**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**Form 10-K**

** **

**(Mark One)**

 

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

 

**For thefiscal year ended January 31, 2008**

** **

**or**

 

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

 

**For the transition periodfrom                                                        to                                                                                    **

** **

**Commission file number 000-20685**

** **

**American Wagering, Inc.**

(Exact name of registrantas specified in its charter)

 

| **Nevada**                                                       |   | **88-0344658**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                             |   |                                  |
| **675  Grier Drive, Las Vegas, NV**                              |   | **89119**                             |
| (Address of principal  executive offices)                        |   | (Zip Code)                            |

 

Registrant’s telephonenumber, including area code  **(702) 735-0101**

 

Securities registered under Section 12(b) ofthe Exchange Act:  **None**

 

Securitiesregistered pursuant to Section 12(g) of the Act:

 
| **Common  Stock, par value, $0.01 per share** |
|-----------------------------------------------|
| (Title of class)                              |

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.

Yes o     No x

 

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

Yes o     No x

 

**Note** – Checking the box above will notrelieve any registrant required to file reports pursuant to Section 13 ofthe Exchange Act from their obligations under those Sections.

 

Indicate bycheckmark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.                                                                  Yesx    No o

 

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K(§229.405 of this chapter) is not contained herein, and will not be contained,to the best of the registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K.                                                              o

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange Act.

 

Large acceleratedfiler o      Accelerated filer o      Non-accelerated filer o      Smaller reporting company x

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Act).           Yes o     No x

 

The aggregate market valueof the voting and non-voting common equity held by non-affiliates as of July 31,2007, based on the closing price of the Over-The-Counter Bulletin Board of$0.97 per share was $3,977,800.

 

APPLICABLE ONLY TOREGISTRANTS INVOLVED IN BANKRUPTCYPROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Indicate by checkmark whether the registrant has filed all documents and reports required to befiled by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934subsequent to the distribution of securities under a plan confirmed by a court.

Yes x     No o

 

As of April 30,2008, the number of outstanding shares of the registrant’s common stock was8,129,879.

 

DOCUMENTS INCORPORATED BYREFERENCE

 

**None**

 

 

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** **

**TABLEOF CONTENTS**

** **
| **PART I**   | **1**      |
|-------------------|------------|
| ** **        | ** ** | ** ** | ** ** |
|              | Item 1.    | Business | 1 |
|              | Item 1A.   | Risk Factors | 10 |
|              | Item 1B.   | Unresolved Staff  Comments | 17 |
|              | Item 2.    | Properties | 17 |
|              | Item 3.    | Legal Proceedings | 18 |
|              | Item 4.    | Submission of  Matters to a Vote of Security Holders | 19 |
|              |       |
| **PART II**  | **21**     |
| ** **        | ** ** |
|              | Item 5.    | Market for  Common Equity, Related Stockholder Matters and Issuer Purchases of Equity  Securites | 21 |
|              | Item 6.    | Selected Financial  Data | 21 |
|              | Item 7.    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 22 |
|              | Item 7A.   | Quantitative  and Qualitative Disclosures About Market Risk | 33 |
|              | Item 8.    | Financial  Statements and Supplementary Data | 33 |
|              |       |   |   |
| ** **        | ** ** | **Report  of Independent Registered Public Accounting Firm** | **34** |
| ** **        | ** ** | ** ** | ** ** |
| ** **        | ** ** | **Consolidated  Balance Sheets January 31, 2008 and 2007** | **35** |
| ** **        | ** ** | ** ** | ** ** |
| ** **        | ** ** | **Consolidated  Statements of Operations for the Years Ended January 31, 2008 and 2007** | **36** |
| ** **        | ** ** | ** ** | ** ** |
| ** **        | ** ** | **Consolidated  Statements of Stockholders’ Equity for the Years Ended January 31, 2008  and 2007** | **37** |
| ** **        | ** ** | ** ** | ** ** |
| ** **        | ** ** | **Consolidated  Statements of Cash Flows for the Years Ended January 31, 2008 and 2007** | **38** |
| ** **        | ** ** | ** ** | ** ** |
| ** **        | ** ** | **Notes  to Consolidated Financial Statements January 31, 2008 and 2007** | **39** |
| ** **        | ** ** | ** ** | ** ** |
|              | Item 9.    | Changes in and  Disagreements With Accountants on Accounting and Financial Disclosure | 59 |
|              | Item 9A    | Controls and  Procedures | 59 |
|              | Item 9B.   | Other Information | 61 |
|              |       |
| **PART III** | **62**     |
|              | ** ** |
|              | Item 10.   | Directors,  Executive Officers and Corporate Governance | 62 |
|              | Item 11.   | **Executive  Compensation** | 64 |
|              | Item 12.   | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters | 69 |
|              | Item 13.   | Certain Relationships  and Related Transactions, and Director Independence | 71 |
|              | Item 14.   | Principal  Accountant Fees and Services | 73 |
|              |       |   |   |
| **PART IV**  | **75**     |
| ** **        |       | ** ** |
|              | Item 15.   | Exhibits,  Financial Statement Schedules | 75 |
|              | ** ** |   |
| **SIGNATURES**    | **78**     |

** **

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** **

**PART I**

** **

# **Item1.**                                   Business

# ** **

**Company History**

** **

American Wagering, Inc.(“AWI” or the “Company”) was incorporated in the state of Nevada in August 1995.AWI is a publicly traded holding company that earns its revenues through theconsolidated operations of its wholly-owned subsidiaries, including Leroy’sHorse & Sports Place, Inc. (“Leroy’s”), Computerized BookmakingSystems, Inc. (“CBS”), AWI Manufacturing, Inc. (“AWIM”), and AWIGaming, Inc. (“AWIG”).

 

**Race and Sports Wagering Revenue Segment**

** **

***Leroy’s. ***Leroy’s was incorporated inthe state of Nevada in November 1977. Leroy’s, through a central computersystem located at the Company’s Las Vegas headquarters, operates a network ofrace and sport wagering facilities on the premises of nonrestricted gaminglocations throughout the state of Nevada. Leroy’s offers a “turn-key” race andsports wagering operation that allows casinos to satisfy their patron’s desirefor race and sports wagering, but without the casino bearing the risk andoverhead associated with running the operation themselves.  By combining volume from a large number oflocations, the Company believes that Leroy’s more effectively hedges risks andmore efficiently covers fixed overhead.

 

**Raceand Sports Wagering Systems Segment**

** **

***CBS. ***CBS is the leading race andsports equipment and software supplier in the State of Nevada.  Accordingly, CBS services the majority ofrace and sports books in Nevada. The CBS Race and Sports System is the industrystandard for race and sports content wager processing, delivery, andaccounting. CBS also is the distributor of self-service race and sports wagerkiosks, designed by AWI Manufacturing, Inc.

 

***AWI Manufacturing, Inc. ***AWIM designs self-servicerace and sports wagering kiosks.  Thekiosks interface seamlessly with our customers’ CBS Race and Sports Systems andthey expand our customers’ race and sports books’ size and hours of operationwithout increasing the labor cost. The AWIM upright kiosk was jointly designedwith a third party vendor.

 

***AWI International, Inc. ***AWI International, Inc.(“AWI Int’l”), formed in fiscal 2007, was established to provide variousservices to gaming suppliers and gaming operators in foreign jurisdictionswhere wagering on race and sporting events is licensed. The Company dissolvedAWI Int’l effective August 27, 2007. The Company may still, through ourestablished CBS subsidiary, seek strategic alliances with third party gamingsuppliers and/or gaming operators that desire to utilize our expertise in therace and sports industry.

 

**Hotel/CasinoSegment**

** **

***AWI Gaming, Inc.***AWIG is thesole member of Sturgeons, LLC, which owns and operates the Sturgeon’s Inn &Casino.  AWIG’s intended purpose is toacquire hotel/casino properties.

