Forward Looking Statements

Certain statements included in this report, including without limitation statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations, which are not historical facts are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All forward-looking statements generally can be identified by the use of forward-looking terminology, such as "may", "will", "expect", "intend", "estimate", "anticipate", "believe", "project" or "continue" or the negative thereof or other similar words. Forward-looking statements involve risks and uncertainties, including, but not limited to those listed in Item 1A of our most recently filed Form 10-K. Actual results may differ materially from those discussed in, or implied by, the forward-looking statements. The forward-looking statements speak only as of the date of this report and we assume no duty to update them.

Overview

TransAct designs, develops, assembles, markets and services world-class transaction printers under the Epic and Ithaca® brand names. Known and respected worldwide for innovative designs and real-world service reliability, our thermal, inkjet and impact printers generate top-quality transaction records such as receipts, tickets, coupons, register journals and other documents. We focus on the following core markets: banking and point-of-sale, casino and gaming, and lottery. We sell our products to original equipment manufacturers, value-added resellers, selected distributors, as well as directly to end-users. Our product distribution spans across the Americas, Europe, the Middle East, Africa, Asia, Australia, the Caribbean Islands and the South Pacific. In addition, we have a strong focus on the after-market side of the business, with a growing commitment to printer service, supplies and spare parts. We operate in one reportable segment, the design, development, assembly and marketing of transaction printers and printer-related service, supplies and spare parts.

Critical Accounting Judgments and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared by us in accordance with accounting principles generally accepted in the United States of America. The presentation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and disclosure of contingent assets and liabilities. Our estimates include those related to revenue recognition, inventory obsolescence, the valuation of deferred tax assets and liabilities, depreciable lives of equipment, warranty obligations, and contingent liabilities. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances.

For a complete description of our accounting policies, see Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations, "Critical Accounting Policies and Estimates," included in our Form 10-K for the year ended December 31, 2007. We have reviewed those policies and determined that they remain our critical accounting policies for the nine months ended September 30, 2008.

Results of Operations: Three months ended September 30, 2008 compared to three months ended September 30, 2007

Net Sales. Net sales, which include printer sales and sales of spare parts, consumables and repair services, by market for the three months ended September 30, 2008 and 2007 were as follows:

                                          Three months ended        Three months ended            Change
(In thousands)                            September 30, 2008        September 30, 2007          $          %
Banking and point-of-sale                $      2,984     17.2 %   $      2,981     25.4 %   $     3       0.1 %
Casino and gaming                               6,681     38.6 %          4,728     40.3 %     1,953      41.3 %
Lottery                                         4,728     27.3 %          1,073      9.1 %     3,655     340.6 %
TransAct Services Group                         2,933     16.9 %          2,955     25.2 %       (22 )    (0.7 )%

                                         $     17,326    100.0 %   $     11,737    100.0 %   $ 5,589      47.6 %

International *                          $      2,982     17.2 %   $      2,824     24.1 %   $   158       5.6 %

* International sales do not include sales of printers made to domestic distributors or other customers who in turn ship those printers to international destinations.

Net sales for the third quarter of 2008 increased $5,589,000, or 48%, from the same period last year due primarily to higher printer shipments into our lottery (an increase of $3,655,000, or 341%), and casino and gaming markets (an increase of $1,953,000, or 41%). Sales from our TransAct Services Group decreased by $22,000, or 1%, and sales from our banking and point-of-sale market remained consistent. Overall, international sales increased by $158,000, or 6%, due to higher international shipments of our casino and gaming printers largely offset by lower international shipments in our other markets.

Banking and point-of-sale:

Revenue from the banking and point-of-sale ("POS") market includes sales of printers used by banks, credit unions, and other financial institutions to print and/or validate receipts and checks at bank teller stations. Revenue from this market also includes sales of inkjet, thermal and impact printers used primarily by retailers in the restaurant (including fine dining, casual dining and fast food), hospitality, and specialty retail industries to print receipts for consumers, validate checks, or print on other inserted media. Sales of our banking and POS printers worldwide increased $3,000, or less than 1%.

