
the 53 weeks ending November 2, 2008, our capital expenditures increased
approximately 94.0%, or $6.3 million to $13.0 million, from $6.7 million during
fiscal 2007, primarily related to the purchase of our new headquarters in Reno,
Nevada.
 
 Fiscal
Year
 
 We have
adopted the fifty-two/fifty-three week fiscal year beginning with the period
ending on the first Sunday in November of 2008.  The fiscal years
ending October 31, 2007 and 2006 were both on a twelve-month calendar
basis.
  Critical
Accounting Policies and Estimates
  Management’s
Discussion and Analysis of Financial Condition and Results of Operations discuss
our condensed consolidated financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles. The preparation
of these financial statements requires us to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the balance sheet dates and reported
amounts of revenue and expenses during the reporting period. On an ongoing
basis, we evaluate our estimates and judgments, including those related to
revenue recognition, bad debts, bingo terminal depreciation, goodwill
impairment, obsolescence, provision for income taxes, and contingencies and
litigation. We base our estimates and judgments on historical experience and on
various other factors that we believe are reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
  We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements.
 
 Revenue
Recognition
  We
recognize revenue when the following criteria are met:
 
 ·
                persuasive
      evidence of an arrangement between us and our customer
    exists,
 ·
                delivery
      has occurred or services have been
rendered,
 ·
                the
      price is fixed or determinable, and
 ·
                collectability
      is reasonably assured.
 
 We earn
our revenue in a variety of ways. We offer our products for lease or sale. We
also sell service and software updates for equipment previously sold or
leased.
 
 Bingo
Equipment
 Revenue
is recognized for bingo terminals and bingo systems installed as a single
element placed in bingo halls under contracts based on (1) a fixed fee per
use per session; (2) a fixed weekly fee per terminal; or (3) a
percentage of the revenue generated by each terminal. Revenue recognition is a
key component of our results of operations, and determines the timing of certain
expenses, such as commissions.  We recognize 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) collectability is reasonably assured. We exercise
judgment in assessing the credit worthiness of customers to determine whether
collectability is reasonably assured. Should changes in conditions cause us to
determine the factors are not met for future transactions, revenue recognized
for future reporting periods could be adversely affected.
 
 22
 Box
Equipment
 Our
product sales revenues are generated from the sale of VLT’s, conversion kits,
content fees, license fees, participation fees, equipment and services. In some
instances, we recognize recurring participation revenue in lieu of a one-time
machine sale. Revenues are recorded in accordance with American Institute of
Certified Public Accountants’ (“AICPA”) Statement of Position (‘SOP”) No. 97-2
Software Revenue Recognition and are reported net of discounts, sales taxes and
other taxes of a similar nature. Revenues related to contracted production are
recognized as the related work is delivered. We recognize license fee revenues
over the term of the associated agreement unless the fee is in exchange for
products delivered or services performed that represent the culmination of a
separate earnings process. Amounts received prior to completing the earnings
process are deferred until revenue recognition criteria are met.  Our
sales credit terms are predominately 30 days. In certain limited
circumstances, we may extend credit terms up to 160 days.
 
 Deferred
Revenue
 
 Deferred
Revenue consists of amounts received or billed after a product is delivered or
services are rendered, but prior to meeting all of the requirements for revenue
recognition.  Complex systems and/or multiple element contracts may
take several months to complete and our deferred revenues may increase as our
products evolve toward a more systems-centric environment.  Deferred
revenue totaled $3.5 million at November 2, 2008 as compared to $0.8 million at
October 31, 2007, and primarily represents amounts received for future
deliverables.
 
 Reserve
for Bingo Terminal Obsolescence
  We
provide reserves for excess or obsolete bingo terminals on hand that we do not
expect to be used. The reserves are based upon several factors, including our
estimated forecast of bingo terminal demand for placement into bingo halls. The
estimates of demand for future bingo terminals may prove to be inaccurate, in
which case we may have understated or overstated the provision required for
excess and/or obsolete bingo terminals. Although we attempt to assure the
accuracy of our estimated forecasts, any significant unanticipated changes in
demand or technological developments could have a significant impact on the
value of our bingo terminals, results of operations, and financial
condition.
 
 Software
Development Capitalization
  We
capitalize costs related to the development of certain software products that
meet the criteria of 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 capitalize qualified costs of software developed for new
products or for significant enhancements to existing products. We cease
capitalizing costs when the product is available for general release to our
customers. We amortize the costs on a straight-line method over the estimated
economic life of the product beginning when the product is available for general
release.  The achievement of technological feasibility and the
estimate of a products’ economic life require management’s judgment. Any changes
in key assumptions, market conditions or other circumstances could result in an
impairment of the capitalized asset and a charge to our operating
results.
  Allowance
for Doubtful Accounts
  Bingo
Equipment
 We
estimate the possible losses resulting from non-payment of outstanding accounts
receivable arising from the lease of our bingo units.  Our customer
base consists primarily of entities operating in charitable, Native American,
and commercial bingo halls located throughout the United States, Canada, Mexico,
and the United Kingdom. In some jurisdictions, the billing and collection
function is performed as part of a distributor relationship, and in those
instances, we maintain allowances for possible losses resulting from non-payment
by both the customer and distributor. We perform ongoing evaluations of
customers and distributors for credit worthiness, economic trends, changes in
customer payment terms, and historical collection experience when evaluating the
adequacy of our allowance for doubtful accounts. We also reserve a percentage of
accounts receivable based on aging category.  In determining these
percentages, we review historical write-offs of receivables, payment trends, and
other available information. While such estimates have been within our
expectations and the provisions established, a change in the financial condition
of specific customers or in overall trends experienced may result in future
adjustments of estimates of collectability of our receivables.
 
 Box
Equipment
 We
estimate the possible losses resulting from non-payment of outstanding accounts
receivables arising from the sale of boxes and related equipment. Our customer
base consists of 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 Long-lived Assets, Goodwill and Intangible Assets
 
 We review
long-lived assets whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable in accordance with SFAS No.
144, Accounting for the
Impairment or Disposal of Long-lived Assets.  Recoverability of
long-lived assets are measured by a comparison of the carrying amount of the
asset to future net cash flows expected to be generated by the asset
undiscounted and without interest.  If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the
assets.
 
 23
 We review
goodwill for impairment annually at the beginning of our fourth fiscal quarter,
or whenever events or circumstances indicate the carrying value may not be
recoverable in accordance with SFAS No. 142, Goodwill and Other Intangible
Assets.  We perform the impairment analysis of goodwill at a
reporting unit level by comparing the fair value of a reporting unit with its
carrying value, including goodwill.  If the fair value is less than
the carrying value, the impairment to be recognized is measured by the amount by
which the carrying amount of the goodwill exceeds the fair value of the
reporting unit goodwill.
 
 During
the year ended November 2, 2008, we recorded an impairment charge of $10.8
million related to goodwill related to our acquisition of
Summit.  During the same period, there was no impairment charge for
long-lived assets.  During the years ended October 31, 2007 and 2006,
no impairment charges related to long-lived assets and goodwill were
recorded.
 
 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 results of operations and
financial condition.
  Results
of Operations
 
 The
following table sets forth certain selected, unaudited, condensed consolidated
financial data for the periods indicated:
 
 53
Weeks Ended November 2, 2008 compared with the 12 Months Ended October 31,
2007
 
 53
      Weeks Ended November 2, 2008 and 12 Months Ended October 31,
      2007(In
      Thousands)Bingo
      Equipment
                
                
                Box
      Equipment53
      Wks
                
                
                12
      Mths
                
                
                %
      Change
                
                
                53
      Wks
                
                
                7
      Mths
                
                
                %
      ChangeEnded
                
                
                Ended
                
                
                Favorable/
                
                
                Ended
                
                
                Ended
                
                
                Favorable/11/2/08
                
                
                10/31/07
                
                
                (Unfavorable)
                
                
                11/2/08
                
                
                10/31/07
                
                
                (Unfavorable)Net
      Revenue
                
                $
                43,964
                
                
                $
                47,114
                
                
                
                (6.7
                %)
                
                $
                11,483
                
                
                $
                11,691
                
                
                
                (1.8
                %)Cost
      of Revenue
                
                
                19,103
                
                
                
                19,683
                
                
                
                2.9
                %
                
                
                6,262
                
                
                
                6,859
                
                
                
                8.7
                %Gross
      Profit
                
                
                24,861
                
                
                
                27,431
                
                
                
                (9.4
                %)
                
                
                5,221
                
                
                
                4,832
                
                
                
                8.1
                %Operating
      Expenses:General
      and administrative
                
                
                7,637
                
                
                
                7,920
                
                
                
                3.6
                %
                
                
                3,380
                
                
                
                1,618
                
                
                
                (108.9
                %)Sales
      and marketing
                
                
                10,007
                
                
                
                10,028
                
                
                
                0.2
                %
                
                
                512
                
                
                
                491
                
                
                
                (4.3
                %)Research
      and Development
                
                
                3,044
                
                
                
                2,837
                
                
                
                (7.3
                %)
                
                
                2,547
                
                
                
                1,028
                
                
                
                (147.8
                %)Goodwill
      Impairment
                
                
                -
                
                
                
                -
                
                
                
                0.0
                %
                
                
                10,780
                
                
                
                -
                
                
                
                (100
                %)Gain
      on sale of assets
                
                
                -
                
                
                
                -
                
                
                
                0.0
                %
                
                
                -
                
                
                
                (656
                )
                
                
                (100
                %)Loss
      Contingencies
                
                
                -
                
                
                
                124
                
                
                
                100.0
                %
                
                
                -
                
                
                
                -
                
                
                
                0.0
                %Total
      operating expenses
                
                
                20,688
                
                
                
                20,909
                
                
                
                1.1
                %
                
                
                17,219
                
                
                
                2,481
                
                
                
                (594.0
                %)Income
      (loss) from operations
                
                
                4,173
                
                
                
                6,522
                
                
                
                (36.0
                %)
                
                
                (11,998
                )
                
                
                2,351
                
                
                
                (610.3
                %)Interest
      Expense
                
                
                (267
                )
                
                
                (125
                )
                
                
                (113.6
                %)
                
                
                (4,357
                )
                
                
                (2,217
                )
                
                
                (96.5
                %)Impairment
      of investments
                
                
                (3,306
                )
                
                
                -
                
                
                
                (100.0
                )%
                
                
                -
                
                
                
                -
                
                
                
                (100.0
                %)Other
      income (expense), net
                
                
                160
                
                
                
                780
                
                
                
                (79.5
                )%
                
                
                21
                
                
                
                27
                
                
                
                (22.2
                %)Income
      (loss) before income taxes
                
                
                760
                
                
                
                7,177
                
                
                
                (89.4
                %)
                
                
                (16,334
                )
                
                
                161
                
                
                
                (10,245.3
                %)Provision
      (benefit) for income taxes
                
                
                211
                
                
                
                2,667
                
                
                
                92.1
                %
                
                
                (4,622
                )
                
                
                -
                
                
                
                100.0
                %Net
      income (loss)
                
                $
                549
                
                
                $
                4,510
                
                
                
                (87.8
                %)
                
                $
                (11,712
                )
                
                $
                161
                
                
                
                (7,374.5
                %)
 We
acquired substantially all of the assets of Summit on March 28,
2007.  Summit net revenues are included in the box business segment
above, and fiscal 2008 reflects 53 weeks of activity compared to only 7 months
of activity for the comparable period presented above for fiscal
2007.
 
 24
 Net
Revenue
 
 Bingo net
revenue for the 53 weeks ended November 2, 2008 decreased 6.7% to $44.0 million
from $47.1 million compared to the 12 months ended October 31, 2007. The
decrease is the result of several factors, including the soft economy, increased
regional competition, pricing pressures, and continued migration of commercial
accounts to slot machine style gaming.  Box net revenues decreased
$208,000 for the 53 weeks ended November 2, 2008, or 1.8% to $11.5 million from
$11.7 million compared to the 7 months ended October 31,
2007.   The continued softness in the Louisiana market affected
VLT sales, as did delays in obtaining approvals on gaming products in
Montana.  Financial results for the Box segment may continue to be
volatile from quarter to quarter until we have broadened our revenue base by
expanding into more VLT markets, and by penetrating into the Class III slot
machine markets, such as California and Nevada.
 