 

***Sturgeons, LLC. ***Sturgeons, LLC d/b/aSturgeon’s Inn & Casino (“Sturgeon’s”) is a hotel, casino and restaurantoperation located in Lovelock, Nevada that we acquired on March 1, 2006.

 

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** **

**Chapter 11 Filing**

** **

On July 25, 2003, AWIand Leroy’s filed voluntary petitions for relief (“Chapter 11 Petitions”) underChapter 11 of the United States Bankruptcy Code (“Chapter 11”) in the UnitedStates Bankruptcy Court for the District of Nevada (the “Bankruptcy Court”).  On February 28, 2005, the BankruptcyCourt confirmed the Restated Amended Joint Plan of Reorganization (the “Plan”)of AWI and Leroy’s.  On March 11,2005, AWI and Leroy’s consummated the Plan and formally emerged from Chapter 11proceedings after completing all required actions and all remaining conditions.

 

On September 26, 2005,the Bankruptcy Court issued an order closing the Chapter 11 cases of AWI andLeroy’s.  All required distributions havebeen made, except with respect to the Racusin matter (“Racusin Claim”).  For fiscal year ended January 31, 2008,the Company has paid $1,124,984 to the Bankruptcy Court and certain otherlienholders of Racusin, as directed. Payments from February 1 through March 3,2008 totaled $325,462. As of January 31, 2008, approximately $1.67 millionremained outstanding to Racusin on the Racusin Claim. For a discussion of theRacusin Claim, see Item 3. Legal Proceedings.

 

**Sports Wagering**

** **

Wagering on sporting eventsis legal in the state of Nevada and in numerous foreign countries.  Sports wagering at Nevada’s race and sportsbooks increased from approximately $0.3 billion in 1980 to $2.5 billion in2007, of which $2.3 billion is processed through the CBS Race and SportsSystem.  During that same period, thenumber of licensed sports books in Nevada increased from 24 to 169; of which 59were Leroy’s locations at January 31, 2007 and 62 were Leroy’s locationsat January 31, 2008.  With theadvent of cable and satellite television, both commercially and privately,viewing access to sporting events has increased significantly.  When sporting events are televised, there isincreased excitement, which, we believe, leads to more interest in sportsbetting.

 

A sports wagering facility,or “sports book,” is a gambling establishment that sets odds and point spreadsand accepts bets on the outcome of sporting events such as football,basketball, baseball, and hockey games. Sports books set odds and point spreads aiming not to reflect the finalresult, but to maintain a “balanced book” by offering odds or point spreadsthat will attract equal amounts of bets on each side of a particularevent.  As a general matter, a patron’sodds or point spread (the “line”) are fixed at the time he or she makes his orher bet, regardless of any subsequent movement in the line.  Under this system, a sports book operatorattracts bets by changing or “moving” the line up or down to encourage wageringon a specific team.  To the extent that abook on a particular event is not balanced, the bookmaking operation takes arisk on the outcome of the event.  Thisis the fundamental difference from other forms of organized gambling whereprofits result from patron play against a statistical advantage that thegambling operator (the “House”) possesses, or in pari-mutuel wagering, used bymajor North American Horse Racing Tracks and Jai-Alai establishments, where theHouse receives a guaranteed percentage for operating expenses, profit and taxesand the remainder is distributed to the winners.

 

This fundamental differenceis part of the appeal for many sports patrons, but it also creates risk for thesports book.  A bookmaker operates in asystem that is interrelated with oddsmakers and patrons.  

 

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Bookmakerscollect bets, adjust odds to account for the preferences of their patrons, paythe winners, and if the book is balanced for each type of sports bet, the Housethen has a “theoretical advantage.”  Forexample, for a straight football bet involving the outcome of one game, it iscommon practice that the patron wagers $11 to win $10.  Accordingly, by maintaining a balanced book,the sports book would win $1 for each $22 wagered, or 4.55% (the winner wouldreceive $21).

 

Oddsmakers (whose servicesare purchased by the bookmakers) initially set betting lines with the goal ofsplitting the bets evenly between each of the betting sides.  Patrons have opinions concerning the odds andbet accordingly, which requires initial lines to be adjusted.  As a result, in practice, a sports book israrely perfectly balanced.  The sportsbooks’ profit depends upon the reliability of the oddsmaker and its own acumenat adjusting the odds when required. Because patrons are betting on propositions of uncertain probability andare paid according to the line at which they make their bets rather than theclosing odds (as in a pari-mutuel system), the sports book is not assured ofeither a constant profit over time or for a single event.

 

A sports book also attemptsto limit the potential risk by setting game limits and line movement.  For example, the opening line for a footballgame ideally would split the bets from the time it was posted untilkick-off.  However, the opening linegenerally is unbalanced. Because a sports book does not want to take the riskof accepting unlimited bets on one side of a game, it creates a game limit, themaximum amount of money that will be accepted at the posted line.  When the game limit is reached, the line ischanged, or “moved,” to attract action on the “other” side. We believe thatusing a conservative strategy of placing limits on games, mitigates a greatportion of our risk of losing large sums of money in short time periods.

 

The game limit isestablished by the sports book based upon the “earn” in a sport, which is afunction of the amount the sports book would earn if the odds guaranteed it aconstant commission regardless of the outcome (the “theoretical hold percentage”),the quality of the line, and the patron mix. For example, when the sports book anticipates that the majority of thebets will come from sophisticated patrons who know as much as, or more than,the oddsmaker, the limit will be relatively low.  We believe that events with the highest fanpopularity and media coverage, such as professional football, have a relativelysmall proportion of sophisticated patrons. Accordingly, the sports books’ expected earn on such an event would behigher and would justify a higher game limit.

 

In order to effectivelybalance its books, a bookmaking operation must take a sufficient volume ofwagers to offset large wagers on any given event.  While many of the consolidated casinooperators have sufficient patron traffic to underwrite the substantial risksinherent in a sports book, many single casino operators are typically more riskadverse.  Through Leroy’s, we offercasino operators the amenity of having sports wagering books with no risk offinancial loss or substantial operating, labor, or administrative costs.  Under Nevada gaming law, Leroy’s is permittedto own and operate sports books located on the premises of other nonrestrictedgaming licensees.

 

When Leroy’s beganoperations in 1978, it was one of only seven sports and race books in LasVegas.  The year 2008, marks Leroy’s 30year anniversary in Nevada. Currently, virtually every major casino in Nevadaoffers its patrons a sports and race book. The typical sports book location leased by Leroy’s encompassesapproximately 300 square feet, contains a board displaying the odds, televisionmonitors showing sporting events, betting stations, ticket sellers andcashiers.  Most leases are at fixedrates, are cancelable by either party with proper notice, and some haveincentive (or participation) clauses.  Asa bet is placed, the wagering data is entered into a computer terminal which isconnected via a communications device to Leroy’s centralized computer systemwhich confirms the line, determines that the bet is within the limits set forthe particular event, records the information on a central database and issuesa ticket evidencing the bet.  The ticketis then distributed to the patron with Leroy’s simultaneously 

 

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recordingthe wager.  Personnel at Leroy’s mainoffice monitor all bets and adjust the odds as necessary to reflect the variousbets throughout all of Leroy’s locations.

 

We believe that Leroy’s haslower maximum betting limits than many sports books operated by the largercasinos.  We established these lowerlimits in an effort to limit bets from the more sophisticated patrons who oftenplace larger bets.  In addition, in orderto limit the more sophisticated bettors from utilizing strategies that wouldprovide an advantage, we set even lower limits for bets placed over thetelephone, which are currently accepted only from within Nevada and are limitedto $2,200 per day per patron (unless a higher limit for a specific patron isapproved by the State Gaming Control Board). We believe that geographical dispersion across Nevada is more likely toattract bets from patrons more evenly on both sides of a line, thereby furtherlimiting our risk.

 

Professional and collegefootball games currently are the most popular sports wagered on, followed byprofessional and college basketball games, and finally professional baseballgames; comprising the majority of the total amount wagered at all of our Leroy’slocations.  Historically, our Leroy’sbusiness has been seasonal in nature, with more than half of its handleoccurring between the months of September and February.

