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. 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. All forward-looking statements involve risks and uncertainties, including, but not limited to those listed in Item 1A of this Annual Report. 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
2008 was a year of positive achievements for TransAct as compared to 2007. During 2008, we focused on and delivered sales growth and delivered across the majority of our sales units, both domestically and internationally. During 2008, we shipped a record 196,000 printers, led by record sales of our Epic 950® casino printer and significantly higher sales of our online thermal lottery printer. Our sales success was also complemented by improved gross margin, operating margin and earnings per share.

We continue to focus on sales growth in our core markets (banking and POS, casino and gaming, lottery, and in our TransAct Services Group) to drive increased profitability. During 2008, our total net sales increased by 28% to approximately $62,207,000. See the table below for a breakdown of our sales by market.

                                Year ended                 Year ended                  Change
(In thousands)              December 31, 2008          December 31, 2007           $             %

Banking and POS           $   11,866        19.1 %   $   11,046        22.6 %   $    820         7.4 %
Casino and gaming             22,299        35.8 %       19,438        39.9 %      2,861        14.7 %
Lottery                       15,731        25.3 %        5,900        12.1 %      9,831       166.6 %
TransAct Services Group       12,311        19.8 %       12,382        25.4 %        (71 )      (0.6 )%
Total net sales           $   62,207       100.0 %   $   48,766       100.0 %   $ 13,441        27.6 %

We experienced an increase of approximately 7% in sales of Banking and POS printers in 2008. Sales of our Bankjet® line of inkjet bank teller printers increased due to incremental sales of our first generation BANKjet® 1500 bank teller printer as well as initial sales of our newly-launched, next generation BANKjet® 2500 bank teller printer. In addition to higher banking printer sales, we also experienced a slight increase in sales from our line of POS printers due primarily to sales of our two new printer products for McDonalds - (1) the Ithaca® 8000 thermal receipt/label printer which will be used to print either a receipt at the front counter or a label at the grill station and (2) the Ithaca ® 8040 label printer which will be used to print labels for McDonalds new combined beverage initiative. Sales of our legacy line of POS impact printers, as these printers continue to be replaced by our newer thermal and inkjet printers. We expect sales of our legacy POS impact printers to continue to decline during 2009, as these printers continue to be replaced by our newer thermal and inkjet printers.

In our casino and gaming market, our focus lies primarily in supplying printers for use in slot machines at casinos and racetracks, as well as in other gaming devices that print tickets or receipts, primarily in the United States, Europe and Australia, as well as in the emerging Asian market, including Macau. During 2008, despite a weak domestic casino market, our domestic casino and gaming printer sales increased by 12% from 2007 due largely to International Game Technologies ("IGT") awarding us default status as default printer provider, which began in April of 2008. Internationally, casino and gaming printer sales increased by 20% to $7.9 million, largely due to sales growth of our off-premise gaming printers to Europe.

On the lottery side, we continue to hold a leading position based on our long-term purchase agreement with Lottomatica's GTECH Corporation ("GTECH"), our largest customer and the world's largest provider of lottery terminals, with approximately a 70% market share. GTECH has been our customer since 1995, and we continue to maintain a good relationship with them. In fact, our contract with GTECH continues through 2012. Currently, we fulfill substantially all of GTECH's printer requirements for lottery terminal installations and upgrades worldwide. During 2008, we experienced a record level of sales compared to historical sales levels from GTECH, with total printer sales increasing by approximately $9,987,000, or 189%, compared to 2007. However, our sales to GTECH each year are directly dependent on the timing and number of new and upgraded lottery terminal installations GTECH performs. Our sales to GTECH are not indicative of GTECH's overall business or revenue.

Our TransAct Services Group ("TSG"), which sells service, replacement parts and consumable products, including receipt paper, ribbons and inkjet cartridges, continues to offer a substantial growth opportunity and recurring revenue stream for TransAct. Even with declining sales of replacement parts for legacy impact printers as the installed base of these printers in the market declines, TSG domestic revenue continued to increase in 2008 by 17% from 2007. During 2008, our domestic sales benefited from higher inkjet cartridge sales resulting from the previously signed agreement with a leading national office supply chain to supply inkjet cartridges in 2006 as well as expanding sales of paper and other consumable products through our e-commerce website, TransActSupplies.com. Internationally, TSG sales declined due to the 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.

Operationally, both our gross margin and operating margin showed marked improvement from 2007. During 2008, our gross margin increased to 33.7% compared to 32.8% in 2007, due primarily to higher sales volume combined with lower product costs and increased absorption of certain manufacturing overhead expenses as we continue to transfer our domestic, in-house production of our products to a lower cost contract manufacturer in China. Our operating margin also increased to 3.0% in 2008 compared to (7.7%) in 2007, as our operating expenses decreased by 3% due to cost reduction programs we put in place at the end of 2007 and our sales increased by 28%.