 Cost
of Revenue
 
 Bingo
cost of revenue for the 53 weeks ended November 2, 2008 decreased 2.9% to $19.1
million, or 43.5% of net revenue, from $19.7 million, or 41.8% of net revenue,
compared to the 12 months ended October 31, 2007. This decrease is primarily due
to $1.5 million less bingo equipment depreciation over the comparable period in
2007, mainly from Travelers becoming fully depreciated in 2007, offset in part
by a $0.9 million increase in the cost of disposals, slow-moving and obsolete
materials as a result of the write-off of units and/or parts on older product
lines as customers migrate to the newer product lines.
  Box
business cost of revenue decreased 8.7% to $6.3 million, or 54.5% of net revenue
for the 53 weeks ended November 2, 2008 from $6.9 million, or 58.7% of net
revenue compared to the 7 months ended October 31, 2007.  The decrease
in cost of revenue is primarily related to the decline in sales and the mix of
products sold.
  Gross
Profit
  Bingo
gross profit for the 53 weeks ended November 2, 2008 decreased 9.4% to $24.9
million, or 56.5% of net revenue, from $27.4 million or 58.2% of net revenue
compared to the 12 months ended October 31, 2007. The decrease in gross profit
margin is primarily due to the revenue decline as described above.
  Box gross
profit increased 8.1% to $5.2 million, or 45.5% of net revenue for the 53 weeks
ended November 2, 2008, from $4.8 million or 41.3% of net revenue compared to
the 7 months ended October 31, 2007.  The increase is due to an
increase in sales of higher margin equipment and software.
  Operating
Expenses
  Bingo
general and administrative costs decreased 3.6% to $7.6 million for the 53 weeks
ended November 2, 2008, from $7.9 million for the 12 months ended October 31,
2007. The decrease is primarily due to lower outside legal fees as the activity
on major lawsuits, such as the Trend case, has declined since
2007.  Box general and administrative costs increased 108.9% or $1.8
million to $3.4 million for the 53 weeks ended November 2, 2008 from $1.6
million for the 7 months ended October 31, 2007 primarily due to a full fiscal
year of expenses. Amortization of the identifiable intangible assets purchased
in the Summit Gaming acquisition increased $0.5 million due to the inclusion of
53 weeks reported for 2008 compared to 7 months reported for the fiscal year
ended October 31, 2007.
  Bingo
sales and marketing expenses remained flat for the 53 weeks ended November 2,
2008, compared to the 12 months ended October 31, 2007. A decrease in
distributor commissions directly related to the decline in revenue, and a
decrease in advertising fees due to Canadian legislative changes, was offset by
an increase in employee costs related to additional
positions.   Box sales and marketing expenses remained flat for
the 53 weeks ended November 2, 2008, compared to the 7 months ended October 31,
2007.
  Bingo
research and development expenses increased by $0.2 million to $3.0 million, for
the 53 weeks ended November 2, 2008, from $2.8 million compared to the 12 months
ended October 31, 2007. The increase is primarily due to higher employee costs
as a result of increased travel costs related to the Elite TM testing in the
UK.  Box research and development expenses increased $1.5 million to
$2.5 million for the 53 weeks ended November 2, 2008, from $1.0 million for the
7 months ended October 31, 2007.  The increase in the box business
segments is primarily due to a full fiscal year of expenses in 2008, costs
expended for developing new product lines, such as the California Keno game
which was approved in August 2008, new hardware design and software development
for a major VLT contract, and increased licensing fees as we expand our
distributorship to new markets.
  For the
53 weeks ended November 2, 2008, we recorded a goodwill impairment charge of
$10.8 million related to our acquisition of Summit compared to no goodwill
impairment charge for the 12 months ended October 31, 2007.
   25
 There
were no gains on the sale of assets for box for the 53 weeks ended November 2,
2008 compared to $0.7 million related to the 7 months ended October 31,
2007.
  There
were no loss legal contingencies recorded for the 53 weeks ended November 2,
2008, compared to $124,000 for the 12 months ended October 31,
2007.
  Interest Expense
  Interest
expense of $4.6 million for the 53 weeks ended November 2, 2008 increased $2.3
million over the 12 months ended October 31, 2007. The increase is due to
interest paid on debt incurred to purchase Summit, debt incurred to purchase our
new corporate headquarters in Reno, Nevada, a prepayment penalty of $0.4 million
as a result of refinancing our credit facility, $0.7 million as a result of our
swap agreement valuation, and $0.8 million due to the write-off of debt
acquisition costs associated with our Old Credit Facility.
  Impairment
of Investments
  At
November 2, 2008, we held auction rate securities (“ARS”) with an aggregate
purchase price of approximately $3.9 million. With the liquidity issues
experienced in global credit and capital markets, the ARS held by us at November
2, 2008 experienced multiple failed auctions as the amount of securities
submitted for sale exceeded the amount of purchase orders.  We engaged
a third party valuation firm to assist us in determining the estimated fair
value of these securities as of November 2, 2008 utilizing the standards set
forth in FAS 157.  Of the eight ARS in our investment portfolio, three
of them (having an aggregate purchase price of approximately $1.6 million)
consisted of Level II securities (as defined by FAS 157).  For these
securities, fair value was measured using the average sale price of recent
observable transactions in the same securities.  The five remaining
ARS in our investment portfolio (having an aggregate purchase price of
approximately $2.3 million) were classified as Level III (as defined by FAS 157)
as no direct market inputs to make a pricing determination were
available.  A discounted cash flow analysis was used to determine the
estimated fair value of these securities.  Based largely upon the
credit risks of the issuers and the lack of an active trading market in these
securities, risk-adjusted discount rates were applied to determine the estimated
fair value of our Level III ARS.  Management determined that the
estimated losses in these securities were other-than-temporary and recorded an
additional pre-tax impairment charge of $2.2 million in the fourth quarter of
2008, resulting in aggregate pre-tax impairment charges of approximately $3.3
million for the 53 weeks ended November 2, 2008.  Seven of the eight
ARS in our investment portfolio continue to pay interest according to their
stated terms.
  Goodwill
Impairment
  In fiscal
2007, the Company acquired the assets of Summit Gaming and added $26.5 million
to goodwill, which included trade names of $1.6 million.  In addition,
we acquired $7.7 million in identifiable intangible assets which will be
amortized over 5 to 10 years. The Company conducts its annual goodwill
impairment analysis during the fourth quarter of each fiscal year, measured as
of July 31, using an outside third party.  The Company assessed the
value of its goodwill as of July 31 of 2006 and 2007 (its annual review date)
and concluded that goodwill was not impaired.  The Company performed
its 2008 annual impairment testing of goodwill and intangibles as of July 31,
2008. Based on a combination of factors, including the current economic
environment, decreased revenues and increased costs, particularly of the box
segment, the Company recorded a noncash goodwill impairment associated with our
acquisition of Summit of $10.8 million in the fourth quarter of fiscal 2008. The
annual evaluation of goodwill and other non-amortizing intangible assets
requires the use of estimates about future operating results of each reporting
unit to determine their estimated fair value.  Changes in forecasted
operations can materially affect these estimates.  Once an impairment
of goodwill or other intangible assets has been recorded, it cannot be
reversed.
  Income
Taxes
  We
recorded our income tax provision at an effective rate of (28.3%) for the 53
weeks ended November 2, 2008, compared with 36.3% for the twelve months ended
October 31, 2007. The change in effective rate is primarily due to the goodwill
impairment recognized in the fourth quarter of the 53 weeks ended November 2,
2008.  For additional information, see Critical Accounting Policies
“Impairment of Long-lived Assets, Goodwill and Intangible Assets” contained
herein.  The actual effective tax rate is different from the expected
federal rate of 34%, reflecting certain permanent differences between financial
accounting and tax accounting, and state and foreign tax
provisions.
  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:
  26
 ·
                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 $2.3 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.
  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.
 
 Year
Ended October 31, 2007 Compared with Year Ended October 31,
2006
  Fiscal
      Year Ended October 31, 2007 and 2006(In
      Thousands)Bingo
      Equipment
                
                Box
      Equipment12
      Mths
                12
      Mths
                %
      Change
                
                7
      Mths
                12
      Mths
                %
      ChangeEnded
                Ended
                Favorable/
                
                Ended
                Ended
                Favorable/10/31/07
                10/31/06
                (Unfavorable)
                
                10/31/07
                10/31/06
                (Unfavorable)Net
      Revenue
                
                $        47,114
                $        49,289
                (4.4%)
                
                $           11,691
                -
                -Cost
      of Revenue
                
                19,683
                19,929
                1.2%
                
                6,859
                -
                -Gross
      Profit
                
                27,431
                29,360
                (6.6%)
                
                4,832
                -
                -Operating
      Expenses:General
      and administrative
                
                7,920
                8,303
                4.6%
                
                1,618
                -
                -Sales
      and marketing
                
                10,028
                11,041
                9.2%
                
                491
                -
                -Research
      and Development
                
                2,837
                2,885
                1.7%
                
                1,028
                -
                -Gain
      on sale of assets
                
                -
                -
                0.0%
                
                (656)
                -
                -Loss
      Contingencies
                
                124
                133
                6.8%
                
                -
                -
                -Total
      operating expenses
                
                20,909
                22,362
                6.5%
                
                2,481
                -
                -Income
      (loss) from operations
                
                6,522
                6,998
                (6.8%)
                
                2,351
                -
                -Interest
      Expense
                
                (125)
                (10)
                (1150%)
                
                (2,217)
                -
                -Impairment
      of investments
                
                -
                -
                -
                
                -
                -
                -Other
      income (expense), net
                
                780
                356
                119.1%
                
                27
                -
                -Income
      (loss) before income taxes
                
                7,177
                7,344
                (2.3%)
                
                161
                -
                -Provision
      (benefit) for income taxes
                
                2,667
                2,961
                9.9%
                
                -
                -
                -Net
      income (loss)
                
                $         4,510
                $          4,383
                2.9%
                
                $              161
                -
                -
  We
acquired substantially all of the assets of Summit on March 28,
2007.  Summit net revenues for the 7 months ended October 31, 2007 are
included in the box business segment above.
 
 Net
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
decreases 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.
 27
 Gross
Profit
 
 Total
gross profit increased 9.9% to $32.3 million, primarily due to $4.8 million in
gross profit contributed by the box segment.  Bingo gross profit
decreased 6.6% to $27.4 million, or 58.2% of net revenue for fiscal 2007, from
$29.3 million or 59.6% of net revenue for the same period in 2006. The decrease
in gross profit is due to the revenue decline as described above.
 
 Operating
Expenses
 
 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.  The Bingo general and
administrative costs decreased 4.6% to $7.9 million for fiscal 2007, from $8.3
million in the comparable period in 2006. The decrease is primarily due to a
reduction in legal and licensing expenses, as well as a reduction in
compensation expense related to the reversal of stock option expense due to the
departure of certain key executives.   Box general and
administrative costs were $1.6 million for the 7 months ended October 31,
2007.
 
 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 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 box segment research and development
expenses.
 
 We
recorded a gain on the sale of assets of $0.7 million for box for the 7 months
ended October 31, 2007. This related to gaming equipment that was sold after
being utilized on a participation basis.
 
 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 meet technological feasibility and recoverability tests in accordance with
FASB Statement No. 86.
 
 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.
 
 Loss
contingencies decreased $9,000, or 6.8% to $124,000 for fiscal 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.
  Interest
Expense
 
 Net
interest expense increased $2.3 million for fiscal 2007 compared to fiscal 2006.
The increase was driven by the interest expense related to the financing used to
acquire Summit Gaming.
  Liquidity
and Capital Resources
 
 We have
funded our operations to date primarily through cash from operations and debt
financing activities. This capital is for operations, research and development,
capital expenditures of equipment and associated support equipment, and
software. As of November 2, 2008, and October 31, 2007, we had a working capital
balance of $9.5 million and $14.0 million, respectively. As of November 2, 2008,
our principal sources of liquidity included cash and cash equivalents of $6.1
million and a $2.0 million revolving credit facility with no amounts drawn. In
addition, we have $2.6 million in restricted cash for use on construction only
for the real property purchased in the fourth quarter of
2008.  Current liabilities include an accrued liability of $4.0
million in connection with a contingent litigation judgment that has been
reversed on appeal and remanded for a new trial.  For additional
information, see Item 3 “Legal
Proceedings” contained herein.
 
 Operating
activities provided $9.0 million of cash for the 53 weeks ended November 2, 2008
compared with $14.8 million for fiscal year 2007. The $9.0 million consisted of
a net loss of $11.2 million, adjusted positively by $11.1 million for
depreciation, amortization, obsolescence provisions, and loss on disposal of
equipment, $3.3 million from the impairment of investments, $10.8 million loss
on impairment on goodwill, $4.7 million spent on inventory and $2.7 million
increase in deferred revenue related to a sale expected to deliver in fiscal
2009, and $1.1 million provided by other net changes in operating assets and
liabilities. During fiscal year 2007, the $14.8 million consisted primarily of
net income of $4.7 million, adjusted positively by $11.7 million for
depreciation, amortization, obsolescence provisions, and loss on disposal of
equipment, release of restricted cash of $4.5 million related to Trend
Litigation, 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 for Summit Gaming.
 
 We used
approximately $9.5 million of cash in investing activities during fiscal
2008 compared to $46.1 million of cash used during fiscal 2007. The
$9.5 million consisted of $7.2 million of expenditures for the acquisition
of our new headquarters, $3.8 million of capital expenditures, $2.6 million
of restricted cash for construction on our new headquarters, $0.1 million for
payment on a royalty, and a net inflow of $4.2 million from short-term
investments.  During fiscal 2007, the $46.1 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.
  28
 Financing
activities provided $2.9 million during fiscal 2008 compared to cash provided of
$29.5 million during fiscal 2007. The $2.9 million provided during fiscal 2008
included the issuance of $38.0 million in long-term debt under our new credit
facility offset by the concurrent repayment of long-term debt consisting of
$18.7 million for the term loan and $7.4 million for the revolver loan under our
prior facility. Also included were payments on long-term debt of approximately
$4.6 million, a $0.3 million payment for debt acquisition costs, and the
repurchase of our common stock for approximately $4.1 million. The $29.5 million
provided during fiscal 2007 included the issuance of $38.9 million in long-term
debt in connection with the Summit acquisition offset by the subsequent
repayment of long term debt consisting of $8.0 million on the term loan and $1.5
million on the revolver loan.
 
 In March
2007, we acquired substantially all of the assets of Summit Gaming for $40.9
million in cash. We financed the acquisition primarily with a credit facility
consisting of a term loan of $30.0 million and a revolving line of credit with a
limit of $10.0 million. On August 22, 2008, we terminated this credit facility
and prepaid all amounts outstanding as part of the requirements of our new
credit facility. We incurred a pre-payment penalty of $0.4 million on the
pre-payment of the term loan facility.  We also wrote-off $0.8 million
of debt acquisition costs related to our prior credit facility.  The
New Credit Facility is discussed further below.
 
 Our New
Credit Facility provided a total of $40.0 million of financing, $38.0 million of
which is in the form of a term loan and $2.0 million of which is in the form of
a revolving line of credit.  Proceeds from the New Credit Facility
were used to refinance our prior credit facility, acquire real property, and for
general corporate purposes.  The term loan matures on August 28, 2013
with monthly interest payments beginning September 30, 2008 based upon one-month
LIBOR rate plus 2.80% and quarterly principal payments of approximately $1.1
million beginning October 31, 2008 until the loan is repaid in
full.  The Senior Secured Revolving Credit Facility matures on August
31, 2010, with monthly interest-only payments due on the last day of each month
beginning September 30, 2008 with an interest rate of either (i) the higher of
the Agent's prime rate or the Federal Funds rate plus 0.50% (a "Base Rate Loan)
minus 0.25%, or (ii) 1, 2, 3, 6, or 12-month LIBOR rate plus 2.0%. With respect
to the term loan, the Company entered into an interest rate swap agreement which
exchanged the variable one-month LIBOR rate for a fixed LIBOR rate of 3.99% per
annum effective August 22, 2008 through the maturity of the loan.  In
the event we were unable to raise additional capital if needed, further measures
would be necessary, including the delay or reduction of our operations, research
and development and other activities. Certain of these measures may require
third-party consent or approvals, including our lenders under the New Credit
Facility, certain regulatory bodies, and others, and there are no assurances
such consent or approvals could be obtained. Management does not believe that
these limitations will adversely affect our operations or our ability to acquire
necessary capital equipment.  For additional information, see Note 4
“Credit Agreements and
Acquisition of Real Property” to our Consolidated Financial Statements
contained herein.
 
 We
believe that cash flows from operations, cash, cash equivalents, and amounts
available under our New Credit Facility will be sufficient to support our
operations, provide for budgeted capital expenditures, and meet liquidity
requirements through the remainder of fiscal 2009. Our long-term liquidity
requirements depend on many factors, including the rate at which we expand our
business and whether we do so internally or through acquisitions. In addition,
we may pursue strategic opportunities that could require us to fund our portion
of operating expenses of such ventures and may require us to advance additional
amounts should any partners in such ventures be unable to meet unanticipated
capital requirements or similar funding events. To the extent that the funds
generated from the sources described above are insufficient to fund our
activities in the long term, we may be required to raise additional funds
through public or private financing. No assurance can be given that the
additional financing will be available or that, if it is available, it will be
on terms acceptable to us.
 
 On
September 4, 2007, the Board of Directors authorized expending up to $5.0
million in a share repurchase program. On September 16, 2008, this program was
extended through close of the trading day December 31, 2008.  The
actual amount and timing of dollars expended and shares repurchased are subject
to business and market conditions and applicable SEC rules.  As of
December 31, 2008, we had acquired 918,943 shares at a cost of approximately
$4.7 million.  This program is now expired, with no additional shares
purchased.
 
 Contractual
Obligations
 
 The following table presents
information on contractual obligations held as of November 2,
2008:
 Payments
      Due by PeriodTotal
                
                
                Less
      than 1 year
                
                
                1
      - 3 years
                
                
                3
      - 5 years
                
                
                More
      than 5 yearsLong-Term
      Debt Obligations:Term
      Loan Facility
                
                $
                36,882
                
                
                $
                4,471
                
                
                $
                13,413
                
                
                $
                18,998
                
                
                $
                —Estimated
      Interest Payments
                
                
                8,741
                
                
                
                2,390
                
                
                
                5,353
                
                
                
                998
                
                
                
                —Other
      Notes Payable
                
                
                279
                
                
                
                38
                
                
                
                161
                
                
                
                20
                
                
                
                60Operating
      Leases
                
                
                1,512
                
                
                
                865
                
                
                
                642
                
                
                
                5
                
                
                
                —Total
                
                $
                47,414
                
                
                $
                7,764
                
                
                $
                19,569
                
                
                $
                20,021
                
                
                $
                60
 
 Purchase
Commitments
 
 From time
to time, we enter into commitments with our vendors to purchase box parts, bingo
terminals and support equipment at fixed prices and/or guaranteed quantities.
During the fiscal year ended November 2, 2008, we entered into an agreement with
a vendor for $3.4 million to purchase box hardware for a sale expected to begin
installation in the second quarter of 2009. As of November 2, 2008, all of this
commitment was fulfilled.  The Company also entered into a
construction agreement in September 2008 with a general contractor for $2.7
million for improvements to our new corporate headquarters which will be funded
by the loan proceeds in a construction account. As of November 2, 2008, $2.6
million of this commitment was still outstanding.  The Company expects
the building improvements to be completed by the beginning of second quarter in
fiscal year 2009. Various other additional orders have been placed throughout
fiscal 2008, of which $1.1 million was outstanding as of November 2,
2008.  All purchases are expected to occur by the end of the second
quarter in fiscal 2009.
 29
 Off
Balance Sheet Arrangements
 
 None.
 
