SEC Filing | TransAct Technologies Incorporated

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: March 31, 2006 OR [ ] 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: 0-21121 TRANSACT TECHNOLOGIES INCORPORATED (Exact name of registrant as specified in its charter) DELAWARE 06-1456680 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 7 LASER LANE, WALLINGFORD, CT 06492 (Address of principal executive offices) (Zip Code) (203) 859-6800 (Registrant's telephone number, including area code) Not applicable (Former name, former address and former fiscal year, if changed since last report.) 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 [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (check one): Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. CLASS OUTSTANDING AS OF APRIL 26, 2006 - ----- -------------------------------- COMMON STOCK, $.01 PAR VALUE 9,714,068

TRANSACT TECHNOLOGIES INCORPORATED INDEX Page No. -------- PART I. Financial Information: Item 1 Financial Statements (unaudited) Condensed consolidated balance sheets as of March 31, 2006 and December 31, 2005 3 Condensed consolidated statements of income for the three months ended March 31, 2006 and 2005 4 Condensed consolidated statements of cash flow for the three months ended March 31, 2006 and 2005 5 Notes to condensed consolidated financial statements 6 - 15 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 16 - 22 Item 4 Controls and Procedures 22 - 23 PART II. Other Information: Item 1 Legal Proceedings 23 Item 1a Risk Factors 24 Item 2c Stock Repurchase 24 Item 6 Exhibits 25 Signatures 26 Certifications 28 - 31 2

ITEM 1. FINANCIAL STATEMENTS TRANSACT TECHNOLOGIES INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) MARCH 31, December 31, 2006 2005 --------- ------------ (In thousands) ASSETS: Current assets: Cash and cash equivalents $ 5,289 $ 4,579 Receivables, net 10,082 8,359 Inventories 7,225 6,036 Refundable income taxes 150 295 Deferred tax assets 2,735 2,735 Other current assets 478 258 ------- ------- Total current assets 25,959 22,262 ------- ------- Fixed assets, net 5,144 4,510 Goodwill 1,469 1,469 Deferred tax assets 565 557 Intangible and other assets, net of accumulated amortization of $61 and $41, respectively 504 534 ------- ------- 7,682 7,070 ------- ------- Total assets $33,641 $29,332 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities: Accounts payable $ 5,531 $ 2,859 Accrued liabilities 4,094 3,198 Accrued restructuring expenses 420 420 Deferred revenue 455 410 ------- ------- Total current liabilities 10,500 6,887 ------- ------- Accrued restructuring expenses, net of current portion 480 587 Deferred revenue, net of current portion 331 270 Other liabilities 338 331 ------- ------- 1,149 1,188 ------- ------- Total liabilities 11,649 8,075 ------- ------- Commitments and contingencies (Note 11) Shareholders' equity: Common stock 103 102 Additional paid-in capital 17,864 19,334 Retained earnings 8,546 7,489 Unamortized restricted stock compensation -- (1,837) Accumulated other comprehensive income 44 36 Treasury stock, 579,800 and 505,000 shares at cost (4,565) (3,867) ------- ------- Total shareholders' equity 21,992 21,257 ------- ------- Total liabilities and shareholders' equity $33,641 $29,332 ======= ======= See notes to condensed consolidated financial statements. 3

TRANSACT TECHNOLOGIES INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) THREE MONTHS ENDED MARCH 31, ------------------ 2006 2005 ------- ------- (In thousands, except per share data) Net sales $16,434 $12,036 Cost of sales 10,747 8,359 ------- ------- Gross profit 5,687 3,677 ------- ------- Operating expenses: Engineering, design and product development 761 731 Selling and marketing 1,580 1,349 General and administrative 1,710 1,364 ------- ------- 4,051 3,444 ------- ------- Operating income 1,636 233 ------- ------- Other income (expense): Interest, net 14 20 Other, net (11) (1) ------- ------- 3 19 ------- ------- Income before income taxes 1,639 252 Income tax provision 582 89 ------- ------- Net income $ 1,057 $ 163 ======= ======= Net income per common share: Basic $ 0.11 $ 0.02 Diluted $ 0.11 $ 0.02 Shares used in per-share calculation Basic 9,558 10,010 Diluted 9,868 10,452 See notes to condensed consolidated financial statements. 4

TRANSACT TECHNOLOGIES INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED) THREE MONTHS ENDED MARCH 31, ----------------- 2006 2005 ------- ------- (In thousands) Cash flows from operating activities: Net income $ 1,057 $ 163 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Share-based compensation expense 155 69 Incremental tax benefits from stock options exercised (35) -- Depreciation and amortization 368 408 Changes in operating assets and liabilities: Receivables (1,723) (235) Inventories (1,189) 36 Refundable income taxes 145 -- Other current assets (220) 32 Other assets 1 -- Accounts payable 2,672 (805) Accrued liabilities and other liabilities 1,044 18 Accrued restructuring expenses (107) (109) ------- ------- Net cash provided by (used in) operating activities 2,168 $ (423) ------- ------- Cash flows from investing activities: Purchases of fixed assets (973) (887) ------- ------- Net cash used in investing activities (973) (887) ------- ------- Cash flows from financing activities: Proceeds from option exercises 170 281 Purchases of common stock for treasury (698) -- Incremental tax benefits from stock options exercised 35 -- ------- ------- Net cash provided by (used in) financing activities (493) 281 ------- ------- Effect of exchange rate changes 8 (3) ------- ------- Increase (decrease) in cash and cash equivalents 710 (1,032) Cash and cash equivalents at beginning of period 4,579 8,628 ------- ------- Cash and cash equivalents at end of period $ 5,289 $ 7,596 ======= ======= Non-cash financing activities: Conversion of preferred stock to common stock $ -- $ (3) Issuance of restricted stock, net of cancellations -- 960 See notes to condensed consolidated financial statements. 5