Overall, we reported net income of $1.4 million and net income per share (diluted) of $0.15 per share for 2008. We also utilized cash during 2008 to fund $979,000 of capital expenditures and repurchase $543,000 of our common stock, and we finished the year with $2.0 million of cash and no debt on our balance sheet as of December 31, 2008.

Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared by us in accordance with accounting principles generally accepted in the United States of America. These principles require the use of estimates, judgments and assumptions. Such estimates and judgments are based upon historical experience and certain assumptions that are believed to be reasonable in the particular circumstances. Those judgments affect both balance sheet items and income statement categories. Our estimates include those related to revenue recognition, allowance for doubtful accounts, inventory obsolescence, the valuation of deferred tax assets and liabilities, goodwill impairment, warranty obligations, restructuring accruals, share-based compensation and contingent liabilities. We evaluate our assumptions on an ongoing basis by comparing actual results with our estimates. Actual results may differ from the original estimates. The following accounting policies are those that we believe to be most critical in the preparation of our financial statements.

Revenue Recognition - Our typical contracts include the sale of printers, which are sometimes accompanied by separately-priced extended warranty contracts. We also sell spare parts, consumables, and other repair services (sometimes pursuant to multi-year product maintenance contracts), which are not included in the original printer sale and are ordered by the customer as needed. We recognize revenue pursuant to the guidance within SAB 104, "Revenue Recognition." Specifically, revenue is recognized when evidence of an arrangement exists, delivery (based on shipping terms which are generally FOB shipping point) has occurred, the selling price is fixed and determinable, and collectablity is reasonably assured. We provide for an estimate of product returns and price protection based on historical experience at the time of revenue recognition.

Revenue related to extended warranty and product maintenance contracts is recognized pursuant to FASB Technical Bulletin 90-1 ("FTB 90-1"), "Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts." Pursuant to FTB 90-1, revenue related to separately priced product maintenance contracts is deferred and recognized over the term of the maintenance period. We record deferred revenue for advance payments received from customers for maintenance contracts.

Our customers have the right to return products that do not function properly within a limited time after delivery. We monitor and track product returns and record a provision for the estimated future returns based on historical experience. Returns have historically been within expectations and the provisions established, but we cannot guarantee that we will continue to experience return rates consistent with historical patterns.

We offer some of our customer's price protection as an incentive to carry inventory of our product. These price protection plans provide that if we lower prices, we will credit them for the price decrease on inventory they hold. Our customers typically carry limited amounts of inventory, and we infrequently lower prices on current products. As a result, the amounts paid under these plans have not been material. However, we cannot guarantee that this minimal level will continue.

We charge our customers for shipping and handling services. The amounts billed to customers are recorded as revenue when the product ships. Any costs incurred related to these services are included in cost of sales.

Accounts Receivable - We have standardized credit granting and review policies and procedures for all customer accounts, including: credit reviews of all new customer accounts; ongoing credit evaluations of current customers; credit limits and payment terms based on available credit information; and adjustments to credit limits based upon payment history and the customer's current creditworthiness. We also provide an estimate of doubtful accounts based on historical experience and specific customer collection issues. Our allowance for doubtful accounts as of December 31, 2008 was $55,000, or less than 1.0% of outstanding accounts receivable, which we feel is appropriate considering the overall quality of our accounts receivable. While credit losses have historically been within expectations and the reserves established, we cannot guarantee that our credit loss experience will continue to be consistent with historical experience. As of December 31, 2008, we had accounts receivable balances due from two customers of approximately 20% and 10%, respectively, of the total balance due, and no other customer accounts receivable balance exceeded 10%. As of December 31, 2007, we had accounts receivable balances due from three customers of 13%, 12% and 10% of the total balance due, respectively, and no other customer accounts receivable balance exceeded 10%.

Inventory - Our inventories are stated at the lower of cost (principally standard cost, which approximates actual cost on a first-in, first-out basis) or market. We review market value based on historical usage and estimates of future demand. Assumptions are reviewed at least quarterly and adjustments are made, as necessary, to reflect changing market conditions. Based on these reviews, inventory write-downs are recorded, as necessary, to reflect estimated obsolescence, excess quantities and market value. Should circumstances change and we determine that additional inventory is subject to obsolescence, additional write-downs of inventory could result in a charge to income. As of December 31, 2008, our net inventory included a reserve of $3,050,000, or 23.5% of gross inventory, to write inventory down to lower of cost or market.

Goodwill - We test the impairment of goodwill each year or more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable. We completed our last assessment as of December 31, 2008. Factors considered that may trigger an impairment review are: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of use of acquired assets or the strategy for the overall business; significant negative industry or economic trends; and significant decline in market capitalization relative to net book value. Goodwill amounted to $1,469,000 at December 31, 2008 and we have determined that no goodwill impairment has occurred.