 Item
7A.   Quantitative and Qualitative Disclosures About Market
Risk
 
 At
November 2, 2008, we held auction rate securities (“ARS”) with an aggregate
purchase price of approximately $3.9 million. With the liquidity issues
experienced in global credit and capital markets, the ARS held by us at November
2, 2008 have experienced multiple failed auctions as the amount of securities
submitted for sale exceeded the amount of purchase orders.  Although
seven of the eight ARS continue to pay interest according to their stated terms,
based on the fair value of the investments and an analysis of other-than
temporary impairment factors, we recorded a pre-tax impairment charge of
approximately $3.3 million as of the 53 weeks ended November 2,
2008.  If uncertainties in the credit and capital markets deteriorate
further or we experience any additional rating downgrades on any of our ARS, we
may incur up to an additional $0.6 million impairment charge related to our ARS
(representing the aggregate fair value of our ARS at November 2, 2008), which
could negatively affect our financial condition, cash flow and reported
earnings.
 
 On August
22, 2008, we terminated our existing credit facility. Concurrently, we entered
into a Senior Secured Credit Facility (the “New Credit Facility”) with U.S. Bank
N.A. as lender, lead arranger and administrative agent, and Bank of the West as
lender (collectively “Lenders”) that provides up to $40.0 million of financing
for our company, $38.0 million of which is represented by a term loan note and
$2 million of which is a Senior Secured Revolving Credit Facility. U.S. Bank
N.A. will hold up to $25.0 million of the New Credit Facility and Bank of the
West will hold up to $15.0 million. As of November 2, 2008, the balance of the
term loan was $36.9 million, and there was no outstanding balance on the
revolver.
 
 The term
loan requires monthly interest payments which began on September 30, 2008, and
quarterly principal payments of approximately $1.1 million which began on
October 31, 2008, until its maturity on August 28, 2013, when the balance will
be due in full. The interest rate for the term loan varies based upon the
one-month LIBOR rate plus 2.80%.  With respect to the term loan, we
also entered into an interest rate swap agreement with U.S. Bank N.
A., which exchanged the variable one-month LIBOR rate of the term loan for
a fixed LIBOR rate of 3.99% per annum effective August 22, 2008, through
the maturity of the term loan. As of November 2, 2008, there was $36.9 million
outstanding under the term loan, and the average interest rate is
6.79%.
  Because
the interest rate on the term loan is fixed under a LIBOR swap agreement,
increases in interest rates will not affect our cash flow. However, if we find
it necessary to accelerate the amortization of the term loan, we could be
required to pay early breakage fees on the LIBOR contracts in the event that
interest rates decrease. Assuming the $36.9 million balance outstanding as of
November 2, 2008, and the effective rate of interest rate of 6.79%, our breakage
fee on the full outstanding balance if LIBOR declined by 50 basis points would
be approximately $0.5 million, and an increase of 100 basis points would result
in a breakage fee of approximately $1.1 million. We do not anticipate the need
to accelerate that amortization of the term loan at any time for the remainder
of fiscal 2009.
 
 Item 8.   Financial
Statements and Supplementary Data
 
 The
consolidated financial statements and supplementary data are as set forth in the
“Index To Consolidated Financial Statements” on page F-1.
 
 Item 9.   Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure
  Not
applicable.
 
 Item 9A.   Controls and
Procedures
 
 Evaluation
of Disclosure Controls and Procedures
 
 We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC rules and forms, including, without
limitation, controls and procedures designed to ensure that such information is
accumulated and communicated to our management, including our Chief Executive
Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow
timely decisions regarding required disclosure.
 
 We have evaluated, with the
participation of our Chief Executive Officer and Chief Financial Officer, the
effectiveness of our disclosure controls and procedures as of November 2, 2008.
Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures are effective
as of November 2, 2008 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.
 
   
 30
 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.
 
 We have
evaluated the effectiveness of our internal control over financial reporting as
of November 2, 2008.  This evaluation was performed using the Internal Control – Integrated
Frameworkdeveloped by the Committee of Sponsoring Organizations of the
Treadway Commission.  Based on such evaluation, management has
concluded that, as of such date, our internal control over financial reporting
was effective.  The attestation report issued by Grant Thornton, LLP
on our internal control over financial reporting is included elsewhere in the
report.
 
 Changes
in Internal Control over Financial Reporting
 
 Other
than as disclosed directly below, there have been no changes in our internal
control over financial reporting during the fourth quarter ended November 2,
2008, that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
 
 The
evaluation of disclosure controls and procedures as of July 31, 2008, performed
under the supervision of the management of the Company, including the CEO and
CFO, and with the participation of an outside accounting firm, identified
significant deficiencies and possible material weaknesses in our internal
control over financial reporting, particularly regarding sufficient
documentation issues found in our internal controls relative to the box revenue
and other controls, that required remediation. Management implemented a
remediation plan and remediated the significant deficiencies and possible
material weaknesses prior to November 2, 2008.
  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 2009 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 2009 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 2009 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 2009 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 2009 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.
  31
 (2)
                  Consolidated Financial Statement
Schedules.
  No financial
statement schedules are included because they are not applicable, are not
required, or because required information
 is included in the
consolidated financial
statements or the notes thereto.
  (b)  
Exhibits
    Exhibit
                    Number
                  
                  Description
      of Exhibit2.1
                  
                  Asset
      Purchase Agreement dated August 30, 2006 between GameTech International,
      Inc. and Summit Amusement & Distributing Ltd. (12)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 (13)
  10.9
                  
                  Letter
      of Agreement by and between the Registrant and Nick Greenwood dated as of
      July 23, 2007 (9)10.10
                  
                  Letter
      Agreement by and between the Registrant and John McCafferty, dated as of
      May 22, 2006 (11)10.11
                  
                  Release
      Agreement by and between the Registrant and James C. Wilson, dated as of
      April 2, 2007 (14)10.12
                  
                  Lease
      Agreement dated November 18, 1999 between the Registrant and Cypress
      Corporate Services, including addendum to lease and first amendment dated
      April 17, 2000 (4)10.13
                  
                  Financing
      Agreement dated as of March 28, 2007 by and between GameTech
      International, Inc. and the lenders named therein, and Ableco Finance,
      LLC, as collateral and administrative
  agent  (15)10.14
                  
                  Amendment
      Number One to Financing Agreement, dated as of August 24, 2007
      (16)10.15
                  
                  Amendment
      Number Two to Financing Agreement, as of October 3, 2007
    (17)10.16
                  
                  Amendment
      Number Three to Financing Agreement, dated effective March 11, 2008
      (18)10.17
                  
                  Amendment
      Number Four to Financing Agreement, dated effective June 5, 2008
      (19)10.18
                  
                  Letter
      Agreement by and between the Registrant and Marcia R. Martin, dated as of
      May 1, 2008 (20)
   32
 10.19
                  
                  Purchase
      and Sale Agreement for the purchase of Real Property between the
      Registrant and RKD Holdings, L.L.C., dated as of March 31, 2008
      (24)10.20
                  
                  First
      Amendment to Purchase and Sale Agreement for the purchase of Real Property
      between the Registrant and RKD Holdings, L.L.C., dated as of May 27, 2008
      (24)10.21
                  
                  Financing
      agreement dated August 22, 2008, by and among GameTech International, Inc.
      and the lenders named herein, and U.S. Bank N.A., as collateral and
      administrative agent (22)10.22
                  
                  Second
      Amendment to Purchase and Sale Agreement for the purchase of Real Property
      between the Registrant and RKD Holdings, L.L.C., dated as of July 28, 2008
      (21)10.23
                  
                  Letter
      Agreement by and between the Registrant and Timothy J. Minard, dated as of
      September 29, 2008 (23)10.24
                  
                  First
      Amendment to August 22, 2008 Financing Agreement, dated as of January 28,
      200921
                  
                  List
      of Subsidiaries23
                  
                  Consent
      of Independent Registered Public Accountant31.1
                  
                  Certification
      of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a)
      promulgated under the Securities Exchange Act of 1934, as
      amended.31.2
                  
                  Certification
      of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a),
      promulgated by the Securities Exchange Act of 1934, as
    amended
 32.1
                  
                  Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  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
 
 
                            
 
 33
 
 EXHIBIT
INDEX
  (1)
                    Incorporated
      by reference to Exhibits 2.1 and 10.1 to the Registrant’s Registration
      Statement on Form S-1 (Registration No. 333-34967) as filed with
      the Commission on or about September 4, 1997.(2)
                    Incorporated
      by reference to Exhibit 4.1 to Amendment No. 1 to the Registrant’s
      Registration Statement on Form S-1 (Registration No. 333-34967)
      as filed with the Commission on or about October 17,
      1997.(3)
                    Incorporated
      by reference to Exhibit 10.1 to the Registrant’s Registration Statement on
      Form S-8 (Registration No. 333-72886) as filed with the
      Commission on or about November 7, 2001.(4)
                    Incorporated
      by reference to Exhibit 10.16 to the Registrant’s Annual Report on
      Form 10-K for the fiscal year ended October 31, 2001 as filed
      with the Commission on or about January 29, 2002, Commission File No.
      000-23401.(5)
                    Incorporated
      by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K
      dated March 7, 2003 as filed with the Commission on or about March 10,
      2003, Commission File No. 000-23401.(6)
                    Incorporated
      by reference to Exhibits 3.3 and 4.4 to the Registrant’s Quarterly Report
      on Form 10-Q for the quarterly period ended January 31, 2003 as filed with
      the Commission on or about March 17, 2003, Commission File No.
      000-23401.(7)
                    Incorporated
      by reference to Exhibit 3.4 to the Registrant’s Quarterly Report on Form
      10-Q for the quarterly period ended January 31, 2004 as filed with the
      Commission on or about March 16, 2004, Commission File No.
      000-23401.(8)
                    Incorporated
      by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
      8-K dated June 27, 2007 as filed with the Commission on or about June 27,
      2007.(9)
                    Incorporated
      by reference to Exhibits 10.1 to the Registrant’s Current Report on Form
      8-K as filed with the Commission on or about July 24,
  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 10.12 to the Registrant’s Annual Report on Form
      10-K for the fiscal year ended October 31, 2006 as filed with the
      Commission on or about January 29, 2007.(12)
                    Incorporated
      by reference to Exhibits 2.1 to the Registrant’s Current Report on Form
      8-K as filed with the Commission on or about August 31,
    2006.(13)
                    Incorporated
      by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form
      10-Q dated July 31, 2006 as filed with the Commission on or about
      September 14, 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 10.1 to the Registrant’s Current Report on Form
      8-K as filed with the Commission on or about March 29,
    2007.(16)
                    Incorporated
      by reference to Exhibit 99.1 to the Registrant's Current Report on Form
      8-K as filed with the Commission on or about September 6,
      2007.(17)
                    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.(18)
                    Incorporated
      by reference to Exhibit 99.1 to the Registrant’s Current Report on Form
      8-K dated March 11, 2008 as filed with the Commission on or about March
      11, 2008.(19)
                    Incorporated
      by reference to Exhibit 99.1 to the Registrant's Current Report on Form
      8-K dated June 5, 2008 as filed with the Commission on or about June 9,
      2008.(20)
                    Incorporated
      by reference to Exhibit 99.1 to the Registrant's Current Report on Form
      8-K dated June 9, 2008 as filed with the Commission on or about June 12,
      2008.(21)
                    Incorporated
      by reference to Exhibit 99.1 to the Registrant's Current Report on Form
      8-K dated July 28, 2008 as filed with the Commission on or about August
      31, 2008.(22)
                    Incorporated
      by reference to Exhibit 10.1 to the Registrant's Current Report on Form
      8-K dated August 22, 2008 as filed with the Commission on or about August
      28, 2008.(23)
                    Incorporated
      by reference to Exhibit 10.1 to the Registrant's Current Report on Form
      8-K dated September 23, 2008 as filed with the Commission on or about
      September 30, 2008.(24)
                    Incorporated
      by reference to Exhibits 99.1 and 99.2 to the Registrant’s Current Report
      on Form 8-K dated June 5, 2008 as filed with the Commission on or about
      June 5, 2008.
 
 
            34
  SIGNATURES
  Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
 
 GAMETECH INTERNATIONAL, INC.By:
                  /s/
      JAY M. MEILSTRUPJay
      M. MeilstrupPresident,
      Chief Executive Officer, and Director
                    (Principal
      Executive Officer)Dated:
      January 30, 2009
  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
      30, 2009Richard
      T. Fedor/s/
      JAY M. MEILSTRUP
                  
                  President,
      Chief Executive Officer and Director
                  
                  January
      30, 2009Jay
      M. Meilstrup
                  
                  (Principal
      Executive Officer )/s/
      MARCIA R. MARTIN
                  
                  Chief
      Financial Officer, Treasurer, and Secretary
                  
                  January
      30, 2009Marcia
      R. Martin
                  
                  (Principal
      Financial Officer and Principal Accounting Officer)/s
      / RICHARD H. IRVINE
                  
                  Director
                  
                  January
      30, 2009Richard
      H. Irvine/s/
      SCOTT H. SHACKELTON
                  
                  Director
                  
                  January
      30, 2009Scott
      H. Shackelton/s/
      DONALD K. WHITAKER
                  
                  Director
                  
                  January
      30, 2009Donald
      K. Whitaker
                     35
   
 GameTech
International, Inc.
 Index
to Consolidated Financial Statements
  Report
      of Independent Registered Public Accounting Firm dated January 28,
      2009
                  
                  
                  F-2Report
      of Independent Registered Public Accounting Firm dated January 28,
      2009
                  
                  
                  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
 
 
 To
the Board of Directors and Stockholders
 GameTech
International, Inc.
 
 We have
audited the accompanying consolidated balance sheet of GameTech International,
Inc. (a Delaware corporation) and its subsidiaries as of November 2, 2008
and October 31, 2007, and the related consolidated statements of
operations, stockholders’ equity, and cash flows for each of the three years in
the period ended November 2, 2008.  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 consolidated financial statements referred to above present fairly,
in all material respects, the financial position of GameTech International, Inc.
as of November 2, 2008 and October 31, 2007, and the results of their
operations and their cash flows for each of the three years in the period ended
November 2, 2008 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), GameTech International, Inc.’s internal control
over financial reporting as of November 2, 2008, based on criteria
established in Internal
Control—Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report dated January 28,
2009 expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
 
 
 /S/
GRANT THORNTON LLP
 
 
 Reno,
Nevada
 January
28, 2009
                         
     
 F-2
 
 Report
of Independent Registered Public Accounting Firm
 
 
 To
the 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 November 2, 2008, 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.’s maintained, in all material respects,
effective internal control over financial reporting as of November 2, 2008,
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 sheet of GameTech
International, Inc. and its subsidiaries as of November 2, 2008 and
October 31, 2007, and the related consolidated statements of operations,
stockholders’ equity, and cash flows for each of the three years in the period
ended November 2, 2008 and our report dated January 28, 2009 expressed an
unqualified opinion.
 