 

We do not offer horse racewagering at all of our Leroy’s locations. We offer limited horse race wagering at most locations, and a fullpari-mutuel race book at several of our locations. See Pari-Mutuel RaceWagering below.

 

Leroy’s race books utilizethe same personnel and facilities as its sports books, but Leroy’s does not setits own odds for race wagering.  Leroy’saccepts wagers for races by offering race patrons the same odds as theracetracks at which the races occur.  Atthose locations with limited race wagering, Leroy’s pays full track odds up tothe predetermined limit. At those locations with full pari-mutuel racewagering, Leroy’s operates a daily race book with wagers merged into theon-track pari-mutuel pools.

 

With the popularity andaccessibility of personal computers, bettors now have an additional medium fromwhich to wager on sporting events. Online sports’ betting has existed for approximately 20 years. With thedynamic growth in ownership and use of home computers, combined with theconvenience of betting online, may result in the continued growth of the sportsbetting industry in general. Or, this could also have an adverse impact uponour live wagering facilities in Nevada. At this time, we cannot predict what impact, if any, the growth ofonline wagering may have on our overall handle (total amount wagered). See Item1.A Risk Factors below.

 

**Pari-Mutuel Race Wagering**

** **

In December 1997, Leroy’sjoined the Nevada Pari-mutuel Association to allow pari-mutuel race wagering atone or more of its licensed locations. As of January 31, 2008, ten licensed Leroy’s locations, inassociation with a disseminator, offer pari-mutuel wagering on numerous eventsat racetracks throughout the country.

 

**Competition**

** **

There is intense competitionamong companies in the gaming industry, most of which have significantlygreater financial, marketing, technical and other resources than we do.

 

Leroy’s faces competitionfrom all other sports and race wagering operations throughout Nevada.  Virtually all of the major casinos in Nevadahave sports and race books, some of which are larger and offer more amenitiesthan our locations and some casinos operate sports books at other casinos.

 

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CBS and its CBS Race andSports System face competition from the following sources:  larger casinos that may develop their ownrace and sports wagering systems; an over-the-counter system offered by anothercompany with approximately 10% of the market; and international race and sportsservice providers.

 

AWIM competes with othermanufacturers of self-service wagering kiosks.

 

AWIG faces competition fromother hotel/casino operators who may be interested in acquiring the sameproperties that AWIG is interested in acquiring.  Sturgeon’s is the only hotel/casino operationin Lovelock, Nevada and competes in the tourism market with casino facilitiesin the nearby cities of Reno, Sparks, Fallon and Winnemucca.  However, other hotel operations (withoutcasino facilities) compete for the tourism market while other (smaller) casinofacilities (without hotel operations) compete for gaming patrons.

 

**Intellectual Property**

** **

We regard our technology asproprietary and attempt to protect it by relying on patents, trademarks,service marks, copyrights and trade secret laws and restrictions on disclosureand transferring title and other methods. We generally enter into confidentiality and/or license agreements withour employees and consultants, and generally control access to and distributionof our documentation and other proprietary information.  Despite these precautions, it may be possiblefor a third party to copy or otherwise obtain and use our proprietaryinformation without authorization or to develop similar technologyindependently.

 

**Research and Development**

** **

We incurred costs of  $952,163 in research and development in thefiscal year ended January 31, 2008, as compared to $1,131,265 in thefiscal year ended January 31, 2007, all of which was expensed asincurred.  We intend to conductcontinuing development and innovation of our products in accordance withchanging consumer preferences, demographics, and the evolution of newtechnologies.  Our development strategyis to leverage our proprietary technology and regulatory approvals to integratethird party developed solutions such as age verification, biometrics,identification and security in order to provide fully-integrated applicationsthat are competitive and innovative in the regulated gaming industry.

 

**Proposed Government Regulation**

** **

In the past, the U.S.Congress has submitted bills that, if passed, would prohibit wagering on some,if not all, types of sporting events. Passage of any such legislation would have a significant negative impacton our operations.

 

**Regulation and Licensing**

** **

The ownership and operationof gaming facilities in Nevada are subject to extensive state and localregulation.  Our gaming operations aresubject to the Nevada Gaming Control Act and its regulations (hereinaftercollectively referred to as the “Nevada Act”) and various localregulations.  Our gaming operations arealso subject to the licensing and regulatory control of the Nevada GamingCommission (the “Commission”), the State Gaming Control Board (the “Board”),various county commissions (gaming, liquor, health, etc.), and other localjurisdictions.  These regulatory agenciesare hereinafter collectively referred to as the “Nevada Gaming Authorities.”

 

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The laws, regulations andsupervisory procedures of the Nevada Gaming Authorities have their genesis invarious declarations of public policy which are concerned with, among otherthings: (i) the prevention of unsavory or unsuitable persons from having adirect or indirect involvement with gaming at any time or in any capacity; (ii) theestablishment and maintenance of responsible accounting practices andprocedures; (iii) the maintenance of effective controls over the financialpractices of licensees, including the establishment of minimum procedures forinternal fiscal affairs and the safeguarding of assets and revenues, providingreliable record keeping and requiring the filing of periodic reports with theNevada Gaming Authorities; (iv) the prevention of cheating and fraudulentpractices; and (v) the creation of a source of state and local revenuesthough taxation and licensing fees. Changes in such laws, regulations and procedures could have an adverseeffect on our gaming operations.

 

We have been found suitableas the publicly traded parent of entities holding Nevada gaming licenses.  Leroy’s is licensed by the Nevada GamingAuthorities as the owner/operator of nonrestricted race and/or sports bookoperations; AWIM is licensed by the Nevada Gaming Authorities as a Manufacturerand a Distributor; AWIG is licensed by the Nevada Gaming Authorities as thesole member of Sturgeon’s; Sturgeon’s is licensed by the Nevada GamingAuthorities as the operator of nonrestricted gaming operations at Sturgeon’sInn & Casino; CBS is not required to maintain any gaming-relatedlicenses.  Gaming licenses require theperiodic payment of fees and taxes and periodic reviews by the gamingauthorities.  Furthermore, gaminglicenses are not transferable.

 

We are registered in Nevadaas a publicly traded corporation and, as such, are required to submit, on aperiodic basis, detailed financial and operating reports to theCommission.  Additionally, we may be requiredto furnish any other information requested by the Commission.  No person may become a stockholder of, orreceive any percentage of profits from Leroy’s, AWIM, AWIG or Sturgeon’s (asnon-public entities) without first obtaining licenses and approvals from theappropriate Nevada Gaming Authorities. We have received from the Nevada Gaming Authorities the variousregistrations, approvals, permits and licenses required to engage in gamingactivities in Nevada.

 

The Nevada GamingAuthorities may investigate any individual who has a material relationship, orinvolvement with us in order to determine whether such individual is suitableor should be licensed as a business associate of a gaming licensee.  Officers, directors and certain key employeesmust file applications with the Nevada Gaming Authorities and may be requiredto be licensed or found suitable by the Nevada Gaming Authorities.  Our officers, directors and key employees whoare actively and directly involved in the gaming activities may be required tobe licensed or found suitable by the Nevada Gaming Authorities.  The Nevada Gaming Authorities may deny anapplication of licensing for any cause deemed reasonable.  A finding of suitability is comparable tolicensing, and both require the submission of detailed personal and financialinformation followed by a thorough investigation.  An applicant for licensing or a finding ofsuitability must pay all of the costs of the investigation.  Changes in licensed positions must bereported to the Nevada Gaming Authorities. In addition to their authority to deny an application for a finding ofsuitability or licensure, the Nevada Gaming Authorities also have jurisdictionto disapprove a change in a corporate position. Our officers and directors and those of our subsidiaries have been orare in the process of being found suitable by the Nevada Gaming Authorities.