                      Three months ended          Three months ended             Change
   (In thousands)     September 30, 2008          September 30, 2007          $          %
   Domestic         $     2,798        93.8 %   $     2,610        87.6 %   $  188       7.2 %
   International            186         6.2 %           371        12.4 %     (185 )   (49.9 )%

                    $     2,984       100.0 %   $     2,981       100.0 %   $    3       0.1 %

Domestic banking and POS revenue increased to $2,798,000, representing an $188,000, or 7%, increase from the third quarter of 2007. Banking printer sales increased by approximately $100,000 due primarily to increasing sales of our new BANKjet®2500 bank teller printer in the third quarter of 2008 compared to the third quarter of 2007. Although we are currently pursuing several banking opportunities, due to the project-oriented nature of these sales, and the current credit crisis that we believe is negatively impacting the banking industry's level of capital expenditures, we cannot predict if and when future sales may occur. Banking printer sales continued to be complemented by increased sales of our new Ithaca 8000 ® receipt/label printer for McDonalds, as well as initial sales of our second printer product, the Ithaca 8040®, for this same customer. These increases were somewhat offset by decreased sales of non-McDonalds POS printers and our legacy line of POS impact printers to our distributors. We expect sales of our legacy impact printers for the remainder of 2008 to continue to be lower than those reported for the comparable 2007 period, as these printers are being replaced by our newer thermal and inkjet printers.

International banking and POS printer shipments decreased by $185,000, or 50%, to $186,000, due primarily to lower sales to our international distributors in Latin America and Asia.

Casino and gaming:

Revenue from the casino and gaming market includes sales of printers used in slot machines, video lottery terminals ("VLTs"), and other gaming machines that print tickets instead of issuing coins ("ticket-in, ticket-out" or "TITO") at casinos and racetracks ("racinos") and other gaming venues worldwide. Revenue from this market also includes sales of printers used in the international off-premise gaming market in gaming machines at non-casino gaming establishments such as Amusement with Prizes ("AWP"), Skills with Prizes ("SWP"), and Fixed Odds Betting Terminals ("FOBT"). Sales of our casino and gaming products increased by $1,953,000, or 41%, from the third quarter of 2007.

                       Three months ended          Three months ended            Change
    (In thousands)     September 30, 2008          September 30, 2007           $       %
    Domestic         $     4,052        60.6 %   $     3,087        65.3 %   $   965   31.3 %
    International          2,629        39.4 %         1,641        34.7 %       988   60.2 %

                     $     6,681       100.0 %   $     4,728       100.0 %   $ 1,953   41.3 %

Domestic sales of our casino and gaming printers increased by $965,000, or 31%, due largely to an increase in domestic sales of our thermal casino printers, including incremental sales resulting from our new status as the default printer provider to International Game Technologies ("IGT") beginning April 2008, despite a weak domestic casino market. The increase was also complemented by increased domestic sales of our thermal gaming printers largely for use in video lottery terminals. We expect the domestic casino and gaming market to continue to be weak for the remainder of 2008 and into 2009. In light of these negative market conditions our future sales to the domestic casino and gaming market will be unpredictable and adversely affected.

International casino and gaming printer sales increased $988,000, or 60%, to $2,629,000 in the third quarter of 2008. International sales represented 39% and 35% of total sales into our casino and gaming market during the third quarter of 2008 and 2007, respectively. This increase was due primarily to increased sales of our thermal casino printers in Asia and Australia and continued growth in sales of our new off-premise gaming printers in Europe.

Lottery:

Revenue from the lottery market includes sales of lottery printers to
Lottomatica's GTECH Corporation ("GTECH"), the world's largest provider of
lottery terminals, for various lottery applications. Sales of our lottery
products increased by $3,655,000, or 341%, from the third quarter of 2007, due
largely to higher domestic sales of lottery printers to GTECH.



                      Three months ended          Three months ended             Change
   (In thousands)     September 30, 2008          September 30, 2007           $          %
   Domestic         $     4,636        98.1 %   $       817        76.1 %   $ 3,819     467.4 %
   International             92         1.9 %           256        23.9 %      (164 )   (64.1 )%

                    $     4,728       100.0 %   $     1,073       100.0 %   $ 3,655     340.6 %

Domestic and international printer sales to GTECH, which include thermal on-line and other lottery printers, increased by $3,655,000, or 341%, in the third quarter of 2008 compared to the third quarter of 2007, with domestic sales increasing $3,819,000 and international sales decreasing $164,000. Our quarterly sales to GTECH are directly dependent on the timing and number of new and upgraded lottery terminal installations GTECH performs, and as a result, may fluctuate significantly quarter-to-quarter. Our sales to GTECH are not indicative of GTECH's overall business or revenue. We expect total sales to GTECH for the fourth quarter of 2008 to be lower than those reported during the third quarter of 2008.