TRANSACT TECHNOLOGIES INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. DESCRIPTION OF BUSINESS TransAct Technologies Incorporated ("TransAct"), which has its headquarters in Wallingford, CT and its primary operating facility in Ithaca, NY, operates in one industry segment, market-specific printers for transaction-based industries. These industries include gaming, lottery, banking and hospitality. Each individual market has distinct, critical requirements for printing and the transaction isn't complete until the receipt and/or ticket is produced. TransAct printers are designed from the ground up based on market specific requirements and are sold under the Ithaca(R) and Epic product brands. TransAct distributes its products through OEMs, value-added resellers, selected distributors, and direct to end-users. Our product distribution spans across the Americas, Europe, the Middle East, Africa, the Caribbean Islands and the South Pacific. TransAct also focuses on the after-market side of the business, providing printer service, supplies and spare parts. 2. BASIS OF PRESENTATION The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These accounting principles were applied on a basis consistent with those of the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2005. In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to fairly state TransAct's financial position as of March 31, 2006, the results of our operations for the three months ended March 31, 2006 and 2005, and our cash flows for the three months ended March 31, 2006 and 2005. The December 31, 2005 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. These interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2005 included in our Annual Report on Form 10-K. The financial position and results of operations of our foreign subsidiary are measured using local currency as the functional currency. Assets and liabilities of such subsidiary have been translated at end of period exchange rates, and related revenues and expenses have been translated at weighted average exchange rates with the resulting translation gain or loss recorded in accumulated other comprehensive income. Transaction gains and losses are included in other income. The results of operations for the three months ended March 31, 2006 are not necessarily indicative of the results to be expected for the full year. 6

TRANSACT TECHNOLOGIES INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 3. SHARE-BASED PAYMENTS In December 2004, the Financial Accounting Standards Board ("FASB") revised Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment" ("FAS 123R"), which establishes accounting for share-based awards exchanged for employee services and requires companies to expense the estimated fair value of these awards over the requisite employee service period. On April 14, 2005, the U.S. Securities and Exchange Commission adopted a new rule amending the effective dates for FAS 123R. In accordance with the new rule, we adopted the accounting provisions of FAS 123R beginning in the first quarter of 2006. Prior to January 1, 2006, we accounted for share-based compensation to employees in accordance with Accounting Principles Board Opinion No. 25, ("APB 25") "Accounting for Stock Issued to Employees," and related interpretations. We also followed the disclosure requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), as amended by Statement of Financial Accounting Standards 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("FAS 148"). Under FAS 123R, share-based compensation expense is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the employee's requisite service period. We have no awards with market or performance conditions. We adopted the provisions of FAS 123R on January 1, 2006, using a modified prospective application ("MPA"), which provides for certain changes to the method for valuing share-based compensation. Under the MPA, prior periods are not revised for comparative purposes. The valuation provisions of FAS 123R apply to new awards and to awards that are outstanding on the effective date and subsequently modified or cancelled. On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3, "Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards." We have elected to adopt the alternative transition method provided in this FASB Staff Position for calculating the tax effects of share-based compensation pursuant to FAS 123R. The alternative transition method includes a simplified method to establish the beginning balance of the additional paid-in capital pool ("APIC pool") related to the tax effects of employee share-based compensation, which is available to absorb tax deficiencies recognized subsequent to the adoption of FAS 123R. We use 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 the option, stock price volatility, risk-free interest rate, dividend yield and exercise price. Many of these assumptions are judgmental and highly sensitive in the determination of compensation expense. In addition, we estimate forfeitures when recognizing compensation expense, and we will adjust our estimate of forfeitures over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative true-up adjustment in the period of change and will also impact the amount of compensation expense to be recognized in future periods. Under the assumptions indicated below, the weighted-average fair value of stock option grants for the three months ended March 31, 2006 was $5.91. The table below indicates the key assumptions used in the option valuation calculations for options granted in the three months ended March 31, 2006 and a discussion of our methodology for developing each of the assumptions used in the valuation model: Three Months Ended March 31, 2006 ------------------ Expected option term 5.2 years Expected volatility 78.4% Risk-free interest rate 4.5% Dividend yield 0% 7

TRANSACT TECHNOLOGIES INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 3. SHARE-BASED PAYMENTS (CONTINUED) No assumptions have been disclosed for the three months ended March 31, 2005, as no stock option grants were made. Expected Option Term - This is the weighted average period of time over which the options granted are expected to remain outstanding giving consideration to our historical exercise patterns. Options granted have a maximum term of ten years. An increase in the expected term will increase compensation expense. Expected Volatility - The stock volatility for each grant is measured using the weighted average of historical daily price changes of our common stock over the most recent period equal to the expected option term of the grant. An increase in the expected volatility factor will increase compensation expense. Risk-Free Interest Rate - This is the U.S. Treasury rate in effect at the time of grant having a term approximately equal to the expected term of the option. An increase in the risk-free interest rate will increase compensation expense. Dividend Yield - We have not made any dividend payments on common stock, and we have no plans to pay dividends in the foreseeable future. An increase in the dividend yield will decrease compensation expense. Prior to adopting the provisions of FAS 123R, we recorded estimated compensation expense for employee stock options based upon their intrinsic value on the date of grant pursuant to APB 25 and provided the required pro forma disclosures of FAS 123. Because we established the exercise price based on the fair market value of our common stock at the date of grant, the stock options had no intrinsic value upon grant, and therefore no estimated expense was recorded prior to adopting FAS 123R. We recorded compensation expense for restricted stock at the fair value of the stock at the date of grant, recognized over the service period. Each accounting period, we reported the potential dilutive impact of stock options in our diluted earnings per common share using the treasury-stock method. Out-of-the-money stock options (i.e., the average stock price during the period was below the strike price of the stock option) were not included in diluted earnings per common share as their effect was anti-dilutive. 8

TRANSACT TECHNOLOGIES INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 3. SHARE-BASED PAYMENTS (CONTINUED) For purposes of pro forma disclosures under FAS 123 for the three months ended March 31, 2005, the estimated fair value of the share-based awards was assumed to be amortized to expense over the stock option's vesting periods. The pro forma effects of recognizing estimated compensation expense under the fair value method on net income and net income per common share were as follows: Three months ended March 31, 2005 ------------------ (In thousands, except per share data) Net income (loss) available to common shareholders: Net income available to common shareholders, as reported $ 163 Add: Stock-based compensation expense included in reported net income, net of tax 44 Deduct: Stock-based compensation expense determined under fair value based method for all awards, net of tax (579) ------ Pro forma net loss available to common shareholders $ (372) ====== Net income (loss) per common share: Basic: As reported $ 0.02 Pro forma $(0.04) Diluted: As reported $ 0.02 Pro forma $(0.04) The pro forma effects of estimated share-based compensation expense on net income and earnings per common share for the three months ended March 31, 2005 were estimated at the date of grant using the Black-Scholes option-pricing model. On November 2, 2005, the Compensation Committee of the Board of Directors approved accelerating the vesting of all outstanding unvested stock options granted to directors, officers and employees of the Company under our applicable stock incentive plans. As a result of the acceleration, options to acquire approximately 109,500 shares of our common stock, which otherwise would have vested from time to time over the next four years, became immediately exercisable. All other terms and conditions applicable to the outstanding stock option grants remain in effect. The option plans under which accelerated grants were issued are our 1996 Stock Plan, 1996 Directors' Stock Plan and the 2001 Employee Stock Plan. The Compensation Committee's decision to accelerate the vesting of affected stock options was primarily based upon our required adoption of FAS 123R effective January 1, 2006. Due to the acceleration of vesting of unvested options prior to the adoption of FAS123R, we will only record compensation expense related to stock options granted in 2006 and beyond. We recorded approximately $26,000 of compensation expense in the fourth quarter of 2005 related to the acceleration of vesting. 9