 

If the Nevada GamingAuthorities were to find an officer, director or key employee unsuitable forlicensing or unsuitable to continue having a relationship with us, we would berequired to sever all relationships with such a person.  Additionally, the Commission may require usto terminate the employment of any person who refuses to file appropriateapplications.  Determinations ofsuitability or questions pertaining to licensing are not subject to judicialreview in Nevada.

 

If it were determined thatwe or our subsidiaries violated the Nevada Act, the gaming licenses orregistration held by us could be limited, conditioned, suspended orrevoked.  At the discretion of the 

 

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Commission,we and any person involved could be subject to substantial fines for eachseparate violation of the Nevada Act. Furthermore, a supervisor could be appointed by the Commission tooperate our gaming properties and, under certain circumstances, earningsgenerated during the supervisor’s appointment (except for the reasonable rentalvalue of our gaming properties) could be forfeited to the State of Nevada.  Limitation, conditioning or suspension of anygaming license or the appointment of a supervisor could, and certainly therevocation of any gaming license would, materially adversely affect the resultsof our operations.

 

A beneficial holder of ourvoting securities, regardless of the number of shares owned, may be required tofile an application, be investigated, and have his or her suitability as abeneficial holder of our voting securities determined if the Commission hasreason to believe that such ownership would otherwise be inconsistent with thedeclared policies of the State of Nevada. The applicant must pay all costs ofthe investigation incurred by the Nevada Gaming Authorities in conducting suchan investigation. If the applicant is an Executive Officer or Director of theCompany, it is our policy to pay for these expenses.  In addition, the Clark County Liquor GamingLicensing Board has taken the position that it has the authority to approve allpersons owning or controlling the stock of any corporation controlling a gaminglicense.

 

The Nevada Act requires anyperson who acquires more than 5% of our voting securities to report theacquisition to the Commission.  TheNevada Act requires that beneficial owners of more than 10% of our votingsecurities apply to the Commission for a finding of suitability within 30 daysafter the Chairman of the Board mails written notice requiring such afiling.  Under certain circumstances, an “institutionalinvestor,” as defined in the Nevada Act, which acquires more than 10%, but not morethan 15%, of our voting securities may apply to the Commission for a waiver ofsuch a finding of suitability if such institutional investor holds the votingsecurities for investment purposes only. An institutional investor shall not be deemed to hold the votingsecurities for investment purposes only unless the voting securities wereacquired and are held in the ordinary course of business as an institutionalinvestor and not for the purpose of causing, directly or indirectly, theelection of a majority of the members of our board of directors, any change inour corporate charter, bylaws, management, policies or operations, or any ofour gaming affiliates, or any other action which the Commission finds to beinconsistent with holding our voting securities for investment purposesonly.  Activities which are not deemedinconsistent with holding voting securities for investment purposes onlyinclude: (i) voting on all matters voted on by stockholders; (ii) makingfinancial and other inquiries of management of the type normally made bysecurities analysts for informational purposes and not to cause a change in itsmanagement, policies or operations; and (iii) such other activities as theCommission may determine to be consistent with such investment intent.  If the Commission grants a waiver to an “institutionalinvestor,” the waiver does not include a waiver or exemption from therequirement for prior approval to “acquire control” of a registeredcorporation.  If the beneficial holder ofvoting securities who must be found suitable is a corporation, partnership ortrust, it must submit detailed business and financial information, including alist of its beneficial owners.  Theapplicant is required to pay all costs of investigation. If the applicant is anExecutive Officer or Director of the Company, our policy is to pay for those expenses.

 

Any person who fails orrefuses to apply for a finding of suitability or a license within 30 days afterbeing ordered to do so by the Commission, or the Chairman of the Board, may befound unsuitable.  The same restrictionsapply to a record owner if the record owner, after request, fails to identifythe beneficial owners.  Any stockholderfound unsuitable and who holds, directly or indirectly, any beneficialownership of the common stock of a registered corporation beyond such period oftime as may be prescribed by the Commission may be guilty of a criminaloffense.  We would be subject todisciplinary action if, after we receive notice that a person is unsuitable tobe a stockholder or to have any other relationship with us or our subsidiaries,we (i) pay that person any dividend or interest on our voting securities; (ii) allowthat person to exercise, directly or indirectly, any voting right conferredthrough securities held by that person; (iii) pay remuneration in any formto that person for services rendered or

 

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otherwise;or (iv) fail to pursue all lawful efforts to require such unsuitableperson to relinquish his voting securities for cash at fair market value.  Any person required by the Commission to befound suitable but who is found unsuitable shall be guilty of a criminaloffense if he holds, directly or indirectly, the beneficial ownership of thevoting or debt securities beyond the time prescribed by the Commission.

 

We are required to maintaina current stock ledger in Nevada, which may be examined by the Nevada GamingAuthorities at any time.  If anysecurities are held in trust by an agent or by a nominee, the record holder maybe required to disclose the identity of the beneficial owner to the NevadaGaming Authorities.  A failure to makesuch a disclosure may be grounds for finding the record holder unsuitable.  We are also required to render maximumassistance in determining the identity of the beneficial owner.  The Commission has the power to require ourstock certificates to bear a legend indicating that the securities are subjectto the Nevada Act.  However, to date, theCommission has not imposed such a requirement on us.

 

Changes in control of AWIthrough merger, consolidation, stock or asset acquisitions, management orconsulting agreements, or any act or conduct by a person whereby he or sheobtains control, may not occur without the prior approval of theCommission.  Entities seeking to acquirecontrol of a registered corporation must satisfy the Board and the Commissionunder a variety of stringent standards prior to assuming control of suchregistered corporation.  The Commissionmay also require controlling stockholders, officers, directors and otherpersons having a material relationship or involvement with the entity thatproposes to acquire control, to be investigated and licensed as part of theapproval process related to the transaction.

 

The Nevada legislature hasdeclared that some corporate acquisitions opposed by management, repurchases ofvoting securities and corporate defensive tactics affecting Nevada gaminglicenses and registered corporations that are affiliated with those operations,may be injurious to stable and productive corporate gaming.  The Commission has established a regulatoryscheme to ameliorate the potentially adverse effects of these businesspractices upon Nevada’s gaming industry and to further Nevada’s policy to: (i) assurethe financial stability of corporate gaming operators and their affiliates; (ii) preservethe beneficial aspects of conducting business in the corporate form; and (iii) promotea neutral environment for the orderly governance of corporate affairs.  Approvals are, in certain circumstances,required from the Commission before we can make exceptional repurchases ofvoting securities above the current market price thereof and before a corporateacquisition opposed by our management can be consummated.  The Nevada Act also requires prior approvalof a plan of recapitalization proposed by a registered company’s board ofdirectors in response to a tender offer made directly to the registered company’sstockholders for the purposes of acquiring control of the registered company.

 

License fees and taxes,computed in various ways depending upon the type of gaming activity involved,are payable to the State of Nevada and to the counties and cities in which theNevada licensees’ respective operations are conducted.  Depending upon the particular fee or taxinvolved, these fees and taxes are payable either monthly, quarterly,semi-annually or annually and are based upon either: (i) a percentage ofgross revenues received; (ii) the number of gaming devices operated; or (iii) thenumber of games operated.  Nevadalicensees that hold a license as an operator of a slot route, or a manufacturer’sor distributor’s license, also pay certain fees and taxes to the State ofNevada.

 

Any person who is licensed,required to be licensed, registered, or required to be registered, or is undercommon control with such person (hereinafter collectively referred to as “licensees”)and who proposes to become involved in a gaming venture outside the State ofNevada is required to deposit with the Board, and thereafter maintain, arevolving fund to pay the expenses of investigation by the Board of his or herparticipation in such foreign gaming.  Wehave filed the appropriate foreign gaming reports and have established therequired revolving fund.  The revolvingfund is subject to increase or decrease in the 

 

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discretionof the Commission.  Thereafter, suchlicensees are required to comply with certain reporting requirements imposed bythe Nevada Act.  Licensees are alsosubject to disciplinary action by the Commission if they knowingly violate anylaws of the foreign jurisdiction pertaining to the foreign gaming operation,fail to conduct the foreign gaming operation in accordance with the standardsof honesty and integrity required of Nevada gaming operations, engage inactivities that are harmful to the State of Nevada or its ability to collectgaming taxes and fees, or employ a person in the foreign operation who has beendenied a license or finding of suitability in Nevada on the basis of personalunsuitability.  Recent changes in theNevada Gaming Control Act would allow us to seek a determination of suitabilityof any associate or activity associated with the foreign gaming opportunityprior to engaging in that activity.