TransAct Services Group:

Revenue from the TransAct Services Group ("TSG") includes sales of consumable
products (inkjet cartridges, ribbons and receipt paper), replacement parts,
maintenance and repair services, refurbished printers, accessories and shipping
and handling charges. Sales from TSG decreased by $22,000, or 1%.



                      Three months ended          Three months ended             Change
   (In thousands)     September 30, 2008          September 30, 2007          $          %
   Domestic         $     2,858        97.4 %   $     2,399        81.2 %   $  459      19.1 %
   International             75         2.6 %           556        18.8 %     (481 )   (86.5 )%

                    $     2,933       100.0 %   $     2,955       100.0 %   $  (22 )    (0.7 )%

Domestic revenue from TSG increased by $459,000, or 19%, largely due to increased sales of consumable products, including higher sales of inkjet cartridges, as well as growing sales of paper and other consumable products through our new e-commerce website, TransActSupplies.com. These increases were somewhat offset by lower maintenance and repair services revenue.

Internationally, TSG revenue decreased by $481,000, or 87%, to $75,000, due largely to a decrease in maintenance and repair services revenue from a service contract with a single customer in the United Kingdom. The service contract, which represented a substantial portion of our U.K. subsidiary's revenue in 2007, ended in November 2007 and was not renewed, as the customer replaced our printers with newer technology that we were unable to provide. As a result, we expect international TSG revenue to be lower in 2008 compared to 2007.

Gross Profit. Gross profit information is summarized below (in thousands, except percentages):

September 30, Percent Percent of Percent of 2008 2007 Change Total Sales - 2008 Total Sales - 2007 Three months ended $ 5,894 $ 3,885 51.7 % 34.0 % 33.1 %

Gross profit is measured as revenue less cost of goods sold. Cost of goods sold includes primarily the cost of all raw materials and component parts, direct labor, and the associated manufacturing overhead expenses, as well as the cost of finished products purchased directly from contract manufacturers. Gross profit increased $2,009,000, or 52%, to $5,894,000 from $3,885,000 due primarily to a 48% increase in sales from the third quarter 2008 compared to the third quarter 2007. Gross margin increased to 34.0% from 33.1%, due primarily to a higher volume of sales and lower component part and labor costs resulting from our continued focus to increasingly move production of our products to Asia, partially offset by a less favorable sales mix, in the third quarter of 2008 compared to the third quarter of 2007.

Engineering and Product Development. Engineering and product development information is summarized below (in thousands, except percentages):

September 30, Percent Percent of Percent of 2008 2007 Change Total Sales - 2008 Total Sales - 2007 Three months ended $ 713 $ 791 (9.9 )% 4.1 % 6.7 %

Engineering, design and product development expenses primarily include salary and payroll related expenses for our engineering staff, depreciation and design expenses (including prototype printer expenses, outside design and testing services, and supplies). Such expenses for the third quarter 2008 decreased by $78,000, or 10%, due to lower professional consulting and prototype expenses, partially offset by additional compensation related expenses. Engineering and product development expenses decreased as a percentage of net sales due primarily to a higher volume of sales in the third quarter of 2008 compared to the third quarter of 2007, as well as lower expenses for the respective period.

Selling and Marketing. Selling and marketing information is summarized below (in thousands, except percentages):

September 30, Percent Percent of Percent of 2008 2007 Change Total Sales - 2008 Total Sales - 2007 Three months ended $ 1,430 $ 1,618 (11.6 )% 8.3 % 13.8 %

Selling and marketing expenses primarily include salaries and payroll related expenses for our sales and marketing staff, sales commissions, travel expenses, expenses associated with the lease of sales offices, advertising, trade show expenses, e-commerce and other promotional marketing expenses. Selling and marketing expenses for the third quarter of 2008 decreased by $188,000, or 12%, due to a reduced level of sales staff related expenses resulting from the cost reduction actions we took in late 2007 as well as lower promotional marketing expenses. Selling and marketing expenses decreased as a percentage of net sales due primarily to a higher volume of sales as well as lower expenses in the third quarter of 2008 compared to the third quarter of 2007.