 /S/
GRANT THORNTON LLP
 
 Reno,
Nevada
 January
28, 2009
                      F-3
 
 GAMETECH
INTERNATIONAL, INC.
 CONSOLIDATED
BALANCE SHEETS
 (In
thousands, except share and per share amounts)
 
 November
      2,
                  
                  
                  October
      31,2008
                  
                  
                  2007ASSETS:Current
      assets:Cash
      and cash equivalents
                  
                  
                  
                  
                  $
                  6,076
                  
                  
                  $
                  3,630Short-term
      investments
                  
                  
                  
                  
                  
                  —
                  
                  
                  
                  7,763Accounts
      receivable, net of allowances of $1,217 in 2008 and $2,429 in
      2007
                  
                  
                  
                  
                  
                  6,303
                  
                  
                  
                  8,585Inventory
                  
                  
                  
                  
                  
                  8,976
                  
                  
                  
                  4,298Deposits
                  
                  
                  
                  
                  
                  42
                  
                  
                  
                  14Prepaid
      expenses and other current assets
                  
                  
                  
                  
                  
                  912
                  
                  
                  
                  702Prepaid
      income taxes
                  
                  
                  
                  
                  
                  1,634
                  
                  
                  
                  76Current
      portion of notes receivable
                  
                  
                  
                  
                  
                  119
                  
                  
                  
                  116Deferred
      income taxes
                  
                  
                  
                  
                  
                  1,825
                  
                  
                  
                  2,651Total
      current assets
                  
                  
                  
                  
                  
                  25,887
                  
                  
                  
                  27,835Property,
      bingo equipment, furniture and other equipment, net
                  
                  
                  
                  
                  
                  22,884
                  
                  
                  
                  19,902Goodwill,
      net
                  
                  
                  
                  
                  
                  25,900
                  
                  
                  
                  36,680Intangibles,
      less accumulated amortization of $6,197 in 2008 and $4,634 in
      2007
                  
                  
                  
                  
                  
                  6,302
                  
                  
                  
                  7,766Restricted
      cash
                  
                  
                  
                  
                  
                  3,158
                  
                  
                  
                  502Notes
      receivables, net of current portion
                  
                  
                  
                  
                  
                  1
                  
                  
                  
                  132Deferred
      income taxes, long term
                  
                  
                  
                  
                  
                  4,539
                  
                  
                  
                  226Debt
      acquisition costs, net
                  
                  
                  
                  
                  
                  258
                  
                  
                  
                  839Investments
                  
                  
                  
                  
                  
                  566
                  
                  
                  
                  —Total
      assets
                  
                  
                  
                  
                  $
                  89,495
                  
                  
                  $
                  93,882LIABILITIES
      AND STOCKHOLDERS' EQUITY:Current
      liabilities:Accounts
      payable
                  
                  
                  
                  
                  $
                  2,278
                  
                  
                  $
                  2,094Accrued
      payroll and related obligations
                  
                  
                  
                  
                  
                  1,168
                  
                  
                  
                  1,074Accrued
      loss contingencies
                  
                  
                  
                  
                  
                  4,022
                  
                  
                  
                  4,022Current
      portion of long-term debt
                  
                  
                  
                  
                  
                  4,509
                  
                  
                  
                  4,462Deferred
      revenue
                  
                  
                  
                  
                  
                  3,502
                  
                  
                  
                  767Other
      accrued liabilities
                  
                  
                  
                  
                  
                  1,285
                  
                  
                  
                  1,463Total
      current liabilities
                  
                  
                  
                  
                  
                  16,764
                  
                  
                  
                  13,882Long
      term debt, net of current portion
                  
                  
                  
                  
                  
                  32,652
                  
                  
                  
                  25,297Interest
      rate swap
                  
                  
                  
                  
                  
                  668
                  
                  
                  
                  —Deferred
      income taxes
                  
                  
                  
                  
                  
                  1
                  
                  
                  
                  224Total
      liabilities
                  
                  
                  
                  
                  $
                  50,085
                  
                  
                  $
                  39,403Stockholders'
      equity:Common
      stock: $0.001 par value; 40,000,000 shares authorized; 14,472,732 in 2008
      and 2007
                  
                  
                  
                  
                  
                  
                  14
                  
                  
                  
                  14Additional
      paid in capital
                  
                  
                  
                  
                  
                  
                  51,561
                  
                  
                  
                  51,355Retained
      earnings
                  
                  
                  
                  
                  
                  
                  543
                  
                  
                  
                  11,706Treasury
      stock, at cost, 2,781,283 shares in 2008 and  1,855,325 shares
      in 2007
                  
                  
                  
                  
                  
                  
                  (12,708
                  )
                  
                  
                  (8,096
                  )Related
      party receivable
                  
                  
                  
                  
                  
                  
                  —
                  
                  
                  
                  (500
                  )Total
      stockholders' equity
                  
                  
                  
                  
                  
                  
                  39,410
                  
                  
                  
                  54,479Total
      liabilities and stockholders' equity
                  
                  
                  
                  
                  
                  $
                  89,495
                  
                  
                  $
                  93,882
 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)
  53
      Weeks Ended November 2,
                    
                    
                    Year
      ended October 31,2008
                    
                    
                    2007
                    
                    
                    2006Net
      revenue
                    
                    $
                    55,447
                    
                    
                    $
                    58,805
                    
                    
                    $
                    49,289Cost
      of revenue
                    
                    
                    25,365
                    
                    
                    
                    26,542
                    
                    
                    
                    19,929Gross
      profit
                    
                    
                    30,082
                    
                    
                    
                    32,263
                    
                    
                    
                    29,360Operating
      expenses:General
      and administrative
                    
                    
                    11,017
                    
                    
                    
                    9,538
                    
                    
                    
                    8,303Sales
      and marketing
                    
                    
                    10,519
                    
                    
                    
                    10,519
                    
                    
                    
                    11,041Research
      and development
                    
                    
                    5,591
                    
                    
                    
                    3,865
                    
                    
                    
                    2,885Goodwill
      impairment
                    
                    
                    10,780
                    
                    
                    
                    —
                    
                    
                    
                    —Gain
      on sale of assets
                    
                    
                    —
                    
                    
                    
                    (656
                    )
                    
                    
                    —Loss
      contingencies
                    
                    
                    —
                    
                    
                    
                    124
                    
                    
                    
                    133Total
      operating expenses
                    
                    
                    37,907
                    
                    
                    
                    23,390
                    
                    
                    
                    22,362Income
      (loss) from operations
                    
                    
                    (7,825
                    )
                    
                    
                    8,873
                    
                    
                    
                    6,998Interest
      expense
                    
                    
                    (4,624
                    )
                    
                    
                    (2,342
                    )
                    
                    
                    (10
                    )Impairment
      of investments
                    
                    
                    (3,306
                    )
                    
                    
                    —
                    
                    
                    
                    —Other
      income (expense), net
                    
                    
                    181
                    
                    
                    
                    807
                    
                    
                    
                    356Income
      (loss) before income taxes
                    
                    
                    (15,574
                    )
                    
                    
                    7,338
                    
                    
                    
                    7,344Provision
      (benefit) for income taxes
                    
                    
                    (4,411
                    )
                    
                    
                    2,667
                    
                    
                    
                    2,961Net
      income (loss)
                    
                    $
                    (11,163
                    )
                    
                    $
                    4,671
                    
                    
                    $
                    4,383Net
      income (loss) per share:Basic
                    
                    $
                    (0.92
                    )
                    
                    $
                    0.37
                    
                    
                    $
                    0.36Diluted
                    
                    $
                    (0.92
                    )
                    
                    $
                    0.36
                    
                    
                    $
                    0.34Shares
      used in calculating net income (loss) per share:Basic
                    
                    
                    12,190
                    
                    
                    
                    12,566
                    
                    
                    
                    12,181Diluted
                    
                    
                    12,190
                    
                    
                    
                    12,991
                    
                    
                    
                    12,757Dividends
      declared per share
                    
                    $
                    0.00
                    
                    
                    $
                    0.00
                    
                    
                    $
                    0.00
 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
                    
                    
                    
                    
                    
                    
                    
                    
                    Treasury
      StockShares
                    
                    
                    Amount
                    
                    
                    Capital
      in excess of par
                    
                    
                    Retained
      Earnings
                    
                    
                    Shares
                    
                    
                    Amount
                    
                    
                    Related
      Party Receivable
                    
                    
                    TotalBalances
      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
                    )
                    
                    
                    54,479Forfeiture
      of restricted stock
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (76
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (76
                    )Issuance
      of common stock upon exercise of stock
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    16
                    
                    
                    
                    —
                    
                    
                    
                    7,805
                    
                    
                    
                    35
                    
                    
                    
                    —
                    
                    
                    
                    51Stock
      based compensation
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    271
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    271Tax
      benefit of stock option exercises
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (5
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (5
                    )Related
      party receivable
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    500
                    
                    
                    
                    500Purchases
      of treasury stock
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    918,153
                    
                    
                    
                    (4,647
                    )
                    
                    
                    —
                    
                    
                    
                    (4,647
                    )Net
      income (loss)
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (11,163
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (11,163
                    )Balances
      at November 2, 2008
                    
                    
                    14,472,732
                    
                    
                    $
                    14
                    
                    
                    $
                    51,561
                    
                    
                    $
                    543
                    
                    
                    
                    2,781,283
                    
                    
                    $
                    (12,708
                    )
                    
                    $
                    —
                    
                    
                    $
                    39,410
 The
accompanying notes are an integral part of these consolidated financial
statements.
                    
 F-6
 
 GAMETECH
INTERNATIONAL, INC.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (In
thousands)
 
 53
      Weeks
                    Ended
                    November
      2,
                  
                  
                  Year
      Ended October 31,2008
                  
                  
                  2007
                  
                  
                  2006Cash
      flows from operating activities:Net
      income (loss)
                  
                  $
                  (11,163
                  )
                  
                  $
                  4,671
                  
                  
                  $
                  4,383Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Depreciation
      and amortization
                  
                  
                  10,108
                  
                  
                  
                  11,544
                  
                  
                  
                  10,317Impairment
      of goodwill
                  
                  
                  10,780
                  
                  
                  
                  —
                  
                  
                  
                  —Obsolescence
      and loss on disposal of bingo terminals and  related
      equipment
                  
                  
                  957
                  
                  
                  
                  175
                  
                  
                  
                  681Loss
      (gain) on disposal of furniture and other equipment
                  
                  
                  (8
                  )
                  
                  
                  65
                  
                  
                  
                  12Issuance
      of note receivable for sale of inventory
                  
                  
                  —
                  
                  
                  
                  (247
                  )
                  
                  
                  —Gain
      (loss) on sale of participation equipment
                  
                  
                  —
                  
                  
                  
                  (656
                  )
                  
                  
                  —Loss
      (gain) on investment impairment
                  
                  
                  3,306
                  
                  
                  
                  —
                  
                  
                  
                  —Stock
      compensation expense
                  
                  
                  206
                  
                  
                  
                  (124
                  )
                  
                  
                  330Deferred
      income taxes
                  
                  
                  (3,710
                  )
                  
                  
                  (667
                  )
                  
                  
                  (696
                  )Amortization/write-off
      of debt acquisition costs
                  
                  
                  848
                  
                  
                  
                  —
                  
                  
                  
                  —Interest
      rate swap
                  
                  
                  668
                  
                  
                  
                  —
                  
                  
                  
                  —Interest
      on investments
                  
                  
                  (347
                  )
                  
                  
                  (365
                  )
                  
                  
                  (187
                  )Interest
      on restricted cash
                  
                  
                  (14
                  )
                  
                  
                  (19
                  )
                  
                  
                  (33
                  )Other
      changes in operating assets and liabilities:Accounts
      receivable, net
                  
                  
                  2,282
                  
                  
                  
                  (2,206
                  )
                  
                  
                  (161
                  )Deposits
                  
                  
                  (28
                  )
                  
                  
                  3
                  
                  
                  
                  4Inventory
                  
                  
                  (4,678
                  )
                  
                  
                  (986
                  )
                  
                  
                  —Prepaid
      taxes
                  
                  
                  (1,558
                  )
                  
                  
                  (13
                  )
                  
                  
                  678Restricted
      short-term investments
                  
                  
                  —
                  
                  
                  
                  4,515
                  
                  
                  
                  66Prepaid
      expenses and other current assets
                  
                  
                  (67
                  )
                  
                  
                  (115
                  )
                  
                  
                  (51
                  )Notes
      receivable
                  
                  
                  128
                  
                  
                  
                  —
                  
                  
                  
                  —Accounts
      payable
                  
                  
                  (1,312
                  )
                  
                  
                  (1,332
                  )
                  
                  
                  (393
                  )Accrued
      payroll and related obligations
                  
                  
                  94
                  
                  
                  
                  134
                  
                  
                  
                  (355
                  )Accrued
      loss contingencies
                  
                  
                  —
                  
                  
                  
                  124
                  
                  
                  
                  133Income
      taxes payable
                  
                  
                  —
                  
                  
                  
                  (294
                  )
                  
                  
                  294Deferred
      revenue
                  
                  
                  2,735
                  
                  
                  
                  767
                  
                  
                  
                  —Other
      accrued liabilities
                  
                  
                  (178
                  )
                  
                  
                  (158
                  )
                  
                  
                  (500
                  )Net
      cash provided by operating activities
                  
                  
                  9,049
                  
                  
                  
                  14,816
                  
                  
                  
                  14,522
  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)
  53
      Weeks Ended November 2,
                  
                  
                  Year
      Ended October 31,2008
                  
                  
                  2007
                  
                  
                  2006Cash
      flows from investing activities:Proceeds
      from sale of short-term investments
                  
                  $
                  10,238
                  
                  
                  $
                  18,034
                  
                  
                  $
                  24,945Payments
      for purchase of short-term investments
                  
                  
                  (6,000
                  )
                  
                  
                  (18,027
                  )
                  
                  
                  (31,662
                  )Capital
      expenditures for property, bingo equipment, furniture and other
      equipment
                  
                  
                  (10,965
                  )
                  
                  
                  (6,211
                  )
                  
                  
                  (11,541
                  )Restricted
      cash for capital expenditures
                  
                  
                  (2,642
                  )
                  
                  
                  —
                  
                  
                  
                  —Payment
      for the acquisition of Summit Amusement & Distributing,
      Ltd
                  
                  
                  —
                  
                  
                  
                  (41,401
                  )
                  
                  
                  (302
                  )Proceeds
      from sale of assets
                  
                  
                  —
                  
                  
                  
                  1,523
                  
                  
                  
                  —Payments
      for acquisitions of intangible assets
                  
                  
                  (100
                  )
                  
                  
                  —
                  
                  
                  
                  (113
                  )Net
      cash used in investing activities
                  
                  
                  (9,469
                  )
                  
                  
                  (46,082
                  )
                  
                  
                  (18,673
                  )Cash
      flows from financing activities:Proceeds
      from issuance of long-term obligations
                  
                  
                  38,000
                  
                  
                  
                  38,946
                  
                  
                  
                  —Payments
      on long-term obligations
                  
                  
                  (30,755
                  )
                  
                  
                  (9,563
                  )
                  
                  
                  —Payment
      for debt acquisition costs
                  
                  
                  (267
                  )
                  
                  
                  —
                  
                  
                  
                  —Tax
      benefit from stock options exercised
                  
                  
                  —
                  
                  
                  
                  252
                  
                  
                  
                  714Cash
      paid to related party for stock repurchase
                  
                  
                  —
                  
                  
                  
                  (500
                  )
                  
                  
                  —Repurchase
      of common stock for treasury
                  
                  
                  (4,112
                  )
                  
                  
                  —
                  
                  
                  
                  —Proceeds
      from issuance of common stock
                  
                  
                  —
                  
                  
                  
                  350
                  
                  
                  
                  2,518Net
      cash (used in) provided by financing activities
                  
                  
                  2,866
                  
                  
                  
                  29,485
                  
                  
                  
                  3,232Net
      increase (decrease) in cash and cash equivalents
                  
                  
                  2,446
                  
                  
                  
                  (1,781
                  )
                  
                  
                  (919
                  )Cash
      and cash equivalents at beginning of year
                  
                  
                  3,630
                  
                  
                  
                  5,411
                  
                  
                  
                  6,330Cash
      and cash equivalents at end of year
                  
                  $
                  6,076
                  
                  
                  $
                  3,630
                  
                  
                  $
                  5,411Supplemental
      cash flow information:Cash
      paid out in the year for:Interest
                  
                  $
                  2,834
                  
                  
                  $
                  2,282
                  
                  
                  $
                  10Income
      taxes
                  
                  $
                  918
                  
                  
                  $
                  2,164
                  
                  
                  $
                  1,895Non-cash
      investing and financing activities:Acquisition
      of assets included in accounts payable:
                  
                  $
                  1,981
                  
                  
                  $
                  485
                  
                  
                  $
                  1,517Settlement
      of related party receivable in company’s common stock
                  
                  $
                  500
                  
                  
                  $
                  —
                  
                  
                  $
                  —Notes
      payable for insurance
                  
                  $
                  157
                  
                  
                  $
                  —
                  
                  
                  $
                  —Notes
      payable for the purchase of a patent
                  
                  $
                  —
                  
                  
                  $
                  250
                  
                  
                  $
                  —
  The
accompanying notes are an integral part of these consolidated financial
statements.
  