 

Pursuant to the Professionaland Amateur Sports Protection Act (the “Sports Protection Act”), which becameeffective January 1, 1993, the proliferation of legalized sports books andwagering was significantly curtailed. Although the Sports Protection Act generally prohibits sports wageringin every jurisdiction, including those jurisdictions subject to the IndianGaming Regulatory Act, the Sports Protection Act does permit sports wagering inthose jurisdictions that authorized sports wagering prior to January 1,1993.  Thus, sports books and wageringare permitted to continue to operate in Nevada provided the wager originates inNevada and is received by a licensed sports book in Nevada.  Moreover, the Interstate Wire Act alsoprohibits those in the business of betting and wagering from utilizing a wirecommunication facility for the transmission in interstate or foreign commerceof any bets, wagers or information assisting in the placing of such bets andwagers on any sporting event or contest unless such betting or wageringactivity is specifically authorized in each jurisdiction involved.

 

**On October 13, 2006, theUnited States Unlawful Internet Gambling Enforcement Act of 2006 (“UIGEA”) wasenacted. UIGEA prohibits any person engaged in the business of betting orwagering from knowingly accepting payments related to unlawful bets or wagerstransmitted over the Internet. UIGEA instructs the U.S. Treasury Department andFederal Reserve to impose new obligations upon financial institutions and otherpayment processors to establish procedures designed to block onlinegaming-related financial transactions. It also expressly requires Internet betsand wagers to comply with the law of the jurisdiction where the wagers areinitiated and received.**

** **

Leroy’s may not accept pari-mutuelbets received by use of wire communications facilities, including telephonesand computers, unless such bets originated in jurisdictions where such bettingor wagering is legal.  Nevada has amendedthe Nevada Gaming Control Act to allow licensed race and sports books in Nevadato accept interstate pari-mutuel wagers (but not other sports betting) fromother jurisdictions in which pari-mutuel wagering is legal.

 

**Employees**

** **

We had 314 full-time and 51part-time employees at January 31, 2008, at all of our locations andsubsidiaries, including our Sturgeon’s property, of which 55 employees werefull-time and 10 were part-time.  None ofour employees are represented by a labor union. We do not know whether or to what extent, if any, our employees will, inthe future, be governed by collective bargaining agreements.  At this time, we believe our employeerelations are good.

 

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** **

**1A. Risk Factors**

** **

**Cautionary Statements Regarding Future Results,Forward-Looking Statements and Other Important Factors**

** **

Throughout this report wemake statements regarding our business, expectations and prospects, such asprojections of future performance, statements of our plans and objectives,forecasts of market trends, and other matters that are “forward-lookingstatements” as defined in Section 27A of the Securities Act of 1933, asamended, (the “Securities Act”) and Section 21E of the Securities ExchangeAct of 1934, as amended (the “Exchange Act”). Statements containing words or phrases such as “will likely result,” “areexpected to,” “will continue,” “is anticipated,” “estimates,” “projects,” “believes,”“expects,” “anticipates,” “intends,” “target,” “goal,” “plans,” “objective,” “might,”“may,” “could,” “will,” “should,” or similar expressions, or the negativethereof, constitute forward-looking statements. Although we believe that our plans, objectives and expectationsreflected in, or suggested by, such forward-looking statements are reasonableat the present time, we might not achieve them or we may modify them from timeto time.  You should read this reportthoroughly and with the understanding that actual future results may bematerially different from what we expect. We do not plan to update forward-looking statements even though oursituation or plans may change in the future, unless applicable law requires usto do so.

 

In addition to other mattersidentified or described by us from time to time in this report or in our otherfilings with the Securities and Exchange Commission (the “SEC”), there areseveral important factors that could cause our future results to differmaterially from historical results or trends, results anticipated or planned,or results that are reflected from time to time in any forward-lookingstatement that may be made by us or on our behalf.  Some of these important factors, but notnecessarily all important factors, include the following:

 

**We Have Had a History of Some Losses and We May IncurAdditional Losses in the Future**

** **

From our inception ofrevenue producing operations through the current fiscal year, we have incurredan accumulated deficit. For the fiscal years ended 2001 though 2008, theCompany recorded net income for five of those years and net losses for three ofthose eight years. While we have implemented strategies to improve futureoperations including, but not limited to the following:  eliminating unprofitable sports booklocations; investing in newer, more profitable sports book locations; investingin additional research and development aimed at new markets and technologies;increasing analysis and focusing on cost reductions; and settling litigationmatters; there is no assurance that such strategies will be successful.  Higher than expected administrative, researchand development, and/or distribution costs, could also negatively impact ourfinancial results.  The timing of thesales of equipment compared to the timing of expenses incurred may alsonegatively affect our financial results. Changes in our business systems ortechnologies affecting our products could also negatively impact our financialresults.  In order for us to maintainprofitability, we need to generate and sustain additional revenues whilemaintaining reasonable cost and expense levels.

 

**If Our Cash Flow From Operations and AvailableCredit Is Not Sufficient to Meet Our Capital Requirements, We Will Need FutureFinancing, Which May not Be Available, Causing Our Business To PotentiallyFail**

 

If our cash flow fromoperations and available credit is not sufficient to meet our capitalrequirements, we will be required to raise additional funds.  If we cannot locate additional sources ofcapital, we may not be able to fund operations, take advantage of futureopportunities, or respond to competitors or changing demands of customers.  In order to raise additional capital, we maybe required to issue equity or convertible debt securities or enter intothird-party debt financing, strategic relationships or other arrangements.  The issuance of equity or convertible debtsecurities will have the effect of reducing the percentage ownership of ourcurrent stockholders.  In addition, theseequity or convertible debt securities may have additional rights, preferences,or privileges to those of our common stock or preferred stock.  Debt financing, if available, may involverestrictive covenants.  Strategicarrangements, if necessary to raise additional funds, may require that werelinquish rights to certain of our technologies or products or agree to othermaterial obligations and covenants.  Inthe event we are required to raise additional funds to support our operations,we cannot assure you that the additional funds will be available on termsfavorable to us, or at all. If adequate funds are not available or are notavailable on acceptable terms, it would likely have a material adverse effecton our financial condition and operating results.

 

**We Are Subject to Intense Competition**

** **

There is intense competitionamong companies in the gaming industry, along with dynamic customer demand andrapid technological advances; and most of our competitors have significantlygreater financial, marketing, technical and other resources than we do.  Significant competition that we encounter mayhave a materially adverse effect on us. There can be no assurance that we will be able to compete successfullyagainst current and future competitors.

 

**We Are Subject to Strict Regulation by GamingAuthorities**

** **

The ownership and operationof gaming licensees in Nevada are subject to strict regulation under variousstate, county and municipal laws. In particular, the Leroy’s, AWIM, AWIG andSturgeon’s subsidiaries are licensed by the Nevada Gaming Commission and aresubject to extensive regulation. Together with key personnel, we undergo extensive investigation beforeeach new gaming license is issued, and the products of CBS and AWIM aresubjected to testing and evaluation prior to approval and use. Generally,gaming authorities have broad discretion when granting, renewing or revokingthese approvals and licenses.  If we failto obtain or retain a required license or approval, it would decrease our sharein the marketplace and put us at a disadvantage with our competitors.  Consequently, the market price of our commonstock may suffer.