TRANSACT TECHNOLOGIES INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 3. SHARE-BASED PAYMENTS (CONTINUED) Upon adoption of FAS 123R, we recognized compensation expense associated with awards granted after January 1, 2006, and the unvested portion of previously granted awards that remain outstanding as of January 1, 2006, in our condensed consolidated statement of income for the first quarter of 2006. During the quarter ended March 31, 2006, we recognized compensation expense of $21,000 for stock options and $134,000 for restricted stock, which was recorded in our condensed consolidated statement of income. The income tax benefits from share-based payments recorded in the income statement totaled $57,000 for the three months ended March 31, 2006. No expense related to stock options was recorded in the three months ended March 31, 2005. The following table illustrates the impact of the adoption of FAS 123R on reported amounts: Three months ended March 31, 2006 ----------------------- Impact of FAS 123R As Reported Adoption ----------- --------- Operating income $1,636 $ 21 Income before income taxes $1,639 $ 21 Net income $1,057 $ 14 Earnings per share: Basic $ 0.11 $0.00 Diluted $ 0.11 $0.00 For the three months ended March 31, 2006, the adoption of FAS 123R resulted in tax benefits from stock options exercised in the period being classified as financing activities in the 2006 statement of cash flows. Shares that are issued upon exercise of employee stock options are newly issued shares and not issued from treasury stock. Upon the adoption of FAS 123R, we also reclassified the unamortized restricted stock compensation account of $1,837,000 against additional paid-in capital. These adjustments are applied using MPA and, accordingly, have not been reflected in the 2005 financial statements. STOCK INCENTIVE PLANS. We currently have four primary stock incentive plans: the 1996 Stock Plan, which provides for the grant of awards to officers and other key employees of the Company; the 1996 Directors' Stock Plan, which provides for non-discretionary awards to non-employee directors; the 2001 Employee Stock Plan, which provides for the grant of awards to key employees of the Company and other non-employees who may provide services to the Company; and the 2005 Equity Incentive Plan, which provides for awards to executives, key employees, directors and consultants. The plans generally provide for awards in the form of: (i) incentive stock options, (ii) non-qualified stock options, (iii) restricted stock, (iv) restricted stock units, (v) stock appreciation rights or (vi) limited stock appreciation rights. However, the 2001 Employee Stock Plan does not provide for incentive stock option awards. Options granted under these plans are at prices equal to 100% of the fair market value of the common stock at the date of grant. Options granted have a ten-year term and generally vest over a three- to five-year period, unless automatically accelerated for certain defined events. Effective upon the approval of the 2005 Equity Incentive Plan on May 25, 2005, no new awards will be made under the 1996 Stock Plan, the 1996 Directors' Stock Plan or the 2001 Employee Stock Plan. At March 31, 2006, approximately 467,000 shares of common stock remained available for issuance under the 2005 Equity Incentive Plan. 10

TRANSACT TECHNOLOGIES INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 3. SHARE-BASED PAYMENTS (CONTINUED) The 1996 Stock Plan, 1996 Directors' Stock Plan, 2001 Employee Stock Plan and 2005 Equity Incentive Plan option activity is summarized below: Weighted Weighted Average Average Remaining Aggregate Exercise Contractual Life Intrinsic Value Options Price (in years) (in thousands) ------- -------- ---------------- --------------- Options outstanding at December 31, 2005: 741,501 $ 6.10 Granted 115,000 $ 8.83 Exercised (31,198) $ 5.45 Canceled (3,000) $16.62 ------- Options outstanding at March 31, 2006 822,303 $ 6.47 5.89 $3,356 ======= Options exercisable at March 31, 2006 707,303 $ 6.09 5.24 $3,267 ======= Options Outstanding ------------------------------------------------------ Options Exercisable Weighted-Average --------------------------------- Outstanding at Remaining Exercisable at March 31, Weighted-Average Contractual Life March 31, Weighted-Average Range of Exercise Prices 2006 Exercise Price (in years) 2006 Exercise Price - ------------------------ -------------- ---------------- ------------------ -------------- ---------------- $ 2.00 - $ 5.00 458,366 $ 3.67 5.78 458,366 $ 3.67 5.01 - 7.50 185,437 $ 6.22 3.44 185,437 $ 6.22 7.51 - 10.00 129,250 $ 8.75 8.95 14,250 $ 8.12 10.01 - 25.00 13,500 $16.50 7.82 13,500 $16.50 25.01 - 35.00 35,750 $31.66 8.16 35,750 $31.66 ------- ------- 822,303 $ 6.47 5.89 707,303 $ 6.09 ======= ======= As of March 31, 2006, unrecognized compensation cost related to stock options totaled $659,000, which is expected to be recognized over a weighted average period of 4.8 years. The total intrinsic value of stock options exercised was $117,000, during the three months ended March 31, 2006. No stock options vested during the three months ended March 31, 2006. Cash received from stock option exercises for the three months ended March 31, 2006 was $170,000. 11

TRANSACT TECHNOLOGIES INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 3. SHARE-BASED PAYMENTS (CONTINUED) RESTRICTED STOCK: Under the 1996 Stock Plan, 2001 Employee Stock Plan and 2005 Equity Incentive Plan, we have granted shares of restricted common stock, for no consideration, to our officers, directors and certain key employees. Restricted stock activity for the 1996 Stock Plan, 2001 Employee Stock Plan and 2005 Equity Incentive Plan is summarized below: Weighted Average Grant Date Fair Restricted Stock Value ---------------- ----------------- Nonvested shares at December 31, 2005 187,550 $12.23 Granted -- -- Vested (33,084) 12.66 Canceled -- -- ------- Nonvested shares at March 31, 2006 154,466 $12.14 ======= As of March 31, 2006, unrecognized compensation cost related to restricted stock totaled $1,703,000, which is expected to be recognized over a weighted average period of 3.6 years. The total fair value of restricted stock that vested during the three months ended March 31, 2006 was $290,000. 4. INVENTORIES The components of inventories are: March 31, December 31, 2006 2005 --------- ------------ (In thousands) Raw materials and purchased component parts $6,804 $5,788 Finished goods 421 248 ------ ------ $7,225 $6,036 ====== ====== 5. ACCRUED PRODUCT WARRANTY LIABILITY The following table summarizes the activity recorded in the accrued product warranty liability during the three months ended March 31, 2006 and 2005. Three months ended March 31, ------------------ 2006 2005 ----- ----- (In thousands) Balance, beginning of period $ 644 $ 597 Additions related to warranties issued 68 198 Warranty costs incurred (112) (151) ----- ----- Balance, end of period $ 600 $ 644 ===== ===== The current portion of the accrued product warranty liability is included in accrued liabilities in the accompanying balance sheet. 12