                      F-8
 GAMETECH INTERNATIONAL, INC.
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 November
2, 2008, October 31, 2007, and October 31, 2006
  1.
Business and Summary of Significant Accounting Policies
  Fiscal
Year
 
 The
Company has adopted the fifty-two/fifty-three week fiscal year beginning with
the period ending on the first Sunday in November for 2008.  The
fiscal years ending October 31, 2007 and 2006 were both on a twelve month
calendar basis.
 
 Description
of Business
  GameTech
International, Inc. (the "Company") was incorporated in Delaware on
April 18, 1994. The Company operates two business segments: the design,
development, and marketing of interactive electronic bingo systems consisting of
portable and fixed-based systems under contractual arrangements with terms
generally ranging from month-to-month to three years with bingo hall customers;
and the design, development, manufacturing, and marketing of video lottery
terminals, slot machine equipment, and related software (collectively referred
to as our “box business”).  We have also developed wireless
server-based gaming technologies into commercially viable
products.  As of November 2, 2008, the Company had bingo systems in
service in 40 states, one US Territory and in five foreign countries and sales
of boxes and related software and equipment in 15 states and one US Territory.
Server-based gaming is currently installed in one state and two foreign
countries.
 
 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 Generally Accepted
Accounting Principles (“GAAP”) requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Allowance for doubtful accounts,
obsolescence, impairment of goodwill, impairment of investments, loss
contingencies, provision for income taxes, and stock-based compensation are
significant estimates made by the Company. Actual results could ultimately
differ from those estimates.
  Cash
and Cash Equivalents
  The
Company considers all highly liquid investments with an original maturity of
three months or less at the date of purchase to be cash
equivalents.
 
 Investments
 
 Short-term
investments consist of interest-bearing securities and are stated at cost plus
accrued interest. Short-term investments are classified as available for sale
and are recorded at fair market value using the specific identification
method.
 
 Long-term
investments at November 2, 2008 consisted of $3.9 million of principal invested
in auction rate securities (ARS). The ARS held are private placement securities
with long-term nominal maturities with the interest rates reset through a Dutch
auction each month. The monthly auctions historically have provided a liquid
market for these securities. Our investments in ARS represent interests in
collateralized debt obligations supported by pools ofresidential and
commercial mortgages, credit cards, insurance securitizations, and other
structured credits, including corporate bonds. Some of the underlying collateral
for the ARS we hold consists of sub-prime mortgages.
  Consistent
with our investment policy guidelines, the ARS investments held had AAA/Aaa
credit ratings at the time of purchase. With the liquidity issues experienced in
global credit and capital markets, the ARS held by us at November 2, 2008 have
experienced multiple failed auctions as the amount of securities submitted for
sale exceeded the amount of purchase orders.
 
 Although
the ARS continue to pay interest according to their stated terms, based on the
fair value of the investments and an analysis of other-than-temporary impairment
factors, we recorded a pre-tax impairment charge of approximately $3.3 million
for the 53 weeks ended November 2, 2008.
  In prior
periods, we classified the amount invested in ARS as marketable securities in
the current assets listed on the balance sheet. Given the failed auctions, our
ARS are illiquid until there is a successful auction for them. Accordingly, we
reclassified the entire balance of the ARS from short-term to non-current
investments.
 
 Bingo
Equipment, Furniture, and Other Equipment
 
 Bingo
equipment includes portable and fixed-base player terminals, file servers,
caller units, point-of-sale units, and other support equipment. The Company
records bingo equipment, furniture, and other equipment at cost and depreciates
these over the estimated useful lives of the assets using the straight-line
method.  The estimated useful lives are as follows:
 F-9
 Bingo
      equipment
                  
                  
                  3-5
      yearsOffice
      furniture and equipment
                  
                  
                  3-7
      yearsLeasehold
      improvements
                  
                  
                  Remaining
      life of Lease
 
 The
Company provides reserves for excess or obsolete bingo terminals on hand that we
do not expect to use. The reserves are based upon several factors, including
estimated forecast of bingo terminal demand for placement into bingo halls. The
estimates of demand for future bingo terminal may prove to be inaccurate, in
which case we may have understated or overstated the provision required for
excess and/or obsolete bingo terminals. Although we attempt to assure the
accuracy of these estimated forecasts, any significant unanticipated changes in
demand or technological developments could have a significant impact on the
value of bingo terminals, results of operations, and financial
condition.
  Software
Development Capitalization
  The
Company capitalizes costs related to the development of certain software
products 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 becomes available for
general release.
  The
achievement of technological feasibility and the estimate of a products’
economic life require management’s judgment. Any changes in key assumptions,
market conditions or other circumstances could result in an impairment of the
capitalized asset and a charge to the Company’s operating results.
  Goodwill
  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 whenever circumstances
indicate that the carrying value may not be recoverable.  Depending
upon the results of that measurement, the recorded goodwill may be written down
and charged to income from operations when its carrying amount exceeds its
estimated fair value. Amortization is still required for identifiable intangible
assets with finite lives.
 
 The
Company’s evaluation of the goodwill of its operations consists of two reporting
units, box and bingo. Goodwill of a reporting unit must be tested for impairment
on at least an annual basis.  The Company conducts its annual goodwill
impairment analysis during the fourth quarter of each fiscal year, measured as
of July 31, using an outside third party.  In addition to an annual
review, the Company assesses the impairment of goodwill whenever events or
changes in circumstances indicate that the carrying value may be greater than
fair value.  Factors the Company considers important that could
trigger an impairment review include significant underperformance relative to
historical or projected future operating results, significant changes in the
manner of the use of the Company’s assets or the strategy for its overall
business and significant negative industry or economic trends.
 
 The
annual evaluation of goodwill and other non-amortizing intangible assets
requires the use of estimates about future operating results of each reporting
unit to determine their estimated fair value.  Changes in forecasted
operations can materially affect these estimates.  The Company
determines fair value of each reporting unit using either the market approach,
the income approach, or the asset approach.  The choice of which
approach to use in a particular situation depends on the specific facts and
circumstances associated with the Company, as well as the purpose for which the
valuation analysis is being conducted.  In the analysis performed by a
third party, the bingo reporting unit was analyzed using the market and income
approaches, specifically the market multiple, comparable transaction and
discounted cash flow methodologies.  For the box reporting unit, the
market multiple and discounted cash flow methods were used, as relevant
comparable transactions were not identified. Once an impairment of goodwill or
other intangible assets has been recorded, it cannot be reversed. For additional
information, see Note 2 “Goodwill and Intangibles” to our Consolidated Financial
Statements contained herein.
 
 Impairment
of Long-Lived Assets
 
 The
Company reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-LivedAssets.  Recoverability of long-lived
assets are measured by a comparison of the carrying amount of an asset to future
net cash flows expected to be generated by the asset, undiscounted and without
interest.  If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.  There was
no impairment charge for long-lived assets in fiscal 2008.
 
       F-10
 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●
                      Collectability
      is reasonably assured.
 The
Company earns revenue in a variety of ways. The Company offers products for
lease or sale, and also sells service and software updates for equipment
previously sold or leased.
 
 Bingo
Equipment
 Revenue
is recognized for bingo terminals and bingo systems installed as a single
element placed in bingo halls under contracts based on (1) a fixed fee per
use per session; (2) a fixed weekly fee per terminal; or (3) a
percentage of the revenue generated by each terminal. Revenue recognition is a
key component of the Company's results of operations, and determines the timing
of certain expenses, such as commissions. The Company 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) collectability is reasonably assured. The
Company exercises judgment in assessing the credit worthiness of customers to
determine whether collectability is reasonably assured. Should changes in
conditions cause the Company to determine the factors are not met for future
transactions, revenue recognized for future reporting periods could be adversely
affected.
  Box
Equipment
 The
Company’s product sales revenues are generated from the sale of box
equipment.  Revenues are recorded in accordance with the American
Institute of Certified Public Accounts’ (“AICPA”) Statement of Position (“SOP”)
No. 97-2 Software Revenue Recognition and are reported net of discounts, sales
taxes and other taxes of a similar nature. Revenues related to contracted
production are recognized as the related work is delivered. The Company
recognizes license fee revenues over the term of the associated agreement unless
the fee is in exchange for products delivered or services performed that
represent the culmination of a separate earnings process. Amounts received prior
to completing the earnings process are deferred until revenue recognition
criteria are met.  In some instances, we recognize recurring
participation revenue in lieu of a one-time machine sale.  The
Company’s sales credit terms are predominately 30 days. In certain limited
circumstances, credit terms may be extended up to 160 days.
 
 Deferred
Revenue
 
 Deferred
revenue consists of amounts received or billed after product is delivered or
services are rendered, but prior to meeting all of the requirements for revenue
recognition.  Complex systems and/or multiple element contracts may
take several months to complete and our deferred revenues may increase as our
products evolve toward a more systems-centric environment.  Deferred
revenue totaled $3.5 million at November 2, 2008 as compared to $0.8 million at
October 31, 2007, and primarily represents amounts received for future
deliverables.
 
 Accounts
Receivable and Allowance for Doubtful Accounts
 
 Bingo
Equipment
 The
Company estimates the possible losses resulting from non-payment of outstanding
accounts receivable arising from the lease of our bingo units.  The
Company’s customer base consists primarily of entities operating in charitable,
Native American, and commercial bingo halls located throughout the United
States, Canada, Mexico, and the United Kingdom.  In some
jurisdictions, the billing and collection function is performed as part of a
distributor relationship, and in those instances, the Company maintains
allowances for possible losses resulting from non-payment by both the customer
and distributor. The Company performs ongoing evaluations of its customers and
distributors for credit worthiness, economic trends, changes in its customer’s
payment terms, and historical collection experience when evaluating the adequacy
of its allowance for doubtful accounts. The Company also reserves a percentage
of accounts receivable based on aging categories. In determining these
percentages, the Company reviews historical write-offs of any receivables,
payment trends, and other available information. While such estimates have been
within the Company’s expectations and the provisions established, a change in
the financial condition of specific customers or in overall trends experienced
may result in future adjustments of its estimates of collectability of its
receivables.
 
 Box
Equipment
 The
Company estimates the possible losses resulting from non-payment of outstanding
accounts receivables arising from the sale of video lottery terminals and
related equipment. The Company’s customer base consists of casinos located in
various states and Native American territories. Ongoing evaluations are
performed on 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.
  Inventories
 
 Inventories
are stated at the lower of cost or market.  Raw materials are valued
using the first-in, first-out method and finished goods are valued using average
costing that approximates the first-in, first-out method. Management
periodically reviews inventory balances, using recent and future expected sales
to identify slow-moving or obsolete items. Inventories consist of the following
at November 2, 2008 and October 31, 2007 (in thousands):
 F-11
 November
      2, 2008
                  
                  
                  October
      31, 2007Raw
      Materials
                  
                  $
                  2,474
                  
                  
                  $
                  2,890Work
      in Progress
                  
                  
                  4,480
                  
                  
                  
                  —Finished
      Goods
                  
                  
                  2,022
                  
                  
                  
                  1,408$
                  8,976
                  
                  
                  $
                  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 the 53 weeks of
2008, fiscal years 2007, and 2006 were not material.
  Research
and Development Costs
  Research
and development costs are charged to the results of operations when
incurred.
 
 Income
Taxes
 
 The Company accounts for income
taxes in accordance with SFAS No. 109, "Accounting for Income Taxes"
("SFAS 109"). SFAS 109 requires the recognition of deferred tax
assets, net of applicable reserves, related to net operating loss carryforwards
and certain temporary differences. The standard requires recognition of a future
tax benefit to the extent that realization of such benefit is more likely than
not. Otherwise, a valuation allowance is applied.
 
 In fiscal
2008, the Company adopted FIN No. 48, Accounting for Uncertainty in Income
Taxes, an Interpretation of FASB Statement No. 109,which creates a
single model to address uncertainty in income tax positions and prescribes the
minimum recognition threshold a taxation is required to meet before being
recognized in the financial statements.  FIN No. 48 also provides
guidance on the derecognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure, and
transition.  The 2008 fiscal year is the first year the Company was
required to adopt FASB No. 48 as it became effective after the beginning of an
entity’s first fiscal year that begins after December 15, 2006.  The
impact of FIN No. 48 on the Company’s financial position, cash flows and results
of operations was not material.
  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.
 
 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 an increase to net cash provided
by financing activities related to the cash received and an incremental tax
benefit. In the fourth quarter of fiscal year 2005, the Company’s Board of
Directors approved the acceleration of the vesting of all unvested stock options
awarded under its 1997 Incentive Stock Plan. As a result, all options
outstanding at October 31, 2005 were fully vested and no compensation cost for
such options will be recognized in any future periods.
 
 For the
53 weeks ended November 2, 2008 and fiscal year ended October 31, 2007, the
Company recognized compensation expense (benefit) for stock options and
restricted stock of $246,000 and ($128,000), respectively, which is included in
general and administrative expenses in the accompanying Consolidated Statement
of Operations.  The related tax benefit (expense) was $94,218 and
($43,000) respectively, for a net cost (benefit) of $151,782 and ($85,000),
respectively. This includes an additional compensation expense of $51,400 for
two stock option settlements for fully vested equity shares and a stock option
forfeiture of $76,000.  For the 53 weeks ended November 2, 2008 and
fiscal year ended October 31, 2007, there was a $0.01 and $(0.01) effect,
respectively, to the basic and diluted earnings per share as a result of
recognizing the share-based compensation expense, net of tax.
    
 F-12
 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).
  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
(“SAB”) No. 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. 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. In December 2007, SAB No. 110 was issued which extends the use of
the “simplified” method for those companies that conclude that it is not
reasonable to base its estimate of expected life of options on its historical
share option exercise experience.  The Company has used the
“simplified” method for all estimations of stock option compensation expense
since adopting SFAS No. 123(R) due to insufficient historical exercise data and
changes in the terms of the share option grants. The use of this method will be
evaluated in fiscal year 2009 to determine if sufficient relevant data is
readily available to estimate the expected term.
 