 

We and our required officersand certain shareholders have received the necessary licenses, permits andauthorizations required to own and operate one or more gaming licensees.  Failure by us or any of our key personnel toobtain or maintain the requisite licenses, permits and authorizations wouldhave a materially adverse effect on us. Expansion of our activities could be hindered by delays in obtainingrequisite state licenses or the inability to obtain such licenses.  No assurance can be given as to 

 

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theterm for which our licenses will be renewed in a particular jurisdiction or asto what license conditions, if any, may be imposed by such jurisdiction inconnection with any future renewals.  Wecannot predict the effects that adoption of and changes in gaming laws, rules andregulations might have on our future operations.

 

**Demand for Our Products and Services is Subjectto Consumer Demand**

** **

We believe our ability toincrease revenues, cash flow, and profitability will depend, in part, uponcontinued market acceptance of our products and services.  There can be no assurance that the marketacceptance of our products and services will continue.  Changes in market conditions in the gamingindustry, the general and gaming industry economic conditions, and thefinancial condition of host locations or patrons could limit or diminish marketacceptance of these products and services. Any interruption in professional or college football or professional orcollege basketball games would consequently decrease demand for wagering andadversely affect us.

 

**DownturnIn General Economic Conditions May Adversely Affect Our Results ofOperations.**

 

Our business is subject to changes in national andlocal economic conditions, including changes in the economy related tothreatened or actual terrorist attacks and related to the war with Iraq.  A recession or downturn in the general,regional or local economies or other demographics could result in fewercustomers visiting Nevada, adversely affecting our results of operations.General economic business conditions, including the rising cost oftransportation may affect the availability of disposable income amongconsumers. The demand for entertainment and leisure activities tends to behighly sensitive to consumers’ disposable incomes, and thus a decline ingeneral economic conditions or a continued increase in gasoline prices may leadto our end users having less discretionary income with which to wager. Thiscould cause a reduction in our revenues and have a material adverse effect onour operating results. During 2007, our economy has been negatively impacteddue to a number of factors, including the subprime mortgage crisis and highergasoline and transportation costs. Confidence in the credit market has alsoeroded, which resulted in a tightening of credit availability. Consumer demandfor gambling due to decreased disposable income may further decline during aneconomic downturn or recession. We face the risk that the effects of higherinterest rates, higher energy costs and pressure on housing prices may placeadded strain on consumers’ ability to make purchases, repay their loans andthus, leave fewer funds available for travel and leisure activities.Accordingly, this economic downturn in the United States can hurt our financialperformance as wagering activity decreases.

 

**The Gaming Industry may be Adversely Affected byFederal Legislation and Tax Laws**

** **

**The U.S. Congress passedUIGEA in late 2006, which prohibits any person engaged in the business ofbetting or wagering from knowingly accepting payments related to unlawful betsor wagers transmitted over the Internet. UIGEA prohibits financial institutionsand other payment processors from processing online gaming-related financialtransactions. It also expressly requires Internet bets and wagers to complywith the law of the jurisdiction where the wagers are initiated andreceived.  In addition, the U.S. Congresshas proposed several bills that would prohibit any person from accepting wagerson amateur sporting events including high school, college and Olympic events.**

** **

Pursuant to the SportsProtection Act, which became effective January 1, 1993, the proliferationof legalized sports books and wagering was significantly curtailed.  Although the Sports Protection Act generallyprohibits sports wagering in every jurisdiction, including those jurisdictionssubject to the Indian Gaming Regulatory Act, the Sports Protection Act doespermit sports wagering in those jurisdictions that authorized sports wageringprior to January 1, 1993.  Thus,sports books and wagering 

 

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arepermitted to continue to operate in Nevada, provided the wager originates inNevada and is received by a licensed sports book in Nevada.  Moreover, the Interstate Wire Act alsoprohibits those in the business of betting and wagering from utilizing a wirecommunication facility for the transmission in interstate or foreign commerceof any bets, wagers or information assisting in the placing of such bets andwagers on any sporting event or contest unless such betting or wagering activityis specifically authorized in each jurisdiction involved.

 

**There is no guarantee thatthe U.S. Congress will not pass a bill which would adversely affect ouroperations.  Additionally, federal andstate tax legislation matters, including changes to current law, or newassessments by taxing authorities could also negatively impact our results ofoperations or financial position.**

** **

**We Are Largely Dependent on Current Management**

** **

Our success is largelydependent on the efforts of Victor Salerno, our Chief Executive Officer andChief Operating Officer. Although we maintain a “key person” life insurancepolicy and have an employment agreement with Mr. Salerno, the loss of Mr. Salerno’sservices could have a materially adverse effect on our business. Changes in theremainder of key management, or other key personnel or their compensation alsocontribute to this risk factor.

 

**We Are Subject to Potential Fluctuations inResults**

** **

Our quarterly results havefluctuated primarily due to outside factors such as professional and collegesports seasons and timing of sales and installations for CBS equipment. All ofthe Company’s wagering revenue comes from its Nevada race and sports books andmore than one-fourth of that is derived from professional football events.  If the professional football season were tobe interrupted, this could have significant adverse impact on futureoperations.  Management also estimatesthat a significant amount of the Company’s Nevada non-casino wagering relatesto college sports and, therefore, the passage of amateur sports anti-wageringlegislation could have a material adverse impact upon future operations.  In addition, because the Company generatessubstantial revenue from system sales and maintenance to a relatively smallpopulation of potential customers, a decline in the size, demand or number ofthese contracts could also adversely affect future operations.

 

Thus, the results of anyquarter are not necessarily indicative of the results that may be expected forany other interim period.  In addition,we take risks by accepting wagers on the outcome of various sporting events.Fluctuations in the levels of the amounts wagered during particular times ofthe year and the win percentage of the wagers contribute to variations infinancial results. While we have instituted measures to lessen the risk, thereis no assurance that we will be able to win more of the wagers than we lose. Inaddition, our inability to manage the timing of the release of new products andinstallations can cause fluctuations in results.

 

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**An Adverse Change Affecting the Gaming Industry,Such as a Change in Gaming Regulations or a Decrease in the Rate of Growth andPopularity of Casino Gaming, Particularly Those Casinos with Race and Sports Wagering, WillNegatively Impact Our Profitability and Our Potential for Growth**

** **

Our ability to grow andoperate profitably is substantially dependent upon the expansion of the Nevadagaming industry and other factors that are beyond our control.  These factors include, among others, the paceof development and expansion, changes in gaming regulations, the continuedpopularity of casino gaming, particularly race and sports wagering, as a leisureactivity, etc. An adverse change in any of these economic, political, legal orother factors may negatively impact our results of operations.  Additionally, consolidation of existinggaming operations could negatively impact our pricing structure and revenue.Due to a slower economic environment, the number of visitors to Las Vegas andgaming revenues fell in January compared with year-ago numbers. Dailydrive-in traffic has slowed compared with last winter, according to the LasVegas Convention and Visitors Authority.

 

**Future Revenue Growth Depends on Our Ability toImprove the Effectiveness and Breadth of Our Sales Organization**

** **

In order to achieve ourgoals for growth, and increase market awareness and sales, particularly withthe AWIG and AWIM subsidiaries, we need to improve the effectiveness andbreadth of our sales operations.  Ourgaming products require sophisticated sales efforts targeted at selected peoplewithin the gaming industry. Also, our ability to develop and refine productsand technologies in a timely manner that have market acceptance, througheffective marketing techniques is essential for financial success.  Competition for qualified sales personnel isintense, and we may not be able to hire the kind and number of sales personnelrequired.  In addition, we will need toeffectively train and educate the sales force in order to be successful inselling into the market.  Reliance uponour current strategic relationships with our customers and our vendors couldalso subject us to increased risk if we are unable to positively andsuccessfully maintain or create those relationships.