TRANSACT TECHNOLOGIES INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 6. ACCRUED BUSINESS CONSOLIDATION AND RESTRUCTURING In February 2001, we undertook a plan to consolidate all manufacturing and engineering into our existing Ithaca, NY facility and to close our Wallingford, CT manufacturing facility (the "Consolidation"). As of December 31, 2001, substantially all Wallingford product lines were successfully transferred to Ithaca, NY. We continue to apply the consensus set forth in EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)" in recognizing the accrued restructuring expenses relating to the Consolidation. The remaining accrued restructuring balance relates to lease and other occupancy costs related to unused space at our Wallingford facility through March 31, 2008. The following table summarizes the activity recorded in accrued restructuring expenses during the three months ended March 31, 2006 and 2005. Three Months Ended March 31, ------------------ 2006 2005 ------ ------ (In thousands) Accrual balance, beginning of period $1,007 $1,454 Cash payments (107) (109) ------ ------ Accrual balance, end of period $ 900 $1,345 ====== ====== 7. EARNINGS PER SHARE Basic and diluted earnings per share are calculated in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." The following table sets forth the reconciliation of basic weighted average shares outstanding and diluted weighted average shares outstanding: Three Months Ended March 31, ------------------ 2006 2005 ------ ------- Net income $1,057 $ 163 ====== ======= Shares: Basic: Weighted average common shares outstanding 9,558 10,010 Add: Dilutive effect of outstanding options and restricted stock as determined by the treasury stock method 310 442 ------ ------- Diluted: Weighted average common and common equivalent shares outstanding 9,868 10,452 ====== ======= Net income per common share: Basic $ 0.11 $ 0.02 Diluted $ 0.11 $ 0.02 13

TRANSACT TECHNOLOGIES INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 7. EARNINGS PER SHARE (CONTINUED) Unvested restricted stock is excluded from the calculation of weighted average common shares for basic EPS. For diluted EPS, weighted average common shares include the impact of restricted stock under the treasury method. For the three months ended March 31, 2006 and 2005, potentially dilutive shares that were excluded from the net income per share calculation, consisting of out-of-the-money stock options and warrants, amounted to 109,750 and 44,250 shares, respectively. 8. COMPREHENSIVE INCOME The following table summarizes the Company's comprehensive income: Three Months Ended March 31, ------------------ 2006 2005 ------ ----- (In thousands) Net income $1,057 $163 Foreign currency translation adjustment 8 (3) ------ ---- Total comprehensive income $1,065 $160 ====== ==== 9. STOCKHOLDER'S EQUITY Changes in stockholders' equity for the three months ended March 31, 2006 were as follows (in thousands): Balance at December 31, 2005 $21,257 Net income 1,057 Issuance of shares from exercise of stock options 170 Purchases of treasury stock (698) Share-based compensation 155 Tax benefits from employee stock transactions 43 Foreign currency translation adjustment 8 ------- Balance at March 31, 2006 $21,992 ======= 10. SIGNIFICANT TRANSACTIONS On March 25, 2005, our Board of Directors approved a stock repurchase program (the "Stock Repurchase Program"). Under the program, we are authorized to repurchase up to $10 million of our outstanding shares of common stock from time to time on the open market over a three year period ending on March 25, 2008, depending on market conditions, share price and other factors. During the three months ended March 31, 2006, we repurchased a total of 74,800 shares of common stock for approximately $698,000 at an average price of $9.33 per share. As of March 31, 2006, we repurchased a total of 579,800 shares of common stock for approximately $4,565,000 at an average price of $7.87 per share since the inception of the Stock Repurchase Program. 14

TRANSACT TECHNOLOGIES INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 11. COMMITMENTS AND CONTINGENCIES In April 2005, we announced a complaint against FutureLogic, Inc. ("FutureLogic"), which charges FutureLogic with disseminating false and misleading statements. We assert claims of defamation and certain other charges. In May 2005, FutureLogic filed a complaint against us, asserting false advertising, defamation, trade libel and certain other charges. The action is currently in the pre-trial motion stage, and, as of March 31, 2006, we are currently unable to estimate any potential liability or range of loss associated with this litigation. Accordingly, no amounts have been accrued in the financial statements related to this matter. 15

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, customer acceptance and market share gains, both domestically and internationally, in the face of substantial competition from competitors that have broader lines of products and greater financial resources; the introduction of new products into the marketplace by competitors; successful product development; dependence on significant customers; dependence on significant vendors; the ability to recruit and retain quality employees as we grow; dependence on third parties for sales outside the United States including Australia, New Zealand, Europe and Latin America; economic and political conditions in the United States, Australia, New Zealand, Europe and Latin America; marketplace acceptance of new products; availability of third-party components at reasonable prices; the absence of price wars or other significant pricing pressures affecting our products in the United States and abroad; and the outcome of lawsuits between TransAct and FutureLogic, Inc. 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 to reflect new, changing or unanticipated events or circumstances. 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, contingent liabilities and restructuring accruals. 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, 2005. We have reviewed those policies and determined that, in addition to the policies noted below, they remain our critical accounting policies for the three months ended March 31, 2006. SHARE-BASED PAYMENTS - As of January 1, 2006, we account for employee stock-based compensation costs in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment" ("FAS 123R"). We 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 input of highly subjective assumptions, including expected volatility and expected term. Further, as required under FAS 123R, we now estimate forfeitures for options granted, which are not expected to vest. Changes in these inputs and assumptions can materially affect the measure of estimated fair value of our share-based compensation. We adopted the provisions of FAS 123R on January 1, 2006, using a modified prospective application, which provides for certain changes to the method for valuing share-based compensation. Under the modified prospective application, prior periods are not revised for comparative purposes. The valuation provisions of FAS 123R apply to new awards and to awards that are outstanding on the effective date and subsequently modified or cancelled. On November 2, 2005, the Compensation Committee of the Board of Directors approved accelerating the vesting of all outstanding unvested stock options granted to directors, officers and employees of the Company under our applicable stock incentive plans. As a result of the acceleration, options to acquire approximately 109,500 shares of our common stock, which otherwise would have vested from time to time over the next four years, became immediately exercisable. All other terms and conditions applicable to the outstanding stock option grants remain in effect. The option plans under which accelerated grants were issued are our 1996 Stock Plan, 1996 Directors' Stock Plan and the 2001 Employee Stock Plan. The Compensation Committee's decision to accelerate the vesting of affected stock options was primarily based upon our required adoption of FAS 123R effective January 1, 2006. Due to the acceleration of vesting of unvested 16