Income Taxes - In preparing our consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. This involves estimating the actual current tax exposure together with assessing temporary differences between the tax basis of certain assets and liabilities and their reported amounts in the financial statements, as well as net operating losses, tax credits and other carryforwards. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We then assess the likelihood that the deferred tax assets will be realized from future taxable income, and to the extent that we believe that realization is not likely, we establish a valuation allowance.

Significant judgment is required in determining the provision for income taxes and, in particular, any valuation allowance or tax reserves with respect to our deferred tax assets and uncertain tax positions. On a quarterly basis, we evaluate the recoverability of our deferred tax assets based upon historical results and forecasted taxable income over future years, and match this forecast against the basis differences, deductions available in future years and the limitations allowed for net operating loss and tax credit carryforwards to ensure that there is adequate support for the realization of the deferred tax assets. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance or tax reserve, in the event we were to determine that we would not be able to realize all or part of our deferred tax assets in the future, an adjustment to the valuation allowance or tax reserves would be charged as a reduction to income in the period such determination was made. Likewise, should we determine that we would be able to realize future deferred tax assets in excess of its net recorded amount, an adjustment to the valuation allowance or tax reserves would increase net income in the period such determination was made.

In July 2006, the Financial Accounting Standards Board (the "FASB") issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, ("FIN 48"). Among other things, FIN 48 prescribes a minimum recognition threshold that an income tax position must meet before it is recorded in the reporting entity's financial statements. FIN 48 requires that the effects of such income tax positions be recognized only if, as of the balance sheet reporting date, it is "more likely than not" (i.e., more than a 50% likelihood) that the income tax position will be sustained based solely on its technical merits. When making this assessment, management must assume that the responsible taxing authority will examine the income tax position and have full knowledge of all relevant facts and other pertinent information. The new accounting guidance also clarifies the method of accruing for interest and penalties when there is a difference between the amount claimed, or expected to be claimed, on a company's income tax returns and the benefits recognized in the financial statements. Additionally, FIN 48 requires significant new and expanded footnote disclosures in all annual periods.

We adopted FIN 48 with an effective date of January 1, 2007. Retrospective application of FIN 48 was prohibited. As a result of the implementation, we recognized a decrease to reserves for uncertain tax positions. This decrease was accounted for as a $318,000 adjustment to the beginning balance of retained earnings on the Consolidated Balance Sheet as of December 31, 2007.

As of December 31, 2008, we recorded a net deferred tax asset of approximately $3,813,000 and a tax reserve of $44,000, primarily on portions of certain tax credits. We will need to recognize approximately $10.9 million in future taxable income in order to realize all of our deferred tax assets at December 31, 2008. In one of the last three years, we have had U.S. taxable losses and there is no assurance that we will generate future taxable income sufficient to realize all of our deferred tax assets. However, based on our current projection of future taxable income as of December 31, 2008, no valuation allowance is considered necessary. Should circumstances change and we determine that some or all of the deferred taxes would not be realized, a valuation allowance would be recorded, resulting in a charge to income in the period such determination is made.

Restructuring - In February 2001, we announced plans to establish a global engineering and manufacturing center at our Ithaca, NY facility. As part of this strategic decision, we undertook a plan to consolidate all manufacturing and engineering into our existing Ithaca, NY facility and close our Wallingford, CT manufacturing facility (the "Consolidation"). As of December 31, 2001, we successfully transferred substantially all our Wallingford operations to Ithaca, NY, with the exception of our corporate headquarters and a service center that remains in Connecticut. The closing of the Wallingford manufacturing facility resulted in the termination of employment of approximately 70 production, administrative and management employees.

In connection with the Consolidation of manufacturing facilities in 2001, we recorded significant accruals. Through December 31, 2007, we recognized approximately $5.5 million of expenses associated with the Consolidation, including severance pay, stay bonuses, employee benefits, moving expenses, non-cancelable lease payments, and other costs. Management has made reasonable estimates of such costs and expenses. During November 2006, we executed an agreement, effective May 1, 2007, to terminate the lease agreement for our Wallingford, CT facility. As a result, we changed our estimate of the restructuring accrual and reversed approximately $479,000 of restructuring expenses in 2006. During the second quarter of 2007, we recorded an additional $12,000 of expense to finalize the termination of the lease agreement. As of September 30, 2007, all non-cancelable lease payments related to our Wallingford, CT facility have been made and we do not expect to incur any additional restructuring expenses related to the Consolidation.

Warranty - We generally warrant our products for up to 24 months and record the estimated cost of such product warranties at the time the sale is recorded. Estimated warranty costs are based upon actual past experience of product repairs and the related estimated cost of labor and material to make the necessary repairs. If actual future product repair rates or the actual costs of material and labor differ from the estimates, adjustments to the accrued warranty liability and related warranty expense would be made.