 

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** **

**We May Not be Able to Protect OurProprietary Rights and May Incur Significant Costs Attempting to do So**

** **

Our success and ability tocompete are dependent to a significant degree on our proprietarytechnology.  We rely on a combination ofpatent, copyright, trade secret and trademark laws, as well as confidentialityand licensing agreements to protect these proprietary rights.  However, it may be possible for a third partyto copy or otherwise obtain and use our software or other proprietaryinformation without authorization or to develop similar softwareindependently.  In addition, litigationmay be necessary in the future to enforce our intellectual property rights, toprotect trade secrets, to determine the validity and scope of the proprietaryrights of others, or to defend against claims of infringement orinvalidity.  Such litigation, whethersuccessful or not, could result in substantial costs and diversions ofresources, either of which could have a material adverse affect on ourfinancial condition or operating results.

 

**The Market for Our Common Stock is Limited**

** **

Our common stock isthinly-traded and any recently reported sales price may not be a truemarket-based valuation of our common stock. There can be no assurance that an active market for our common stockwill develop.  In addition, the stockmarket in general has experienced extreme price and volume fluctuations thathave often been unrelated or disproportionate to operating performance.

 

**Our Common Stock is Considered a “Penny Stock”and, as such, the Market for Our Common Stock May be Further Limited byCertain SEC Rules**

** **

As long as the price of ourcommon stock remains below $5.00 per share, the stock is likely to be subjectto certain “penny stock” rules promulgated by the SEC.  Those rules impose certain salespractice requirements on brokers who sell penny stock to persons other thanestablished customers and accredited investors (as defined in Rule 501(a) ofRegulation D promulgated under the Securities Act).  For transactions covered by the penny stockrules, the broker must make a special suitability determination for thepurchaser and receive the purchaser’s written consent to the transaction priorto the sale.  Furthermore, the pennystock rules generally require, among other things, that brokers engaged insecondary trading of penny stocks provide customers with written disclosuredocuments, monthly statements of the market value of penny stocks, disclosureof the bid and ask prices, disclosure of the compensation to the brokeragefirm, and disclosure of the sales person working for the brokerage firm.  These rules and regulations adverselyaffect the ability of brokers to sell our common stock and limit the liquidityof our securities.

 

**The Trading Price of Our Common Stock isVolatile and Could Decline Substantially**

** **

The trading price of ourcommon stock is volatile and is likely to continue to be volatile.  Our stock price could be subject to widefluctuations in response to a variety of issues, including broad market factorsthat may have a material adverse impact on our stock price, regardless of ouractual performance.  The factors include,but are not limited to, the following:

 

·                  Periodicvariations in the actual or anticipated financial results of our business orthat of our competitors;

 

·                  Downwardrevisions in estimates of our future operating results or of the futureoperating results of our competitors;

 

·                  Material announcementsby us or our competitors;

 

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·                  Uncertainty asto the continued quotation of our stock on the OTC Bulletin Board (“OTCBB”);and

 

·                  Adverse changesin general market conditions or economic trends or in conditions or trends inthe market in which we operate.

 

**We Have the Authority to Issue Additional EquitySecurities, Which Would Lead to Dilution of Our Issued and Outstanding CommonStock**

** **

The issuance of additionalequity securities or securities convertible into equity securities would resultin dilution of our existing stockholders’ equity interests in us.  Our Board of Directors has the authority toissue, without vote or action of stockholders, preferred stock in one or moreseries, and has the ability to fix the rights, preferences, privileges andrestrictions of any such series.  Wecurrently have Redeemable Series A Preferred Stock outstanding, of which3,238 shares, representing $323,800, are subject to redemption at any time,without prior approval from the Board of Directors.  Any redemption of the remainder of thepreferred stock is subject to prior approval from the Board of Directors.  Any such series of preferred stock couldcontain dividend rights, conversion rights, voting rights, terms of redemption,redemption prices, liquidation preferences or other rights superior to therights of holders of our common stock. If we issue convertible preferred stock, a subsequent conversion maydilute the current common stockholders’ interest.  In addition, as of January 31, 2008, wewere authorized to issue, without stockholder approval, up to 16,870,121 sharesof common stock.  Of that amount, 468,500shares of our common stock were issuable upon the exercise of vested options.

 

**We do not Intend to Pay Cash Dividends.  As a Result, Stockholders will Benefit froman Investment in Our Common Stock Only if it Appreciates in Value**

** **

We have never paid a cashdividend on our common stock, and we do not plan to pay any cash dividends onour common stock in the foreseeable future. We currently intend to retain any future earnings to finance ouroperations and further expand and grow our business, including growth throughacquisitions.  As a result, the successof an investment in our common stock will depend upon any future appreciationin its value.  We cannot guarantee thatour common stock will appreciate in value or even maintain the price at whichstockholders have purchased their shares.

 

**We Face Considerable Risk in SuccessfullyImplementing Acquisitions**

** **

As part of our businessstrategy, we acquired Sturgeon’s in fiscal 2006, and we may acquire otherbusinesses in the future.  Acquisitionscould result in potential dilution of the value of our common stock, cashexpenditures, increased debt, increased system costs related to integration,and greater potential risk for contingent liabilities.  We cannot assure you that we willsuccessfully complete any future acquisitions due to various constraints, suchas our need for funding, increased competition, cost constraints, legal,compliance and regulatory issues.

 

Our acquisition of Sturgeon’sin March 2006, and any future acquisitions, may not produce the revenues,earnings or potential savings due to business synergies that were anticipatedfor such reasons or constraints below:

 

·                  Potential lossof key employees;

 

·                  issues relatedto the integration of the operations, financial reporting, technologies,systems, including those caused by geographic differences;

 

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·                  risks ofentering into markets in which we have limited or no prior experience;

 

·                  cost increases,particularly in transportation that affect potential tourism and gamingrevenue;

 

·                  difficulties inour use, development or marketing of the acquired entity’s brand identity;

 

·                  diversion ofthe attention of our management and others away from our daily operations; and

 

·                  any undisclosedor potential legal liabilities of the acquired businesses.

 

**We May Not Receive an Unqualified OpinionFrom Our Auditors With Respect to the Assessment of Our Internal Controls OverFinancial Reporting That is Required by Section 404 of the Sarbanes-OxleyAct Of 2002, and We Will Incur Additional Costs in That Process**

** **

We believe that effectiveinternal controls are necessary for us to provide reasonable assurance withrespect to our financial reports.  Wehave and will continue to incur a substantial amount of management time andresources and significant expenses in order to comply with laws, regulationsand standards relating to corporate governance and public disclosure, includingthe Sarbanes-Oxley Act of 2002.  Inparticular, Section 404 of the Sarbanes-Oxley Act of 2002 required ourmanagement’s annual review and evaluation of our internal control systems,commencing with our Annual Report on Form 10-K for the fiscal year ended January 31,2008 and thereafter, requires subsequent attestations as to the effectivenessof these systems by our independent public accounting firm commencing with theannual report for the following fiscal year.

 

We have and will continue toincur significant increased costs in implementing and responding to theserequirements due to the complexities of Section 404 that requiresignificant documentation, testing and, if necessary, remediation.  Our process of reviewing, documenting andtesting our internal controls over financial reporting may cause a significantstrain on our management, diverting them from their daily business focus andstrain on our information systems and other resources.  We likely will be required to hire additionalpersonnel and to use outside legal, accounting and advisory services andsoftware to assist us in compliance efforts. In addition, we will incur additional fees from our auditors as theyperform the added review work necessary for them to provide theirattestation.  Even with thoseexpenditures, we may not be able to successfully complete our assessment or wemay not be able to obtain an unqualified attestation report on such assessment.

 

Also, partly in response to Section 404,we are in the process of a significant redesign and upgrade of our financialreporting processes, staffing and procedures, with significant improvementsmade this fiscal year.  This redesign andupgrade has been undertaken in hopes of strengthening our internal control overfinancial reporting, improving our ability to plan and analyze our business andreducing the work burden on our finance and accounting staff.