options prior to the adoption of FAS123R, we will only record compensation expense related to stock options granted in 2006 and beyond. We recorded approximately $26,000 of compensation expense in the fourth quarter of 2005 related to the acceleration of vesting. Upon adoption of FAS 123R, we recognized compensation expense associated with awards granted after January 1, 2006, and the unvested portion of previously granted awards that remain outstanding as of January 1, 2006, in our condensed consolidated statement of income for the first quarter of 2006. During the quarter ended March 31, 2006, we recognized compensation expense of $21,000 for stock options and $134,000 for restricted stock, which was recorded in our condensed consolidated statement of income. The income tax benefits from share-based payments recorded in the income statement totaled $57,000 for the three months ended March 31, 2006. No expense related to stock options was recorded in the three months ended March 31, 2005. For the three months ended March 31, 2006, the adoption of FAS 123R resulted in tax benefits from stock options exercised in the period being classified as financing activities in the 2006 statement of cash flows. Shares that are issued upon exercise of employee stock options are newly issued shares and not issued from treasury stock. Upon the adoption of FAS 123R, we also reclassified the unamortized restricted stock compensation account of $1,837,000 against additional paid-in capital. These adjustments are applied using MPA and, accordingly, have not been reflected in the 2005 financial. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THREE MONTHS ENDED MARCH 31, 2005 NET SALES. Net sales, which include printer sales and sales of spare parts, consumables and repair services, by market for the three months ended March 31, 2006 and 2005 were as follows: Change Three months ended Three months ended ------------- March 31, 2006 March 31, 2005 $ % ------------------ ------------------ ------ ---- (In thousands) Point of sale and banking $ 4,664 28.4% $ 3,954 32.8% $ 710 18.0% Gaming and lottery 8,644 52.6% 5,471 45.5% 3,173 58.0% TransAct Services Group 3,126 19.0% 2,611 21.7% 515 19.7% ------- ------ ------- ----- ------ $16,434 100.0% $12,036 100.0% $4,398 36.5% ======= ====== ======= ===== ====== International * $ 3,809 23.2% $ 2,083 17.3% $1,726 82.9% ======= ====== ======= ===== ====== * 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 quarter of 2006 increased $4,398,000, or 37%, from the same period last year due to double-digit sales increases in all three of our markets: point of sale ("POS") and banking (an increase of approximately $710,000, or 18%); gaming and lottery (an increase of approximately $3,173,000, or 58%); and the TransAct Services Group ("TSG") (an increase of $515,000, or 20%). Overall, international sales increased by $1,726,000, or 83%, due largely to higher international shipments of our gaming printers, primarily to Europe, as well as international shipments of our lottery printers to GTECH. POINT OF SALE AND BANKING: Revenue from the POS and banking market includes sales of inkjet, thermal and impact printers used primarily by retailers in the hospitality, restaurant (including fine dining, casual dining and fast food) and specialty retail industries to print receipts for consumers, validate checks, or print on other inserted media. Revenue from this market also includes sales of printers used by banks, credit unions and other financial institutions to print and/or validate receipts at bank teller stations. Sales of our POS and banking printers worldwide increased approximately $710,000, or 18%. Change Three months ended Three months ended --------------- March 31, 2006 March 31, 2005 $ % ------------------ ------------------ ----- ------- (In thousands) Domestic $4,262 91.4% $3,418 86.4% $ 844 24.7% International 402 8.6% 536 13.6% (134) (25.0%) ------ ----- ------ ----- ----- $4,664 100.0% $3,954 100.0% $ 710 18.0% ====== ===== ====== ===== ===== Domestic POS and banking revenue increased to $4,262,000, representing an $844,000, or 25%, increase from the first quarter of 2005, due primarily to higher sales of (1) our iTherm(TM)280 thermal printer, (2) our new line of 17

printers launched in 2005 exclusively for POS distributors, and (3) our line of inkjet printers, with the most significant increase in our Bankjet(R) line of inkjet printers to an existing banking customer. Although we are currently pursuing several banking opportunities, due to the project-oriented nature of these sales, we cannot predict if and when future sales may occur. These increases were partially offset by decreasing sales of our legacy POS impact printers, as expected, as these printers are being replaced by our newer thermal and inkjet printers. International POS and banking printer shipments decreased by approximately $134,000, or 25%, to $402,000, due primarily to lower sales to one of our international POS distributors in Latin America. We expect sales into the POS and banking market for the second quarter of 2006 to be higher than those reported for the first quarter of 2006, as our additional sales staff and initiatives put in place during 2005 continue to take hold. GAMING AND LOTTERY: Revenue from the gaming and lottery 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, racetracks ("racinos") and other gaming venues worldwide. Revenue from this market also includes sales of lottery printers to GTECH, the world's largest provider of lottery terminals, for various lottery applications. Sales of our gaming and lottery products increased by $3,173,000, or 58%, from the first quarter of 2005, primarily due to higher sales of lottery printers to GTECH, both domestically and internationally, and an increase in sales of our slot machine and other gaming printers, both domestically and internationally. Change Three months ended Three months ended -------------- March 31, 2006 March 31, 2005 $ % ------------------ ------------------ ------ ----- (In thousands) Domestic $6,003 69.4% $4,481 81.9% $1,522 34.0% International 2,641 30.6% 990 18.1% 1,651 166.8% ------ ----- ------ ----- ------ $8,644 100.0% $5,471 100.0% $3,173 58.0% ====== ===== ====== ===== ====== Domestic sales of our gaming and lottery printers increased by $1,522,000, or 34%, due largely to an increase in domestic sales of lottery printers to GTECH and, to a lesser extent, an increase in sales of our thermal casino printers driven by increased market share as we begin to realize benefits from our new sales relationship with JCM American Corporation. Domestic and international printer sales to GTECH Corporation (a worldwide lottery terminal provider and major customer), which include impact and thermal on-line lottery printers, increased by approximately $1,756,000, or 98%, in the first quarter of 2006 compared to the first quarter of 2005. Our quarterly sales to GTECH are directly dependent on the timing and number of new and upgraded lottery terminal installations GTECH performs, and are not indicative of GTECH's overall business or revenue. Based on the timing of orders, we expect sales of lottery printers to GTECH for the second quarter of 2006 to be less than those reported in the first quarter of 2006. International gaming and lottery printer sales increased $1,651,000, or 167%, to $2,641,000 in the first quarter of 2006. Such sales represented 31% and 18% of total sales into our gaming and lottery market during the first quarter of 2006 and 2005, respectively. This increase was led primarily by continued growth in international gaming printer sales, primarily in Europe, as Europe continues to expand ticket printing in slot machines and other gaming and amusement machines. In addition, we experienced higher international lottery printer sales to GTECH. We expect sales of our international gaming and lottery printers for the second quarter of 2006 to be lower than those reported for the first quarter of 2006, as we expect lower international lottery printer shipments to GTECH. TRANSACT SERVICES GROUP: Revenue from TSG includes sales of consumable products (inkjet cartridges, ribbons and paper), replacement parts, maintenance and repair services, refurbished printers, and shipping and handling charges. Sales from TSG increased by approximately $515,000, or 20%. Change Three months ended Three months ended ----------- March 31, 2006 March 31, 2005 $ % ------------------ ------------------ ---- ---- (In thousands) Domestic $2,360 75.5% $2,054 78.7% $306 14.9% International 766 24.5% 557 21.3% 209 37.5% ------ ----- ------ ----- ---- $3,126 100.0% $2,611 100.0% $515 19.7% ====== ===== ====== ===== ==== 18