 These
amounts were determined using the Black-Scholes option-pricing model, which
values options based on the stock price at the grant date, the expected life of
the option, the estimated volatility of the stock, the expected dividend
payments, and the risk-free interest rate over the expected life of the option.
During 2008, the Company did not grant any stock options, therefore the
assumptions are not represented below.  The assumptions used in the
Black-Scholes model for fiscal years 2007 and 2006 were as follows:
 53
      Weeks
                          Ended
                          November
      2,
                          2008
                        
                        Year
      ended October 31,2007
                        
                        2006Risk-free
      interest rate
                        —
                        %
                        
                        4.81
                        %
                        
                        5.08
                        %Dividend
      yield
                        —
                        
                        
                        —
                        
                        
                        —Volatility
      factor
                        —
                        %
                        
                        61.6
                        %
                        
                        63.9
                        %Expected
      life (in years)
                        —
                        
                        
                        6.4
                        
                        
                        5.5
  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 anti-dilutive. The difference between basic and diluted net income
(loss) per share is attributable to stock options.
  Concentrations
of Credit Risk
 
 Financial
instruments, which potentially subject the Company to concentration of credit
risk, consist primarily of cash and cash equivalents, investments, restricted
short-term investments, and trade receivables. Cash equivalents, 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 2008, 2007 and 2006.   The Company conducts a
substantial amount of its business through distributor relationships, many of
which act as a collection agent.  As of November 2, 2008, there was one
distributor that represented 21.4% of the consolidated accounts receivable
balance.
 
 Interest
Rate Swap Contract
 
 The
Company has entered into an interest rate swap agreement to hedge its interest
rate exposure on its credit facility described in Note 4. In this agreement, the
Company agrees to pay the counterparty a fixed rate payment in exchange for the
counterparty agreeing to pay the Company a variable rate payment that is
intended to approximate the Company’s variable rate payment obligation on the
credit facility. The payment obligation is based on the notional amount of the
swap. Depending on the state of interest rates in general, the use of interest
rate swaps could enhance or harm the overall performance of the common shares.
The market value of interest rate swaps is based on pricing models that consider
the time value of money, volatility, and the current market and contractual
prices of the underlying financial instrument. Unrealized gains are reported as
an asset and unrealized losses are reported as a liability on the Company’s
Consolidated Balance Sheet. The change in value of interest rate swaps,
including the accrual of periodic amounts of interest to be paid or received on
swaps is reported as interest expense in the Company’s Consolidated Statements
of Operations.  Swap agreements involve, to varying degrees, elements
of market and counterparty risk, and exposures to loss in the related amounts
are reflected in the Company’s Balance Sheet.
 F-13
 Fair
Values Measurements
  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.
  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.
Effective beginning in October 2008, 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.
The Company has adopted this statement and did have a material impact on the
Company’s consolidated results of operations, financial position and cash
flows.
  Significant
Market Revenue Concentration
  A
significant portion of the Company’s revenue is concentrated in the Texas,
Montana, and Louisiana markets. For the 53 weeks ended November 2, 2008, Texas
represented approximately 16% of our bingo revenue and 13% of consolidated
revenue compared to 17% of bingo revenue and 14% of consolidated revenue for
fiscal year ended October 31, 2007.  The Montana market generated
approximately 44% of box revenue and 9% of consolidated revenue for the 53 weeks
ended November 2, 2008 compared to 50% of box revenue and 10% of consolidated
revenue for fiscal year ended October 31, 2007.  The Louisiana market
generated approximately 44% of box revenue and 11% of consolidated revenue for
the 53 weeks ended November 2, 2008 compared to 42% of box revenue and 10% of
consolidated revenue for fiscal year ended October 31, 2007.  Certain
state laws require electronic bingo devices and systems to be placed through
qualified distributors.
  Recent
Accounting Pronouncements
 
 In
February 2007, the FASB issued SFAS No. 159, Fair Value Option for Financial
Assets and Financial Liabilities. SFAS No. 159 permits companies to elect
to measure eligible financial instruments, commitments and certain arrangements
at fair value at specified election dates, with changes in fair value recognized
in earnings at each subsequent reporting period. SFAS No. 159 is effective for
fiscal years beginning after November 15, 2007. We are assessing the potential
impact of SFAS No. 159 on our financial position, results of operation, and cash
flow.
 
 In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations, and
SFAS No. 160, Accounting
and Reporting of Non-Controlling Interest in Consolidated Financial
Statements, an Amendment of ARB No. 51. These new standards will
significantly change the financial accounting and reporting of business
combination transactions and non-controlling (or minority) interests in
consolidated financial statements. We will be required to adopt SFAS No. 141(R)
and SFAS No. 160 on or after December 15, 2008. The Company is evaluating
the impact , if any, that the adoption of SFAS 141(R) and SFAS No. 160 will have
on our consolidated financial.
 
 In
December 2007, the Securities and Exchange Commission issued Staff Accounting
Bulletin  (“SAB") No. 110 to permit entities, under certain
circumstances, to continue to use the “simplified” method, in developing
estimates of expected term of “plain-vanilla” share options in accordance with
SFAS No. 123 (R) Share-Based Payment. SAB No. 110 amended SAB No. 107 to permit
the use of the “simplified” method beyond December 31, 2007. The Company
continues to use the “simplified” method and will do so until more detailed
relevant information about exercise behavior becomes readily
available.
 
 In
February 2008, the FASB issued FASB Staff Position No. FAS 157-2 (“FSP 157-2”).
FSP 157-2 delays the implementation of SFAS 157 for nonfinancial assets and
nonfinancial liabilities, except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis. This statement
defers the effective date to fiscal years beginning after November 15, 2008
and interim periods within those fiscal years, which is fiscal year 2010 for the
Company.
 
 In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
instruments and Hedging Activities. The new standard is intended to
improve financial reporting about derivative instruments and hedging activities
by requiring enhanced disclosures to enable better understanding of the effects
on financial position, financial performance, and cash flows. The effective date
is for fiscal years and interim periods beginning after November 15, 2008. The
Company has not yet determined the effect, if any that the adoption of SFAS No.
161 will have on the Company’s consolidated financial statements.
 
 In April
2008, the FASB issued Staff Position No. FAS 142-3 which amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No. 142, “Goodwill and Other Intangible Assets.” The intent of this FSP is to
improve the consistency between the useful life of a recognized intangible asset
under Statement 142 and the period of expected cash flows used to measure the
fair value of the asset under FASB Statement No. 141 (revised 2007), Business Combinations, and
other U.S. generally accepted accounting principles (GAAP). The Company is in
the process of evaluating the effect of FAS No. 142-3 on the Company’s
consolidated financial statements.
  In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. This Statement identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States. The FASB believes that the GAAP hierarchy should be directed
to entities because it is the entity (not its auditor) that is responsible for
selecting accounting principles for financial statements that are presented in
conformity with GAAP. The FASB does not believe this Statement will result in a
change in current practice. SFAS 162 is effective November 15,
2008.
  F-14
 2. Goodwill and
Intangibles
  In fiscal
2007, the Company acquired the assets of Summit Gaming and added $26.5 million
to goodwill, which included trade names of $1.6 million. In addition, we
acquired $7.7 million in identifiable intangible assets which will be amortized
over 5 to 10 years. The Company conducts its annual goodwill impairment analysis
during the fourth quarter of each fiscal year, measured as of July 31, using an
outside third party.  The Company assessed the value of its goodwill
as of July 31 of 2006 and 2007 (its annual review date) and concluded that
goodwill was not impaired.  The Company performed its 2008 annual
impairment testing of goodwill and intangibles as of July 31, 2008. Based on a
combination of factors, including the current economic environment, decreased
revenues and increased costs, the Company recorded a noncash goodwill impairment
associated with our acquisition of Summit of $10.8 million in the fourth quarter
of fiscal 2008. The annual evaluation of goodwill and other non-amortizing
intangible assets requires the use of estimates about future operating results
of each reporting unit to determine their estimated fair
value.  Changes in forecasted operations can materially affect these
estimates.  Once an impairment of goodwill or other intangible assets
has been recorded, it cannot be reversed.
 
 Intangible
assets consisted of the following as of November 2, 2008 (in
thousands):
 Stated
      Value
                  
                  
                  Accumulated
      Amortization
                  
                  
                  Net
      Carrying Value
                  
                  
                  Weighted
      Average Amortization Period (in years)Intellectual
      property (software)
                  
                  $
                  4,173
                  
                  
                  $
                  (4,090
                  )
                  
                  $
                  83
                  
                  
                  
                  0.7Copyrights/trademarks
                  
                  
                  247
                  
                  
                  
                  (55
                  )
                  
                  
                  192
                  
                  
                  
                  10.8Distributor
      buyouts
                  
                  
                  260
                  
                  
                  
                  (260
                  )
                  
                  
                  —
                  
                  
                  
                  —Summit
      Gaming identifiable intangible assets:Customer
      relationships
                  
                  
                  3,600
                  
                  
                  
                  (1,140
                  )
                  
                  
                  2,460
                  
                  
                  
                  3.4Patent
      applications
                  
                  
                  620
                  
                  
                  
                  (82
                  )
                  
                  
                  538
                  
                  
                  
                  8.4Game
      software library
                  
                  
                  3,600
                  
                  
                  
                  (570
                  )
                  
                  
                  3,030
                  
                  
                  
                  8.4$
                  12,500
                  
                  
                  $
                  (6,197
                  )
                  
                  $
                  6,303
  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
  Estimated
future aggregate amortization expense for intangible assets subject to
amortization as of November 2, 2008 is as follows (in thousands):
 
 2009
                  
                  $
                  1,2292010
                  
                  
                  1,1532011
                  
                  
                  1,1502012
                  
                  
                  7302013
                  
                  
                  430After
      2013
                  
                  
                  1,511$
                  6,203
 
 A prepaid
royalty of $100,000 was paid during fiscal year 2008 related to a license
agreement to develop, manufacture, sell or lease games and gaming devices that
use the technology protected by claims in patents owned by Patent Investments
Co. Amortization will not be recognized on this until the life is determined
which will not occur until after the software is approved. As a result, the
table above does not include any amortization of this amount.
       F-15
 3. Property, Bingo Equipment, Furniture
and Other Equipment
  Property,
bingo equipment, furniture and other equipment consisted of the following as of
November 2, 2008 and October 31, 2007 (in thousands):
  November
      2,
                  
                  
                  October
      31,2008
                  
                  
                  2007Land
                  
                  $
                  2,471
                  
                  
                  $
                  —Building
                  
                  
                  4,864
                  
                  
                  
                  —Bingo
      equipment
                  
                  
                  51,384
                  
                  
                  
                  55,307Office
      furniture and equipment
                  
                  
                  4,733
                  
                  
                  
                  4,716Leasehold
      improvements
                  
                  
                  874
                  
                  
                  
                  86464,326
                  
                  
                  
                  60,887Less
      accumulated depreciation and amortization
                  
                  
                  45,076
                  
                  
                  
                  44,639Less
      reserve for excess or obsolete terminals
                  
                  
                  220
                  
                  
                  
                  13919,030
                  
                  
                  
                  16,109Construction
      in progress
                  
                  
                  264
                  
                  
                  
                  —Add
      bingo component parts
                  
                  
                  3,590
                  
                  
                  
                  3,793Bingo
      equipment, furniture and other equipment, net
                  
                  $
                  22,884
                  
                  
                  $
                  19,902
  Depreciation
for bingo equipment is applied over three- and five-year periods. Terminals
on-hand that are not expected to be re-used are provided for as excess or
obsolete.
 
 Overall
depreciation expense during the 53 weeks ended November 2, 2008, fiscal years
ended October 31, 2007, and 2006 amounted to approximately $8.5 million,
$10.2 million, and $9.6 million, respectively. In addition, during the
53 weeks ended November 2, 2008, fiscal years ended October 31, 2007, and
2006, the Company reserved $81,000, $38,000, and $249,000, respectively for
bingo terminals and parts not expected to be re-used.
 
 Component
parts are for the assembly of terminals and recorded at average cost until the
completed terminal is placed in bingo equipment and depreciated.
  4.
Credit Agreements and Acquisition of Real Property
  On March
28, 2007, the Company entered into a credit facility related to the acquisition
of Summit. This credit facility consisted of a term note for $30.0 million and a
revolving line of credit for $10.0 million. On August 22, 2008, this credit
facility was terminated concurrent with the refinancing transaction as described
below. The Company incurred approximately $0.4 million in prepayment penalties
to Ableco Finance LLC, which was funded by the proceeds of the refinance
transaction.  The Company also expensed $0.8 million of debt
acquisition costs related to the prior credit facility.
 
 On August
22, 2008, the Company entered into a Senior Secured Credit Facility (the “New
Credit Facility”) with U.S. Bank N.A. as lender, lead arranger and
administrative agent, and Bank of the West as lender (collectively “Lenders”)
that provides up to $40.0 million of financing for the Company. U.S. Bank N.A.
will hold up to $25.0 million of the New Credit Facility and Bank of the West
will hold up to $15.0 million. The New Credit Facility will be used (i) to
refinance our existing credit facility as described earlier in this note, (ii)
acquire real property as described below, and (iii) for general corporate
purposes. The Company’s obligations under the New Credit Facility are secured by
first priority security interest in all of the Company’s assets, including a
first deed of trust on real estate and property purchased concurrently with
closing of New Credit Facility, and future cash flows. The Company incurred
arrangement, up front, document and other fees of approximately $0.3 million
payable to Lenders, and the fees were funded by the proceeds of the New Credit
Facility.
 
 The New
Credit Facility provides a Senior Secured Revolving Credit Facility (the
“Revolver”) of $2.0 million, maturing on August 31, 2010, with monthly
interest-only payments due on the last day of each month beginning September 30,
2008. The Company selects the interest rate calculation for each advance under
the Revolver from two allowable interest rate calculations. The first allowed
interest rate calculation, called the Base Rate, is the higher of the Agent’s
prime rate or the Federal Funds rate plus 0.50% (a “Base Rate Loan”) minus
0.25%. The second allowed interest rate calculation is the 1, 2, 3, 6, or
12-month LIBOR rate plus 2.0%. As of November 2, 2008, there were no outstanding
borrowings under the Revolver.
 
 The New
Credit Facility also provided for a Senior Secured Term Credit Facility (the
“Term Loan”) of $38.0 million that required monthly interest payments beginning
September 30, 2008, and quarterly principal payments of approximately $1.1
million beginning October 31, 2008, until its maturity on August 28, 2013, when
the balance will be due in full. The interest rate for the term loan varies
based upon the one-month LIBOR rate plus 2.80%. In connection with the Term Loan
agreement, the Company also entered into an interest rate swap agreement with
U.S. Bank N. A., which exchanged the variable one-month LIBOR rate of the
Term Loan for a fixed LIBOR rate of 3.99% per annum effective August 22,
2008, through the maturity of the Term Loan. As of November 2, 2008, there was
$36.9 million outstanding under the Term Loan at an average interest rate of
6.79% and the value of the interest rate swap was ($0.7) million.
    
 F-16
 Combined
aggregate principal maturities of the New Credit Facility during the next five
years and thereafter are as follows (in thousands):
 
 Principal
                    Repayments2009
                  
                  $
                  4,4712010
                  
                  
                  4,4712011
                  
                  
                  4,4712012
                  
                  
                  4,4712013
                  
                  
                  4,471Thereafter
                  
                  
                  14,527$
                  36,882
 
 Under the
New Credit Facility, the Company must comply with various financial and
non-financial covenants. The financial covenants include a cash flow leverage
ratio, fixed charge coverage ratio, working capital requirement and liquidity
requirement. The non-financial covenants include restrictions on asset
divestitures; liens; transactions with related parties; limitations on
additional indebtedness; mergers, acquisitions and consolidations; cash
dividends; redemptions of stock (other than the existing stock repurchase
program publicly announced on September 4, 2007); and change of control. The New
Credit Facility provides for a mandatory prepayment of principal equal to 50% of
free cash flow when a collateral shortfall is present, measured on an annual
basis beginning October 31, 2009. A collateral shortfall will exist if the
outstanding principal balance of the New Credit Facility exceeds the sum of (i)
100% of cash held in a control account, (ii) 80% of accounts receivable, (iii)
50% of net book value of finished goods and raw materials, (iv) 75% of the net
book value of land, buildings, and property improvements, and (v) 50% of the net
book value of all other fixed assets. Free cash flow is defined as EBITDA as of
the fiscal year then ended less the sum of (i) unfinanced capital expenditures,
(ii) cash paid interest, (iii) cash paid taxes, (iv) the change in working
capital, and (v) debt amortization under New Credit Facility.  On
January 28, 2009, the Company entered into an amendment with both lenders of the
New Credit Facility (“Amendment”).  The Amendment waives the fixed
charge coverage ratio requirement for the fiscal 2008 year end.  The
Amendment also reduces the minimum fixed charge coverage ratio for the first
fiscal quarter of 2009, increases the base rate on the Revolver by 0.25%, and
increases the LIBOR spread on the Revolver from 2.0% to 2.5%.  At
November 2, 2008, we were in compliance with all the covenants as
amended.
 