Contingencies - We record an estimated liability related to contingencies based on our estimates of the probable outcomes pursuant to FAS 5. On a quarterly basis, we assess the potential liability related to pending litigation, audits and other contingencies and confirm or revise estimates and reserves as appropriate. If the actual liabilities are settled in an amount greater than those recorded on the balance sheet, a change to income would be recorded.

Share-Based Compensation - We calculate share-based compensation expense in accordance with SFAS 123(R), "Share-Based Payment (as amended)" using the Black-Scholes option-pricing model to calculate the fair value of share-based awards. The key assumptions for this valuation method include the expected term of an option grant, and the stock price volatility, risk-free interest rate, dividend yield, and forfeiture rate. The determination of these assumptions is based on past history and future expectations, and is subject to a high level of judgment. To the extent any of the assumptions were to change from year to year, the fair value of new option grants may vary significantly.

Results of Operations: Year ended December 31, 2008 compared to year ended December 31, 2007

Net Sales. Net sales, which include printer sales and sales of spare parts, consumables and repair services, by market for the years ended December 31, 2008 and 2007 were as follows:

                                Year ended                 Year ended                  Change
(In thousands)              December 31, 2008          December 31, 2007           $             %

Banking and POS           $   11,866        19.1 %   $   11,046        22.6 %   $    820         7.4 %
Casino and gaming             22,299        35.8 %       19,438        39.9 %      2,861        14.7 %
Lottery                       15,731        25.3 %        5,900        12.1 %      9,831       166.6 %
TransAct Services Group       12,311        19.8 %       12,382        25.4 %        (71 )      (0.6 )%
                          $   62,207       100.0 %   $   48,766       100.0 %   $ 13,441        27.6 %

International*            $   10,126        16.3 %   $   10,795        22.1 %   $   (669 )      (6.2 )%

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

Net sales for 2008 increased $13,441,000, or 28%, from 2007 due to sales increases in three out of four of our markets: banking and point of sale ("POS") (an increase of approximately $820,000, or 7%), casino and gaming (an increase of approximately $2,861,000, or 15%) and lottery (an increase of approximately $9,831,000 or 167%). Sales from our TransAct Services Group ("TSG") decreased by approximately $71,000, or less than 1%.

Overall, international sales decreased by $669,000, or 6%. The decrease in international sales was 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: Revenue from the banking and POS market includes sales of printers used by banks, credit unions and other financial institutions to print and/or validate receipts at bank teller stations. Revenue from this market also includes sales of inkjet, thermal and impact printers used primarily by retailers in restaurant (including fine dining, casual dining and fast food), hospitality, and specialty retail stores to print receipts for consumers, validate checks, or print on other inserted media. Sales of our banking and POS printers worldwide increased approximately $820,000, or 7%, from 2007.

                              Year ended                 Year ended                Change
       (In thousands)     December 31, 2008          December 31, 2007          $          %

       Domestic         $   10,664        89.9 %   $    9,775        88.5 %   $ 889        9.1 %
       International         1,202        10.1 %        1,271        11.5 %     (69 )     (5.4 )%
                        $   11,866       100.0 %   $   11,046       100.0 %   $ 820        7.4 %

Domestic banking and POS printer sales increased to $10,664,000, representing an $889,000, or 9%, increase from 2007. Banking printer sales increased by approximately $610,000 due largely to incremental sales of our first generation BANKjet® 1500 bank teller printer as well as new product sales of our BANKjet® 2500 bank teller printer in 2008 compared to 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 the level of future sales. Our increased banking printer sales were also complemented by new product sales of our new Ithaca® 8000 and Ithaca® 8040 thermal receipt/label printers for McDonalds. We also experienced lower sales of our legacy impact printers, as expected, during 2008 compared to 2007, as these printers continue to be replaced by our thermal and inkjet printers.

International banking and POS printer shipments decreased by approximately $69,000, or 5%, to $1,202,000, due primarily to lower sales to our international POS distributors in Europe and Asia, largely offset by an increase in printer sales to our international POS distributors in Latin America.

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 or receipts instead of issuing coins ("ticket-in, ticket-out" or "TITO") at casinos, racetracks ("racinos") and other gaming venues worldwide. Sales of our casino and gaming printers increased by $2,861,000, or 15%, from 2007, due to increased sales of our thermal casino and gaming printers both domestically and internationally.

                             Year ended                 Year ended                 Change
      (In thousands)     December 31, 2008          December 31, 2007           $           %

      Domestic         $   14,355        64.4 %   $   12,798        65.8 %   $ 1,557       12.2 %
      International         7,944        35.6 %        6,640        34.2 %     1,304       19.6 %
                       $   22,299       100.0 %   $   19,438       100.0 %   $ 2,861       14.7 %
. . .