Domestic revenue from our TSG group increased by approximately $306,000, to $2,360,000 largely due to higher maintenance and repair services revenue, and increased sales of replacement parts, refurbished printers and inkjet cartridges. These increases were somewhat offset by a decline in consumable products for our legacy impact printers. Internationally, TSG revenue increased by approximately $209,000 to $766,000 due largely to an increase in maintenance and repair services revenue. We expect TSG revenue for the second quarter of 2006 to be consistent with those reported in the first quarter of 2006. GROSS PROFIT. 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. Gross profit increased $2,010,000, or 55%, and gross margin increased to 34.6% from 30.6%, due primarily to a higher volume of sales in the first quarter of 2006 compared to the first quarter of 2005. We expect gross margin for the second quarter of 2006 to be consistent with the gross margin reported for the first quarter of 2006. ENGINEERING AND PRODUCT DEVELOPMENT. Engineering, design and product development expenses primarily include salary and payroll related expenses for our engineering staff, depreciation and design expenses (including prototype printer expense, outside design and testing services, and supplies). Such expenses increased by $30,000, or 4%, to $761,000, as we incurred higher expenses related to increased engineering staffing and other employee compensation expenses, which were largely offset by a decrease in costs associated with IGT's integration and attainment of jurisdictional approvals for our new Epic 950(TM) thermal casino printer on all of IGT's slot platforms worldwide (the "IGT Integration"). We incurred approximately $100,000 of IGT Integration costs in the first quarter of 2005 that did not recur in the first quarter of 2006. Engineering and product development expenses decreased as a percentage of net sales to 4.6% from 6.1%, due primarily to higher sales in the first quarter of 2006 compared to the first quarter of 2005. We expect engineering and product development expenses for the second quarter of 2006 to be consistent with those reported in the first quarter of 2006. SELLING AND MARKETING. 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 and other promotional marketing expenses. Selling and marketing expenses for the first quarter of 2006 increased by $231,000, or 17%, to $1,580,000, as we incurred the full-quarter effect of expenses related to the addition of new corporate marketing staff, and new sales staff for our three Strategic Sales Units including those for our new service centers in Las Vegas, NV and Wallingford, CT made throughout 2005. These increases were somewhat offset by lower trade show and promotional expenses compared with the first quarter of 2005. Selling and marketing expenses decreased as a percentage of net sales to 9.6% from 11.2%, due primarily to higher sales volume in the first quarter of 2006 compared to the first quarter of 2005. We expect selling and marketing expenses to be higher in the second quarter of 2006 compared to the first quarter of 2006, as we expect to incur higher trade show and promotional marketing expenses. GENERAL AND ADMINISTRATIVE. General and administrative expenses primarily include salaries and payroll related expenses for our executive, accounting, human resource and information technology staff, expenses for our corporate headquarters, professional and legal expenses, and telecommunication expenses. General and administrative expenses increased by $346,000, or 25%, to $1,710,000, due primarily to (1) the full-quarter effect in 2006 of compensation related expenses associated with the re-location of our accounting department from Ithaca, NY to Wallingford, CT during 2005, (2) higher legal expenses related to both our lawsuit against FutureLogic, Inc. and the expansion of our international patent portfolio, (3) data conversion expenses associated with our Oracle software implementation and (4) increased telecommunications expenses associated with the implementation of our new companywide phone system. These increases were partially offset by a decrease in recruiting costs incurred during the first quarter of 2005 related to the re-location of our accounting department and the increased staffing of the TSG sales unit that did not recur in the first quarter of 2006. General and administrative expenses decreased as a percentage of net sales to 10.4% from 11.3% due primarily to increased expenses in proportion to higher volume of sales in the first quarter of 2006 as compared to the first quarter of 2005. We expect general and administrative expenses to be higher in the second quarter of 2006 compared to the first quarter of 2006, largely to higher legal expenses related to the continued expansion of our portfolio of international patents. OPERATING INCOME. During the first quarter of 2006 we reported operating income of $1,636,000, or 10.0% of net sales, compared to $233,000, or 1.9% of net sales in the first quarter of 2005. The substantial increase in our operating income and operating margin was due largely to higher sales and gross profit, somewhat offset by higher operating expenses, in the first quarter of 2006 compared to that of 2005. INTEREST. We recorded net interest income of $14,000 in the first quarter of 2006 compared to $20,000 in the first quarter of 2005, due to our lower average cash balances during the first quarter of 2006 as compared to the first 19

quarter of 2005. Our average cash balance was lower in the first quarter of 2006 due largely to the repurchase of $700,000 of our common stock under our stock repurchase program. We did not repurchase any common stock during the first quarter of 2005. We do not expect to draw on our revolving borrowings as we expect to continue to generate cash from operations during 2006. As a result, we expect to continue to report net interest income throughout 2006. See "Liquidity and Capital Resources" below for more information. INCOME TAXES. We recorded an income tax provision of $582,000 and $89,000 in the first quarter of 2006 and 2005, respectively, at an effective rate of 35.5% and 35.3%, respectively. We expect our annual effective tax rate for 2006 to be between 35% and 36%. NET INCOME. We reported net income during the first quarter of 2006 of $1,057,000, or $0.11 per diluted share, compared to net income of $163,000, or $0.02 per diluted share, for the first quarter of 2005. 20