 On August
22, 2008, and concurrent with the closing of the New Credit Facility, the
Company purchased from RKD Holdings, L.L.C. certain real property in southwest
Reno, Nevada for an aggregate purchase price of $7.2 million. The real property
includes an approximately 100,000 square foot building that will be used as our
new headquarters. Pursuant to the New Credit Facility, the Company will invest
approximately $2.7 million in additional improvements to the interior of the
building to add office space, and provide for the manufacturing and assembly
needs of bingo, VLT and slot equipment. The building improvements are being
funded by proceeds from the New Credit Facility, and the proceeds of $2.7
million are being held in a construction control cash account with U.S. Bank
N.A., of which the remaining balance of $2.6 million is reflected as restricted
cash in our Long-Term Asset section of the Consolidated Balance
Sheet.  The New Credit Facility provides for the release of the funds
to cover payments for the construction of the additional improvements. Any funds
remaining in the construction control account will be returned to us upon
satisfactory completion of the building improvements. The Company expects to
complete the building improvements and relocate to our new corporate
headquarters by the beginning of the second fiscal quarter in 2009.
  5. Commitments and
Contingencies
 
 Leases
 
 The
Company leases administrative and warehouse facilities and certain equipment
under non-cancelable operating leases. Rent expense during the 53 weeks ended
November 2, 2008, fiscal years ended October 31, 2007, and
2006  was $1,022,000, $847,000, and $836,000,
respectively.
 
 Future
minimum lease payments under these leases as of November 2, 2008 are as follows
(in thousands):
  2009
                  
                  $
                  8652010
                  
                  
                  6122011
                  
                  
                  172012
                  
                  
                  132013
                  
                  
                  5$
                  1,512
 
 Purchase
Commitments
  From time
to time, the Company enters into commitments with our vendors to purchase box
parts, bingo terminals and support equipment at fixed prices and/or guaranteed
quantities. During the 53 weeks ended November 2, 2008, the Company entered into
an agreement with a vendor for $3.4 million to purchase box hardware for a sale
expected to deliver in early 2009.  As of November 2, 2008 all of this
commitment was fulfilled.  The Company also entered into a
construction agreement in September 2008 with a general contractor for $2.7
million for improvements to our new corporate headquarters which will be funded
by the loan proceeds in the construction account. As of November 2, 2008, $2.6
million of this commitment was still outstanding.  The Company expects
the building improvements to be completed by the beginning of second quarter in
fiscal year 2009. Various other additional orders have been placed throughout
fiscal 2008, of which $1.1 million was outstanding as of November 2,
2008.  All purchases are expected to occur in early 2009.
 F-17
 Litigation
 
 Trend
Litigation-Texas.  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”)(involving a distribution agreement in Texas), 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.  During the quarter ended April 30,
2008, we wrote off all receivables and related reserves.  Trial in
this matter commenced October 4, 2004. On November 1, 2004, the jury
returned a verdict in favor of Trend against 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.
 
 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 as pre-trial motions and issues are currently
being addressed.  Additionally, as a result of this decision, the
supersedeas bonds posted by GameTech International prior to filing 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-Virginia.  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. The rights to the
judgments in this matter have now been assigned to a third party collection
entity for them to pursue.  The assignment provides we are to receive
forty percent of what ever is collected after they deduct their reasonable
out-of-pocket collection costs.  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-Based
Compensation
  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
 F-18
 Plan”).
Under the 2001 Plan, the Company authorized the granting of restricted stock to
employees who are not officers or directors, consultants, and independent
contractors. At the annual meeting of stockholders held on March 28, 2006, the
stockholders of the Company approved the amendment and restatement of the 1997
Plan, which included the combination of the 2001 Plan with the 1997 Plan and the
extension of the term of the 1997 Plan for an additional ten
years.
 
 The
aggregate intrinsic value represents the difference between the closing price of
our common stock on November 2, 2008, which was $2.36, and the exercise price,
multiplied by the number of in-the-money stock options as of the same date. This
represents the amount that would have been received by the stock option holders
if they had all exercised their stock options on November 2, 2008. In future
periods, this amount will change depending on fluctuations in our stock price.
The aggregate intrinsic value of the options outstanding at November 2, 2008 was
$0, as all options are currently not in-the-money.  For those options
that were exercisable, the aggregate intrinsic value at November 2, 2008 was $0.
During the 53 weeks ended November 2, 2008, years ended October 31, 2007, and
2006, the aggregate intrinsic value of options exercised under our stock option
plans were $0.5 million, $0.6 million, and $1.8 million, respectively,
determined as of the date of option exercise.
 
 As of
November 2, 2008, options to purchase 612,150 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 November 2, 2008, 844,691 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:
  53
      Weeks Ended November 2,
                      
                      
                      Year
      ended October 31,2008
                      
                      
                      2007
                      
                      
                      2006Number
      of
                        Shares
                        (Options)
                      
                      
                      Weighted-Average
      Exercise Price
                      
                      
                      Number
      of
                        Shares
                        (Options)
                      
                      
                      Weighted-
                        Average
                        Exercise
                        Price
                      
                      
                      Number
      of
                        Shares
                        (Options)
                      
                      
                      Weighted-
                        Average
                        Exercise
                        PriceBalance
      at beginning of year
                      
                      
                      721,550
                      
                      
                      $
                      4.38
                      
                      
                      
                      847,735
                      
                      
                      $
                      3.93
                      
                      
                      
                      1,410,900
                      
                      
                      $
                      3.63Options:Granted
                      
                      
                      —
                      
                      
                      $
                      0.00
                      
                      
                      
                      300,000
                      
                      
                      $
                      10.44
                      
                      
                      
                      150,000
                      
                      
                      $
                      6.92Forfeited
                      
                      
                      (76,900
                      )
                      
                      $
                      7.52
                      
                      
                      
                      (325,000
                      )
                      
                      $
                      9.09
                      
                      
                      
                      (82,166
                      )
                      
                      $
                      3.81Exercised
                      
                      
                      (32,500
                      )
                      
                      $
                      3.65
                      
                      
                      
                      (101,185
                      )
                      
                      $
                      3.46
                      
                      
                      
                      (630,999
                      )
                      
                      $
                      3.99Balance
      at end of year
                      
                      
                      612,150
                      
                      
                      $
                      4.02
                      
                      
                      
                      721,550
                      
                      
                      $
                      4.38
                      
                      
                      
                      847,735
                      
                      
                      $
                      3.93Exercisable
      at end of year
                      
                      
                      562,150
                      
                      
                      $
                      3.36
                      
                      
                      
                      621,550
                      
                      
                      $
                      3.39
                      
                      
                      
                      722,735
                      
                      
                      $
                      3.40Weighted
      average grant-date fair value of options granted during the
      year
                      
                      
                      
                      
                      
                      $
                      0.00
                      
                      
                      
                      
                      
                      
                      $
                      6.88
                      
                      
                      
                      
                      
                      
                      $
                      4.17
  As of
November 2, 2008, 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 $212,400. This cost will be amortized for fiscal years 2009,
2010, and 2011 at $93,500, $93,500, and $25,400, respectively, and will be
adjusted for subsequent changes in estimated forfeitures.
 
 The
following table summarizes information regarding stock options outstanding and
exercisable as of November 2, 2008:
 
 Options
      Outstanding
                    
                    Options
      ExercisableRange 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
                    
                    
                    6.58
                    
                    $
                    2.87
                    
                    
                    313,500
                    
                    
                    6.58
                    
                    $
                    2.87$3.10
      - $3.19
                    
                    
                    75,000
                    
                    
                    6.58
                    
                    $
                    3.13
                    
                    
                    75,000
                    
                    
                    6.58
                    
                    $
                    3.13$3.46
      - $3.63
                    
                    
                    56,650
                    
                    
                    5.84
                    
                    $
                    3.52
                    
                    
                    56,650
                    
                    
                    5.84
                    
                    $
                    3.52$3.89
      - $4.29
                    
                    
                    62,000
                    
                    
                    4.54
                    
                    $
                    4.05
                    
                    
                    62,000
                    
                    
                    4.54
                    
                    $
                    4.05$4.62
      - $6.54
                    
                    
                    55,000
                    
                    
                    5.69
                    
                    $
                    5.50
                    
                    
                    55,000
                    
                    
                    5.69
                    
                    $
                    5.50$11.46
                    
                    
                    50,000
                    
                    
                    8.27
                    
                    $
                    11.46
                    
                    
                    —
                    
                    
                    —
                    
                    $
                    —612,150
                    
                    
                    6.36
                    
                    $
                    4.02
                    
                    
                    562,150
                    
                    
                    6.19
                    
                    $
                    3.36
  During
the 53 weeks ended November 2, 2008, we granted 162,000 restricted shares to
various employees that vest over a three-year period. The shares were valued at
market on the grant date. The awards will be amortized on a straight-line basis
over the term of the grants. We recognized expense for the 53 weeks ended
November 2, 2008, of $139,000 and a related tax benefit of $47,000 for a net
cost of $92,000. As of November 2, 2008, the compensation related to unvested
restricted stock awards granted to employees under our stock option plan but not
yet recognized was $607,000. The cost will be adjusted for subsequent changes in
estimated forfeitures.
 
 For the
53 weeks ending November 2, 2008, there were no new stock options
granted.
  F-19
 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):
 
 53
      Weeks
                    Ended
                    November
      2,
                  
                  
                  Year
      Ended October 31,2008
                  
                  
                  2007
                  
                  
                  2006Current:Federal
                  
                  $
                  (1,046
                  )
                  
                  $
                  2,587
                  
                  
                  $
                  2,947State
                  
                  
                  135
                  
                  
                  
                  378
                  
                  
                  
                  365Foreign
                  
                  
                  208
                  
                  
                  
                  387
                  
                  
                  
                  345(703
                  )
                  
                  
                  3,352
                  
                  
                  
                  3,657Deferred:Federal
                  
                  
                  (2,948
                  )
                  
                  
                  (500
                  )
                  
                  
                  (576
                  )State
                  
                  
                  (676
                  )
                  
                  
                  (130
                  )
                  
                  
                  16Foreign
                  
                  
                  (84
                  )
                  
                  
                  (55
                  )
                  
                  
                  (136
                  )(3,708
                  )
                  
                  
                  (685
                  )
                  
                  
                  (696
                  )Income
      tax provision (benefit)
                  
                  $
                  (4,411
                  )
                  
                  $
                  2,667
                  
                  
                  $
                  2,961
 
 
 The
significant components of the Company's deferred income tax assets and
liabilities as of November 2, 2008 and October 31, 2007 are as follows (in
thousands):
  November
      2, 2008Current
                  
                  
                  Non-CurrentDeferred
      income tax assets:Amortization of intangible assets
                  
                  $
                  —
                  
                  
                  $
                  3,904Allowance for doubtful accounts
                  
                  
                  418
                  
                  
                  
                  —Reserve for obsolete terminals
                  
                  
                  —
                  
                  
                  
                  82Loss contingencies
                  
                  
                  1,478
                  
                  
                  
                  —Accrued vacation
                  
                  
                  177
                  
                  
                  
                  —Stock option expense
                  
                  
                  43
                  
                  
                  
                  63Royalties
                  
                  
                  (37
                  )
                  
                  
                  —Foreign tax credit carryforward
                  
                  
                  —
                  
                  
                  
                  34Value
      of credit swap derivative
                  
                  
                  —
                  
                  
                  
                  248Fair
      market value write-down on investments
                  
                  
                  —
                  
                  
                  
                  1,289Loss
      carryforwards
                  
                  
                  111
                  
                  
                  
                  12Total
      deferred income tax assets
                  
                  
                  2,190
                  
                  
                  
                  5,632Valuation
      allowance
                  
                  
                  (365
                  )
                  
                  
                  (924
                  )Deferred
      income tax assets, net:
                  
                  
                  1,825
                  
                  
                  
                  4,708Deferred
      income tax liability:Depreciation
                  
                  
                  —
                  
                  
                  
                  (170
                  )Net
      deferred income tax asset (liability):
                  
                  $
                  1,825
                  
                  
                  $
                  4,538
  
 F-20
 October
      31, 2007Current
                  
                  
                  Non-CurrentDeferred
      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 carryforward
                  
                  
                  —
                  
                  
                  
                  36Loss
      carryforwards
                  
                  
                  —
                  
                  
                  
                  13Total
      deferred income tax assets
                  
                  
                  2,651
                  
                  
                  
                  602Deferred
      income tax liability:Depreciation
                  
                  
                  —
                  
                  
                  
                  (600
                  )Net
      deferred income tax asset (liability)
                  
                  $
                  2,651
                  
                  
                  $
                  2
 
 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:
  53
      Weeks
                    Ended
                    November
      2,
                  
                  
                  Year
      ended October 31,2008
                  
                  
                  2007
                  
                  
                  2006Income
      tax provision (benefit) at the statutory rate
                  
                  
                  (34.0
                  )
      %
                  
                  
                  34.0
                  %
                  
                  
                  34.0
                  %State
      income taxes, net
                  
                  
                  (4.9
                  )
                  
                  
                  3.1
                  
                  
                  
                  3.4Meals
      and entertainment
                  
                  
                  0.3
                  
                  
                  
                  0.6
                  
                  
                  
                  0.7Non
      deductible lobbying expenses
                  
                  
                  0.1
                  
                  
                  
                  0.1
                  
                  
                  
                  0.4State
      minimum/capital taxes
                  
                  
                  0.4
                  
                  
                  
                  —
                  
                  
                  
                  —Change
      in valuation allowance
                  
                  
                  8.1
                  
                  
                  
                  —
                  
                  
                  
                  —Other,
      net
                  
                  
                  1.7
                  
                  
                  
                  (1.5
                  )
                  
                  
                  1.8Income
      tax provision (benefit) at its effective rate
                  
                  
                  (28.3
                  )
      %
                  
                  
                  36.3
                  %
                  
                  
                  40.3
                  %
 
 At November 2, 2008, the Company had net
operating loss carryforwards for state income tax purposes of approximately $2.4
million. The entire amount of the net operating loss carryforwards are subject
to limitations under Section 382 of the Internal Revenue Code (“Section 382”).
Section 382 limits the amount of carryforwards available per year for use
against future taxable income. The Company will be carrying the federal net
operating loss back and there is sufficient prior year taxable income to fully
absorb the loss and yield a full benefit in the form of refund, therefore the
net operating loss carry forward of $2.4 million pertains to states
only. The state carryforwards are expected to be fully utilized before they
expire, which generally occurs within 5 to 20 years.
 
 The
valuation allowance pertains to the deferred tax asset resulting from the
auction rate security write-down of $3.3 million. When that loss is recognized
for tax purposes, it will be a capital loss available only to offset capital
gains, and the Company does not expect to be able to utilize it during the five
year carry forward period.  However, according to SFAS 109, our
valuation allowance has been classified as current or noncurrent based on the
percentages of current and noncurrent deferred tax assets to total deferred tax
assets.
 