General and Administrative. General and administrative information is summarized below (in thousands, except percentages):

September 30, Percent Percent of Percent of 2008 2007 Change Total Sales - 2008 Total Sales - 2007 Three months ended $ 1,838 $ 1,664 10.5 % 10.6 % 14.2 %

General and administrative expenses primarily include salaries and payroll related expenses for our executive, accounting, human resource, business development and information technology staff, expenses for our corporate headquarters, professional and legal expenses, telecommunication expenses, and other expenses related to being a publicly-traded company. General and administrative expenses increased by $174,000, or 11%, due primarily to higher employee compensation related expenses, including the hiring of our new Vice President of Business Development in May 2008, partially offset by lower recruiting and professional fee expenses. General and administrative expenses decreased as a percentage of net sales due primarily to a higher volume of sales, partially offset by higher expenses in the third quarter of 2008 as compared to the third quarter of 2007.

Legal Fees associated with lawsuit. During the third quarter of 2008, we did not incur any legal fees related to the recently settled lawsuit with FutureLogic, Inc. compared to $1,525,000 in the third quarter of 2007. The substantial decrease was due to the settlement of our litigation with FutureLogic, Inc. in May 2008. As a result of this settlement, we do not expect to incur any additional legal fees related to the lawsuit for the remainder of 2008. See "Item 1 - Legal Proceedings" in Part II of this report for more information.

Operating Income (Loss). Operating income (loss) information is summarized below (in thousands, except percentages):

September 30, Percent Percent of Percent of 2008 2007 Change Total Sales - 2008 Total Sales - 2007 Three months ended $ 1,913 $ (1,713 ) 211.7 % 11.0 % (14.6 )%

During the third quarter of 2008, we reported operating income of $1,913,000, or 11.0% of net sales, compared to an operating loss of ($1,713,000), or (14.6%) of net sales in the third quarter of 2007. The increase in our operating income and operating margin was primarily due to higher sales volume and gross profit, as well as lower operating expenses (primarily no legal expense related to the FutureLogic lawsuit in the third quarter of 2008 compared to $1,525,000 in the third quarter of 2007).

Interest. We recorded net interest expense of $3,000 in the third quarter of 2008 compared to net interest income of $20,000 in the third quarter of 2007. The decrease was largely due to a lower overall rate of return on our invested cash balance due to the decreasing rate environment, as well as a lower average cash balance in the third quarter of 2008 compared to the third quarter of 2007. See "Liquidity and Capital Resources" below for more information.

Other Income (Expense). We recorded other income of $102,000 in the third quarter of 2008 due primarily to transaction exchange gains recorded by our UK subsidiary resulting from the significant strengthening of the U.S. dollar against the British pound during the third quarter of 2008. We recorded other expense of $8,000 in the third quarter of 2007.

Income Taxes. We recorded an income tax provision for the third quarter of 2008 of $802,000 at an effective tax rate of 39.9%, compared to an income tax benefit during the third quarter of 2007 of $685,000 at an effective tax rate of 40.3%. Our effective tax rate for the third quarter of 2008 does not include any benefit from the federal research and development credit, as this credit expired at the end of 2007. However, in October 2008 this credit was reinstated retroactive to January 1, 2008, as part of the passage of the Emergency Economic Stabilization Act of 2008. As a result, we expect to recognize the full year 2008 income tax benefit from the federal research and development credit of approximately $100,000 in the fourth quarter of 2008, which will favorably impact our effective tax rate for the fourth quarter and full year 2008. We expect our annual effective tax rate for 2008 to be between 34% and 35%.

Net Income (Loss). We reported net income during the third quarter of 2008 of $1,210,000, or $0.13 per diluted share, compared to a net loss of ($1,016,000), or ($0.11) per diluted share, for the third quarter of 2007.