LIQUIDITY AND CAPITAL RESOURCES CASH FLOW Overview: In the first three months of 2006, our cash flows reflected the results of higher sales volume and our increased investment in infrastructure, compared to the same period in 2005. Despite the repurchase of approximately $700,000 of our common stock and capital expenditures of $973,000 during the first quarter of 2006, our cash balance increased by $710,000 from December 31, 2005. We ended the first quarter of 2006 with approximately $5.3 million in cash and cash equivalents. We expect to earn interest income on our available cash balance throughout 2006. Operating activities: The following significant factors affected our cash provided by operations of $2,168,000 in the first three months of 2006: - We reported net income of $1,057,000. - We recorded depreciation and amortization expense of $368,000. - Accounts receivable increased by $1,723,000 due to higher sales and timing of sales during the quarter. - Inventory increased by $1,189,000 due to anticipated demand for our products. - Accounts payable increased by $2,672,000 due to increased inventory purchases related to higher sales volume during the quarter. - Accrued liabilities increased by $1,044,000 due to the following: (1) higher income tax accrual based on the increased level of income before taxes and (2) higher consulting services accruals related to the implementation of our new companywide phone system and Oracle software. These increased accruals were partially offset by lower compensation related accruals. - As of March 31, 2006 and December 31, 2005, our restructuring accrual amounted to $900,000 and $1,007,000, respectively. The decrease of $107,000 is related solely to payments made on our Wallingford lease obligation. We expect to pay approximately $420,000 of these expenses per year from 2006 through 2007, and the remaining $194,000 in 2008. These payments from 2006 through 2008 relate primarily to lease obligation costs for unused space in our Wallingford, CT facility. Investing activities: Our capital expenditures were approximately $973,000 and $887,000 in the first three months of 2006 and 2005, respectively. Expenditures in 2006 included approximately $350,000 for the purchase of hardware, software and outside consulting costs related to our Oracle software implementation, $325,000 for the purchase of hardware and consulting costs related to our new phone system, $100,000 for the purchase of leasehold improvements made on the new gaming and lottery headquarters and western region service center in Las Vegas, NV and the remaining amount primarily for the purchase of new product tooling. We expect capital expenditures for the full year 2006 to be approximately $2,500,000. During the remainder of 2006, we expect to invest in two significant projects: (1) the implementation of Oracle software and (2) new product tooling and tooling enhancements to our existing products. Financing activities: We used approximately $493,000 in financing activities during the first three months of 2006, largely due to the repurchase of Company stock (approximately $698,000), partly offset by proceeds from stock option exercises (approximately $170,000). WORKING CAPITAL Our working capital increased to $15,459,000 at March 31, 2006 from $15,375,000 at December 31, 2005. The current ratio decreased to 2.5 to 1 at March 31, 2006 from 3.2 to 1 at December 31, 2005. The decrease in the current ratio was largely due to higher accounts payable resulting from higher sales volume and inventory purchases and an increase in income taxes payable resulting from a higher level of income before taxes, somewhat offset by higher accounts receivable and inventory levels. DEFERRED TAXES As of March 31, 2006, we had a net deferred tax asset of approximately $3,300,000. In order to utilize this deferred tax asset, we will need to generate approximately $7.9 million of taxable income in future years. Based on future projections of taxable income, we have determined that it is more likely than not that the existing net deferred tax asset will be realized. 21

CREDIT FACILITY AND BORROWINGS On August 6, 2003, we entered into a $12.5 million credit facility (the "TD Banknorth Credit Facility") with TD Banknorth, N.A. The TD Banknorth Credit Facility provides for an $11.5 million revolving credit line expiring on July 31, 2006, and a $1 million equipment loan facility, which expired in July 2005. Borrowings under the revolving credit line bear a floating rate of interest at the prime rate and are secured by a lien on all the assets of the company. The TD Banknorth Credit Facility imposes certain quarterly financial covenants on the Company and restricts the payment of dividends on our common stock and the creation of other liens. We expect to replace or renew our credit facility during 2006. On March 28, 2005, we received a consent from TD Banknorth, N.A. to permit us to repurchase our common stock pursuant to the terms of the Stock Repurchase Program. On February 24, 2006, we amended the TD Banknorth Credit Facility to revise a financial covenant effective December 31, 2005. The borrowing base of the revolving credit line under the TD Banknorth Credit Facility is based on the lesser of (a) $11.5 million or (b) 85% of eligible accounts receivable plus (i) the lesser of (1) $5,500,000 and (2) 45% of eligible raw material inventory plus 50% of eligible finished goods inventory, less (ii) a $40,000 credit reserve. As of March 31, 2006, we had no balances outstanding on the revolving credit line. Undrawn commitments under the TD Banknorth Credit Facility were approximately $11,500,000 at March 31, 2006. However, our maximum additional available borrowings under the facility were limited to approximately $8,100,000 at March 31, 2006 based on the borrowing base of our collateral. We were in compliance with all financial covenants of the Banknorth Credit Facility at March 31, 2006. STOCK REPURCHASE PROGRAM On March 25, 2005 our Board of Directors approved a stock repurchase program ("the Stock Repurchase Program"). Under the Stock Repurchase Program, we are authorized to repurchase up to $10 million of the our outstanding shares of common stock from time to time in the open market over a three-year period ending March 25, 2008, depending on market conditions, share price and other factors. For the three months ended March 31, 2006, we repurchased a total of 74,800 shares of common stock for approximately $698,000 at an average price of $9.33 per share. As of March 31, 2006, we repurchased a total of 579,800 shares of common stock for approximately $4,565,000 at an average price of $7.87 per share since the inception of the Stock Repurchase Program. SHAREHOLDERS' EQUITY Shareholders' equity increased by $735,000 to $21,992,000 at March 31, 2006 from $21,257,000 at December 31, 2005. The increase was primarily due to the following for the three months ended March 31, 2006: (1) net income of $1,057,000 (2) proceeds of approximately $170,000 from the issuance of approximately 31,000 shares of common stock from stock option exercises, (3) an increase in additional paid in capital of approximately $35,000 resulting from the tax benefits resulting from the sale of employee stock from stock option exercises, and (4) compensation expense related to stock options and restricted stock of $155,000. These increases were offset by treasury stock purchases of 74,800 shares of common stock for approximately $698,000. CONTRACTUAL OBLIGATIONS / OFF-BALANCE SHEET ARRANGEMENTS We have experienced no material changes in our contractual obligations outside the ordinary course of business during the three months ended March 31, 2006. We have no material off-balance sheet arrangements as defined in Regulation S-K 303(a)(4)(ii). RESOURCE SUFFICIENCY We believe that our cash on hand and cash flows generated from operations will provide sufficient resources to meet our working capital needs, including costs associated with the Consolidation, to finance our capital expenditures, to fund our Stock Repurchase Program, and meet our liquidity requirements through at least the next 12 months. ITEM 4. CONTROLS AND PROCEDURES As of the end of the period covered by this quarterly report, an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures was conducted under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were adequate and designed to ensure that information required to be disclosed by the Company in this 22