 FIN 48
 In fiscal
2008, the Company adopted FIN No. 48, Accounting for Uncertainty in Income
Taxes, an Interpretation of FASB Statement No. 109,which creates a
single model to address uncertainty in income tax positions and prescribes the
minimum recognition threshold a taxation is required to meet before being
recognized in the financial statements.  FIN No. 48 also provides
guidance on the derecognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure, and
transition.  The 2008 fiscal year is the first year the Company is
required to adopt FIN No. 48 as it became effective after the beginning of an
entity’s first fiscal year that begins after December 15, 2006.  The
impact of FIN No. 48 on the Company’s financial position, cash flows and results
of operations is not material, therefore during fiscal 2008, the Company did not
book any interest or penalties related to unrecognized tax
positions.
 
 The
Company files numerous consolidated and separate income tax returns in the
United States and in many state and foreign jurisdictions. With few exceptions,
the Company is no longer subject to United States federal income tax
examinations for years before 2004, and is no longer subject to state and
local, or foreign income tax examinations for years
before 2003.
 
 8.
Short-Term Investments
  The following table presents the estimated fair value breakdown of
investment by category (in thousands):
   F-21
  November
      2,
                  
                  October
      31,2008
                  
                  2007Corporate
      securities
                  
                  $
                  —
                  
                  
                  $
                  1,300Auction
      rate securities
                  
                  
                  —
                  
                  
                  
                  6,463Total
      short-term investments
                  
                  $
                  —
                  
                  
                  $
                  7,763
 
 In
prior periods, we classified the amount invested in ARS as marketable securities
in the current assets listed on the balance sheet.  Given the failed
auctions, our ARS are illiquid until there is a successful auction for
them.  Accordingly, in fiscal 2008 we reclassified the entire balance
of the ARS from short-term to non-current investments.
 
 9. Accrued Severance
  The
Company has incurred expenses connected with severance agreements. These amounts
are recorded in accrued payroll. During the 53 weeks ended November 2, 2008, the
total severance expense was $192,255 recorded in sales, service, operations,
general and administrative expenses.  As of November 2, 2008, $134,535
of severance expense had been paid, with $58,235 remaining as an outstanding
balance which will be paid in the first quarter of 2009. In fiscal 2007, total
severance expenses of $111,000 were recorded in sales, general and
administrative expenses.
  Accrued
severance consisted of the following as of November 2, 2008, and October 31,
2007 (in thousands):
  November
      2,
                  
                  
                  October
      31,2008
                  
                  
                  2007Beginning
      balance
                  
                  $
                  —
                  
                  
                  $
                  44Severance
      expenses
                  
                  
                  192
                  
                  
                  
                  111Less
      severance paid
                  
                  
                  (134
                  )
                  
                  
                  (155
                  )Ending
      balance
                  
                  $
                  58
                  
                  
                  $
                  —
  10.
Other Accrued Liabilities
 
 Other
accrued liabilities consist of (in thousands):
 
 November
      2,
                  
                  
                  October
      31,2008
                  
                  
                  2007Accrued
      professional fees
                  
                  $
                  153
                  
                  
                  $
                  176Accrued
      distributor commissions
                  
                  
                  582
                  
                  
                  
                  401Accrued
      property tax
                  
                  
                  117
                  
                  
                  
                  145Other
                  
                  
                  433
                  
                  
                  
                  741$
                  1,285
                  
                  
                  $
                  1,463
 
 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):
 
 53
      Weeks
                    Ended
                    November
      2,
                  
                  Year
      ended October 31,2008
                  
                  2007
                  
                  
                  2006Basic
      weighted average shares outstanding
                  12,190
                  
                  
                  12,566
                  
                  
                  
                  12,181Effect
      of dilutive securities:Stock
      options
                  279
                  
                  
                  425
                  
                  
                  
                  576Diluted
                  12,469
                  
                  
                  12,991
                  
                  
                  
                  12,757
 
 Employee
stock options to purchase approximately 50,000, 100,000, and 125,000, shares
during the 53 weeks ended November 2, 2008, in fiscal years ending October 31,
2007, and 2006, respectively, were outstanding, but were not included in the
computation of diluted earnings per share because the effect would have been
anti-dilutive.
 
 12.
Valuation and Qualifying Accounts (in thousands)
   
 F-22
 Description
                  Balance
      at Beginning of Period
                  
                  Additions
      Charged to Costs and Expenses
                  
                  Net
      Deductions (Write-offs, Net of Collections)
                  
                  Balance
      at End of PeriodAllowance
      for accounts receivableYear
      ended October 31, 2006:Allowance
                  $
                  2,374
                  
                  $
                  277
                  
                  $
                  (421
                  )
                  $
                  2,230Year
      ended October 31, 2007:Allowance
                  $
                  2,230
                  
                  $
                  561
                  
                  $
                  (362
                  )
                  $
                  2,429Year
      ended November 2, 2008:Allowance
                  $
                  2,429
                  
                  $
                  563
                  
                  $
                  (1,775
                  )
                  $
                  1,217
  The
balance of the allowance for accounts receivable for fiscal years ended 2007,
and 2006 included a combined allowance of $1.6 million for Trend Gaming Systems,
LLC and Trend Gaming, LLC consisting of the entire accounts receivable balance
related to these companies; this balance was written off during the 53 weeks
ending November 2, 2008.  For additional information, see Note 5
“Commitments and Contingencies
– Litigation” contained herein.
  Description
                  Balance
      at Beginning of Period
                  
                  Additions
      Charged to Costs and Expenses
                  
                  Deductions
      (Disposal of Assets)
                  
                  Balance
      at End of PeriodAllowance
      for property and equipmentYear
      ended October 31, 2006:Allowance
                  $
                  2,878
                  
                  $
                  249
                  
                  $
                  (2,913
                  )
                  $
                  214Year
      ended October 31, 2007:Allowance
                  $
                  214
                  
                  $
                  38
                  
                  $
                  (113
                  )
                  $
                  139Year
      ended November 2, 2008:Allowance
                  $
                  139
                  
                  $
                  143
                  
                  $
                  (62
                  )
                  $
                  220
 
 13.
Agreement to Acquire Assets
 
 On March
28, 2007, we acquired essentially all of the assets of Summit Gaming for $40.9
million in cash. Summit is a leading developer and manufacturer of entertainment
driven gaming devices, including primarily VLTs, slot equipment and related
software, headquartered in Billings, Montana.
 
 Under the
purchase method of accounting, the total purchase price is allocated to Summit’s
tangible and intangible assets based on their fair values as of the date of the
closing of the acquisition. The Company is in disagreement with the seller
regarding approximately $1.0 million of the purchase price regarding the total
working capital at the date of closing.  The Company is working with
the seller to settle this matter through arbitration.  The purchase
price may change based on the outcome of the arbitration.  The
purchase price, including the disputed working capital, has been allocated as
described below.
 
 The total
purchase price is as follows (in thousands):
 Cash
      paid for Summit
                    
                    $
                    39,745Direct
      transaction costs
                    
                    
                    1,115Total
      cash purchase price
                    
                    $
                    40,860
 The
preliminary purchase price includes approximately $1.0 million in working
capital that is in dispute. The dispute is being arbitrated and should be
resolved in fiscal year 2009. The allocation of the preliminary purchase price
and estimated useful lives and first year amortization associated with certain
assets is as follows (in thousands):
 
 Accounts
      receivable
                  
                  $
                  2,645Prepaid
      expenses and other assets
                  
                  
                  211Inventory
                  
                  
                  3,312Property
      plant and equipment
                  
                  
                  1,598Identifiable
      depreciable intangibles assets
                  
                  
                  7,720Trade
      name
                  
                  
                  1,600Goodwill
                  
                  
                  24,896Accounts
      payable and other accrued expenses
                  
                  
                  (1,122)Total
      preliminary purchase price
                  
                  $
                  40,860
  
 F-23
  In the
above acquisition, the Company acquired various intangible assets listed
below:
 
 Acquired
Intangible Assets (in thousands):
 
 November
      2, 2008Net
      FairFair
      Market
                  
                  Estimated
                  
                  Accumulated
                  
                  
                  MarketValue
                  
                  Lives
                  
                  Amortization
                  
                  
                  ValueAmortized
      Intangible AssetsCustomer
      relationships
                  
                  $
                  3,600
                  
                  5
      years
                  
                  $
                  1,140
                  
                  
                  $
                  2,460Patent
      application
                  
                  
                  520
                  
                  10
      years
                  
                  
                  82
                  
                  
                  
                  438Game
      library
                  
                  
                  3,600
                  
                  10
      years
                  
                  
                  570
                  
                  
                  
                  3,030Total
      amortizable intangible assets
                  
                  $
                  7,720
                  
                  
                  
                  $
                  1,792
                  
                  
                  $
                  5,928Unamortized
      Intangible AssetsGoodwill
                  
                  $
                  24,896Summit
      trade name
                  
                  
                  1,600Total
                  
                  $
                  26,496
 
 14.
Related Party Transactions
 
 On March
28, 2007, the Company acquired essentially all of the assets of
Summit.  The Company sold video lottery terminals to Amusement
Services, LLC, which was owned by the person who was at the time also President
of Summit, a division of the Company. For the fiscal year ended October 31,
2007, $639,364 was sold to Amusement Services, LLC.  As of September,
2007, the President of Summit was no longer employed by the Company, and
therefore the sale of boxes to Amusement Services, LLC is no longer considered a
related party transaction.
 
 The
Company has also purchased equipment from Ceronix, Inc., which is controlled by
one of our board members.  For the fiscal year ended October 31, 2007,
$4,400 was spent with Ceronix, Inc.  The Company did not purchase any
equipment from Ceronix during the 53 weeks ended November 2, 2008.
 
 During
the fiscal year ended October 31, 2007, $0.5 million was advanced to a member of
the Company’s Board of Directors to repurchase stock on our
behalf.  This was accounted for as a related party receivable for
financial statement reporting purposes.  During the quarter ended
January 31, 2008, the director settled the receivable by delivering the
repurchased common stock to the Company.
 
 As of
November 2, 2008, there is a balance owing to a member of the board of the
Company in the amount of $34,454, net of discount. This relates to covering the
individual for medical insurance until the age of retirement.
 
 15.
Business Segment Information
 
 Management
reviewed the Company’s operating segments in accordance with SFAS 131, Disclosure about Segments of an
Enterprise and Related Information. Due to our acquisition of Summit in
March 2007, management determined that a new operating segment was
appropriate.  The segment discussion outline below represents the
adjusted segment structure as determined by management in accordance with SFAS
No. 131.
  Management
has identified two operating segments. Each operating segment is considered a
reporting segment, which is described as follows:  the design,
development, and marketing of interactive electronic bingo systems consisting of
portable and fixed-based systems and the manufacturing and sale of gaming
equipment.
  The
accounting policies of the reporting segments are the same as those described in
the summary of significant accounting policies. We evaluate the performance of
these segments based on many factors including sales, sales trends, margins, and
operating performance.
            
 F-24
 Financial
information for the two reporting segments is as follows: (in
thousands)
 53
      Weeks Ended
                  
                  
                  12
      Months EndedNovember
      2,
                  
                  
                  October
      31,2008
                  
                  
                  2007
      (1)Net
      RevenueBingo
      Equipment
                  
                  $
                  43,964
                  
                  
                  $
                  47,114Box
      Equipment
                  
                  
                  11,483
                  
                  
                  
                  11,691$
                  55,447
                  
                  
                  $
                  58,805Net
      Cost of RevenueBingo
      Equipment
                  
                  $
                  19,103
                  
                  
                  $
                  19,683Box
      Equipment
                  
                  
                  6,262
                  
                  
                  
                  6,859$
                  25,365
                  
                  
                  $
                  26,542Net
      Income/(Loss)Bingo
      Equipment
                  
                  
                  549
                  
                  
                  $
                  4,510Box
      Equipment
                  
                  
                  (11,712
                  )
                  
                  
                  161$
                  (11,163
                  )
                  
                  $
                  4,671Depreciation
      and AmortizationBingo
      Equipment
                  
                  $
                  8,822
                  
                  
                  $
                  10,743Box
      Equipment
                  
                  
                  1,286
                  
                  
                  
                  801$
                  10,108
                  
                  
                  $
                  11,544Interest
      ExpenseBingo
      Equipment
                  
                  $
                  267
                  
                  
                  $
                  125Box
      Equipment
                  
                  
                  4,357
                  
                  
                  
                  2,217$
                  4,624
                  
                  
                  $
                  2,342
  November
      2,
                  
                  
                  October
      31,2008
                  
                  
                  2007(1)Identifiable
      AssetsBingo
      Equipment
                  
                  $
                  47,088
                  
                  
                  $
                  60,378Box
      Equipment
                  
                  
                  42,407
                  
                  
                  
                  33,504$
                  89,495
                  
                  
                  $
                  93,882
 
 1.  Box
equipment for fiscal 2007 represents seven months of operations, as the purchase
of the segment assets occurred in March 2007.
 
 16.
Quarterly Financial Information (Unaudited)
 
 Summarized
unaudited quarterly financial information for the 53 weeks ended November 2,
2008 and fiscal year 2007 are noted below (in thousands, except per share
amounts):
 
 53
      Weeks Ended November 2, 2008First
                    Quarter
                  
                  
                  Second
                    Quarter
      (1)
                  
                  
                  Third
                    Quarter
      (1)
                  
                  
                  Fourth
                    Quarter
      (1,2)Revenue
                  
                  $
                  15,184
                  
                  
                  $
                  13,870
                  
                  
                  $
                  13,362
                  
                  
                  $
                  13,031Gross
      profit
                  
                  
                  8,584
                  
                  
                  
                  7,701
                  
                  
                  
                  6,547
                  
                  
                  
                  7,250Income
      (loss) from operations
                  
                  
                  1,800
                  
                  
                  
                  1,090
                  
                  
                  
                  (11
                  )
                  
                  
                  (10,704)Net
      income (loss)
                  
                  $
                  331
                  
                  
                  $
                  113
                  
                  
                  $
                  (488
                  )
                  
                  $
                  (11,119)Net
      income (loss) per share:Basic
                  
                  $
                  .03
                  
                  
                  $
                  .01
                  
                  
                  $
                  (.04
                  )
                  
                  $
                  (.92)Diluted
                  
                  $
                  .03
                  
                  
                  $
                  .01
                  
                  
                  $
                  (.04
                  )
                  
                  $
                  (.92)
   Year
      ended October 31, 2007First
                    Quarter
                  
                  
                  Second
                    Quarter(3)
                  
                  
                  Third
                    Quarter(3)
                  
                  
                  Fourth
                    Quarter(3)Revenue
                  
                  $
                  12,016
                  
                  
                  $
                  13,411
                  
                  
                  $
                  16,637
                  
                  
                  $
                  16,741Gross
      profit
                  
                  $
                  7,094
                  
                  
                  $
                  7,465
                  
                  
                  $
                  8,590
                  
                  
                  $
                  9,114Income
      (loss) from operations
                  
                  $
                  1,566
                  
                  
                  $
                  2,015
                  
                  
                  $
                  2,537
                  
                  
                  $
                  2,755Net
      income (loss)
                  
                  $
                  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
  F-25
 
 Year
      ended October 31, 2006First
                    Quarter
                  
                  
                  Second
                    Quarter
                  
                  
                  Third
                    Quarter
                  
                  
                  Fourth
                    Quarter
      (4)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 our second, third and fourth quarters of 2008 reflect impairment
      charges of $1.0 million, $0.1 million and $2.2 million, respectively,
      related to our investments in auction rate securities.2.
                  Results
      for our fourth quarter of 2008 reflect the impairment charge related to
      goodwill of $10.8 million associated with our acquisition of
      Summit.3.
                  Results
      for the second, third, and fourth quarters of fiscal 2007 reflect the
      acquisition of the assets of Summit.4.
                  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-26