Nine months ended September 30, 2008 compared to nine months ended September 30, 2007

Net Sales. Net sales by market for the nine months ended September 30, 2008 and 2007 were as follows:

                                           Nine months ended         Nine months ended             Change
(In thousands)                            September 30, 2008        September 30, 2007          $           %
Banking and point-of-sale                $      8,730     18.2 %   $      8,705     23.4 %   $     25       0.3 %
Casino and gaming                              16,958     35.4 %         13,883     37.4 %      3,075      22.1 %
Lottery                                        13,124     27.4 %          4,697     12.6 %      8,427     179.4 %
TransAct Services Group                         9,118     19.0 %          9,867     26.6 %       (749 )    (7.6 )%

                                         $     47,930    100.0 %   $     37,152    100.0 %   $ 10,778      29.0 %

International *                          $      7,735     16.1 %   $      8,769     23.6 %   $ (1,034 )   (11.8 )%

* International sales do not include sales of printers made to domestic distributors or other customers who in turn ship those printers to international destinations.

Net sales for the first nine months of 2008 increased $10,778,000, or 29%, from the prior year's first nine months due primarily to higher printer shipments into our lottery (an increase of $8,427,000, or 179%) and casino and gaming (an increase of $3,075,000, or 22%) markets. Sales from TSG decreased by $749,000, or 8%. Overall, international sales decreased by $1,034,000, or 12%. The decrease in TSG sales and international sales were due largely to the expiration in November 2007 of a service contract with a single customer in the United Kingdom.

Banking and point-of-sale:

Sales of our banking and POS printers worldwide increased $25,000, or less than 1%.

                       Nine months ended           Nine months ended             Change
   (In thousands)     September 30, 2008          September 30, 2007          $          %
   Domestic         $     8,058        92.3 %   $     7,675        88.2 %   $  383       5.0 %
   International            672         7.7 %         1,030        11.8 %     (358 )   (34.8 )%

                    $     8,730       100.0 %   $     8,705       100.0 %   $   25       0.3 %

Domestic banking and POS revenue increased to $8,058,000, representing a $383,000, or 5%, increase from the first nine months of 2007. Banking printer sales increased by approximately $600,000 due largely to incremental sales of our first generation BANKjet ® 1500 bank teller printer to an existing customer as well as increasing sales of our new BANKjet® 2500 bank teller printer in the first nine months of 2008 compared to the first nine months of 2007. Although we are currently pursuing several banking opportunities, due to the project-oriented nature of these sales, and the current credit crisis that we believe is negatively impacting the banking industry's level of capital expenditures, we cannot predict if and when future sales may occur. Our increased banking printer sales were also complemented by increased sales of our new Ithaca ® 8000 thermal receipt/label printer for McDonalds, as well as initial sales of our second printer product, the Ithaca® 8040, for this same customer. We also experienced increased sales of our legacy line of POS impact printers to our distributors. Although we experienced higher sales of legacy impact printers in the first nine months of 2008 compared to the first nine months of 2007, we expect sales of these printers for the remainder of 2008 to be lower than those reported for the comparable 2007 period, as these printers are being replaced by our newer thermal and inkjet printers. These increases were largely offset by the non-recurring sales of a discontinued inkjet printer to a single customer in the first quarter of 2007.

International banking and POS printer shipments decreased by $358,000, or 35%, to $672,000, due primarily to lower sales to our international POS distributors in Europe, Latin America, and Asia.

Casino and gaming:

Sales of our casino and gaming products increased by $3,075,000, or 22%, from the first nine months of 2007, due to increased sales of our thermal casino and gaming printers both domestically and internationally.

                         Nine months ended         Nine months ended           Change
      (In thousands)    September 30, 2008        September 30, 2007          $       %
      Domestic         $     10,606     62.5 %   $      8,621     62.1 %   $ 1,985   23.0 %
      International           6,352     37.5 %          5,262     37.9 %     1,090   20.7 %

                       $     16,958    100.0 %   $     13,883    100.0 %   $ 3,075   22.1 %

Domestic sales of our casino and gaming printers increased by $1,985,000, or 23%, due largely to an increase in domestic sales of our thermal casino printers, including incremental sales beginning in the second quarter of 2008 resulting from our new status as default printer provider to IGT beginning April 2008, despite a weak domestic casino market. We expect the domestic casino and . . .