report is recorded, processed, summarized and reported in a timely manner, including that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. There were no significant changes in internal controls or in other factors that could be reasonably likely to materially affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses in internal controls, during the period covered by this report. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a controls system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. 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 the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On April 28, 2005 we announced that we filed a complaint in Connecticut Superior Court against FutureLogic, Inc. ("FutureLogic") of Glendale, California. The complaint charges FutureLogic with disseminating false and misleading statements, which impugn our business reputation with the intent of damaging our business. We assert claims of defamation, tortious interference with contractual relations, tortious interference with business expectancy, and violation of the Connecticut Unfair Trade Practices Act, and seek an award of compensatory and punitive damages, attorneys' fees and costs. FutureLogic removed this action to the United States District Court for the District of Connecticut and, on June 7, 2005, filed a motion to dismiss the claims for lack of jurisdiction. On December 7, 2005, we amended our complaint in the action pending in the District of Connecticut to add claims that FutureLogic's conduct violated the Lanham Act's bar on false and deceptive advertising. On May 20, 2005, FutureLogic filed a complaint in the United States District Court for the Central District of California against us. The complaint charges us with false advertising, defamation, trade libel, intentional interference with prospective economic advantage, common law unfair competition and statutory unfair competition and seeks an award of compensatory and punitive damages, attorneys' fees and costs. On August 3, 2005, FutureLogic amended its complaint in California to seek a declaratory judgment that Patent No. 6,924,903 issued to us by the United States Patent and Trademark Office ("PTO") on August 2, 2005, for our dual-port printer technology, is invalid, and that FutureLogic is not infringing our patent. We moved to dismiss FutureLogic's action in California, on the grounds that any claims raised in that action should have been brought as part of the case filed by us in the District of Connecticut. In the alternative, we moved to stay the California action pending the resolution of jurisdictional motions in the Connecticut court. On January 20, 2006, the California District Court filed an order granting our motion to stay the California proceeding pending the resolution of jurisdictional motions in the Connecticut case. Under the California court's order, should the Connecticut court find that it has jurisdiction over FutureLogic, FutureLogic's patent case will be transferred to the District of Connecticut for consolidation with the action pending in that forum. The jurisdictional motions before the District of Connecticut were fully briefed as of February 17, 2006 and await the decision of the Connecticut court. Regardless in what forum we eventually face FutureLogic's patent claims, we intend to defend against the claims vigorously, as we believe them to be without merit or factual basis. This action is in the pre-trial motion stage and we are currently unable to calculate any potential or probable liability associated with this action at this time. 23

ITEM 1A. RISK FACTORS Risk factors that may impact future results include those disclosed in our Form 10-K for the year ended December 31, 2005. No changes have occurred during the three months ended March 31, 2006. In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2005, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. ITEM 2C. STOCK REPURCHASE On March 25, 2005 our Board of Directors approved a stock repurchase program ("the Stock Repurchase Program"). Under the Stock Repurchase Program, management is authorized to repurchase up to $10 million of the our outstanding shares of common stock from time to time in the open market over a three year period ending March 25, 2008, depending on market conditions, share price and other factors. For the three months ended March 31, 2006, we had repurchased a total of 74,800 shares of common stock for approximately $698,000. As of March 31, 2006, we had repurchased a total of 579,800 shares of common stock for approximately $4,565,000, at an average price of $7.87 per share since the inception of the Stock Repurchase Program. The following table summarizes repurchases of our common stock in the three months ended March 31, 2006. Total Number of Approximate Dollar Shares Purchased as Value of Shares Total Number Average Part of Publicly that May Yet Be of Shares Price Paid Announced Purchased under the Period Purchased per Share Plans or Programs Plans or Programs - ------ ------------ ---------- ------------------- ------------------- January 1, 2006 - January 31, 2006 -- $ -- -- $6,133,000 February 1, 2006 - February 28, 2006 -- -- -- $6,133,000 March 1, 2006 - March 31, 2006 74,800 9.33 74,800 $5,435,000 ------ ------ Total 74,800 $9.33 74,800 ====== ====== 24

ITEM 6. EXHIBITS a. Exhibits filed herein Exhibit 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 32.2 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 25

SIGNATURES Pursuant to the requirements 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. TRANSACT TECHNOLOGIES INCORPORATED (Registrant) May 9, 2006 /s/ Steven A. DeMartino ---------------------------------------- Steven A. DeMartino Executive Vice President, Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) 26

EXHIBIT LIST The following exhibits are filed herewith. Exhibit - ------- 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 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 2002 32.2 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 27

Exhibit 31.1 CERTIFICATION I, Bart C. Shuldman, certify that: 1. I have reviewed this quarterly report on Form 10-Q of TransAct Technologies Incorporated; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 9, 2006 /s/ Bart C. Shuldman - ------------------------------------- Bart C. Shuldman Chairman, President and Chief Executive Officer 28

Exhibit 31.2 CERTIFICATION I, Steven A. DeMartino, certify that: 6. I have reviewed this quarterly report on Form 10-Q of TransAct Technologies Incorporated; 7. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 8. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 9. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 10. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 9, 2006 /s/ Steven A. DeMartino - ------------------------------------- Steven A. DeMartino Executive Vice President, Chief Financial Officer, Treasurer and Secretary 29

EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of TransAct Technologies Incorporated (the "Company") on Form 10-Q for the period ending March 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Bart C. Shuldman, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 9, 2006 /s/ Bart C. Shuldman - ------------------------------------- Bart C. Shuldman Chief Executive Officer 30

EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of TransAct Technologies Incorporated (the "Company") on Form 10-Q for the period ending March 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Steven A. DeMartino, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (3) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (4) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 9, 2006 /s/ Steven A. DeMartino - ------------------------------------- Steven A. DeMartino Chief Financial Officer 31