 

Further, we or our auditorsmay identify significant deficiencies or material weaknesses in our internalcontrol over financial reporting.  If wefail to maintain the adequacy of our internal controls, we may not be able toconclude on an ongoing basis that we have effective internal controls overfinancial reporting.  Additionally,internal control over financial reporting may not prevent or detectmisstatements because of its inherent limitations, including the possibility ofhuman error, the circumvention or overriding of controls, or fraud.  Therefore, even effective internal controlscan provide only reasonable assurance with respect to the preparation and fairpresentation of financial statements.  Inaddition, projections of any evaluation of effectiveness of internal controlover financial reporting to future periods 

 

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aresubject to the risk that the control may become inadequate because of changesin conditions, or that the degree of compliance with the policies or proceduresmay deteriorate.

 

As of the fiscal year ended January 31,2008, the finance and accounting department has a fully-staffed department anda new CFO as of August 2007. Significant improvements in processes toimprove our internal controls over financial reporting have been made since thehiring of the CFO in August 2007.

 

If we fail to maintainadequate internal controls, including any failure to implement the required newor improved controls, this could have a material adverse effect on ourbusiness, financial position and results of operations.

 

**Litigation May Subject Us to SignificantExpenses and Liability**

** **

From time to time in thecourse of our business, we may be subject to litigation claims or other legaldisputes, which may not be covered under our insurance policies or as to whichour insurance carriers may seek to deny coverage.  Consequently, due to actions from thirdparties, we might incur adverse judgments, costly settlements or significantlegal fees, any or all of which might have a material adverse effect on us.

 

# **Item1B.**                          UnresolvedStaff Comments

# ** **

Not applicable.

 

# **Item2.**                                   Properties

# ** **

Our corporate office islocated in a 29,250 square foot building at 675 Grier Drive, Las Vegas,Nevada.  On January 7, 2005, wecompleted a sale and leaseback of the property. Prior to the sale, the building was owned by our CBS subsidiary.  We realized a gain of $1,638,000 on the saleof the building.  However, pursuant toStatement of Financial Accounting Standards (“SFAS”) No. 28, *Accounting for Sales with Lease-backs*,only a portion of the gain has been recognized. The gain has been deferred and is amortized against the lease paymentsover the initial lease term (5 years). CBS leases the building from the new owner for rent in the amount of$31,519 per month (triple net).  Thelease has an initial term expiring February 1, 2010 with options for twoadditional five-year terms.  CBS, inturn, sublets a portion of the building to AWI (2,830 square feet; $5,236 permonth), to Leroy’s (6,769 square feet; $11,014 per month) and the remainder ofthe space that is not utilized by CBS, is rented to an unaffiliated party at $8,760per month.  In addition, CBS leases 1,847****square feet of office and warehouse space in Reno, Nevadato provide 24 hour maintenance service to our Northern Nevada customers.  This space is located at 960 Matley Lane, Suite 21**,** Reno, Nevada.  CBSpays $1,580 per month plus utilities, for a twelve month period ending September 30,2008. The lease expires on September 30, 2009.

 

Leroy’s operates race and/orsports books subject to lease agreements with the host casino operators.  The average book occupies approximately 300square feet, with individual books ranging from 80 to 10,000 square feet.

 

Sturgeon’s is located at1420 Cornell Avenue in Lovelock, Nevada. The facility contains over 65,000 square feet and is the security for a$1.475 million loan with Great Basin Bank, having a 20-year amortization with a5-year maturity at a fixed interest rate of 8.0% per annum.

 

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We believe that the existing facilities in Las Vegas,Reno and Lovelock satisfy our present and foreseeable needs and we do notanticipate any changes.

 

# **Item3.**                                   LegalProceedings

# ** **

**Racusin**

** **

On October 6, 2006, the9th Circuit reversed the Bankruptcy Appellate Panel for the Ninth Circuit (the “BAP”),which previously (April 14, 2005) ruled in our favor that the bankruptcyclaim of Racusin was subject to subordination under Section 510(b) ofthe U.S. Bankruptcy Code (the “Code”). In reversing the BAP’s ruling, the 9th Circuit ruled that Racusin’sclaim was not subject to subordination and remanded the case for furtherproceedings.

 

On October 20, 2006, wepetitioned the 9th Circuit for a panel rehearing or, in the alternative, arehearing *en banc*.

 

On June 28, 2007, inthe case titled Michael Racusin, d/b/a M. Racusin & Company v.American Wagering, Inc. et al., Case No. 05-15969, the 9th Circuitissued a decision that reversed the ruling in our favor by the BAP on the issueof whether a July 8, 2003 judgment (the “Judgment”) by the United StatesDistrict Court for the District of Nevada in favor of Racusin, in a breach ofcontract action against us, was subject to subordination under Section 510(b) ofthe Code pursuant to our prior plan of reorganization under Chapter 11 of theCode (the “Plan”). In all material respects, the 9th Circuit’s June 28,2007 decision has the same effect as its October 6, 2006 decision in whichit ruled that the Judgment was not subject to subordination (as to which we hadfiled a petition for rehearing), but the 9th Circuit withdrew the April 14,2005 decision and replaced it with the June 28, 2007 decision. The 9thCircuit also ruled that no further petitions for a rehearing may be filed.

 

As a result of the 9thCircuit’s reversal of the BAP’s ruling, and in accordance with our September 3,2004 Settlement Agreement with Racusin described and included as Exhibit 99.1in our Form 8-K filed on September 7, 2004 (the “Settlement Agreement”),the 9th Circuit issued its original decision reversing the BAP’s ruling duringour fiscal year ended January 31, 2007.

 

A hearing was scheduled for September 12,2007 in order to determine the manner and timing of the payments, however, wereceived notice on September 7, 2007 that the Bankruptcy Court continuedthe matter until November 2, 2007. On November 2, 2007, the Bankruptcy Court heard an argument todetermine whether the Company could withdraw its 250,000 shares of common stockand whether it could begin depositing funds pursuant to the SettlementAgreement attached to the Company’s motion (the “Revised Payment Schedule”).

 

The Bankruptcy Court orderedin pertinent part that pursuant to the Order Approving the Plaintiff’s Motionto Deposit Shares of Stock with the Clerk of the Court Pursuant to Fed. R.Bankr. P. 7067 (“Interpleader Order”) previously entered into by the BankruptcyCourt on August 2, 2005, (i) we were to deposit with the BankruptcyCourt amounts provided for in Revised Payment Schedule commencing November 6,2007, less sums distributed to any lienholders of the Racusin Claim, andcontinuing each month; and (ii) the clerk of the court was ordered torelease and return our previously deposited 250,000 shares of common stockdeposited pursuant to the Interpleader Order.

 

The Interpleader Order didnot preclude either party from requesting the court to modify the RevisedPayment Schedule in the future.  TheCompany filed its Corrected Amortization Schedule on March 17, 2008 (“CorrectedAmortization Schedule”).  Interest wasincorrectly calculated in the Company’s Revised Payment Schedule. Federal Rule ofAppellate Procedure 37(b) provides in pertinent 

 

18

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partthat “[i]f the court modifies or reverses a judgment with a direction that amonetary judgment be entered in the district court, the mandate must containinstructions about the allowance of interest.” The 9th Circuit’s June 28, 2007 decision did not containinstructions about the allowance of interest, which was incorporated in theRevised Payment Schedule.  Hence, theCompany began depositing monies with the Bankruptcy Court according to theCorrected Amortization Schedule commencing March 1, 2008, and willcontinue to do so unless or until directed otherwise by the Bankruptcy Court.If a complaint is filed by Racusin, there can be no assurance that theBankruptcy Court will approve our Corrected Amortization Schedule.

 

The 250,000 shares werereturned to the Company and we began payment on November 6, 2007 tosatisfy the decision on November 2, 2007. For fiscal year ended January 31, 2008, the Company has paid$1,124,984 to the U.S. Bankruptcy Court and other lienholders as directed.Payments from February 1 through March 3, 2008 totaled $325,462. At January 31,2008, approximately $1.67 million remained outstanding to Racusin.

 

**Other**

** **

We are not a party to anyother material pending legal proceeding nor, to our knowledge, is any othermaterial legal proceeding threatened against us or any of oursubsidiaries.  We maintain insurancecoverage, including property, workers compensation and general liabilityinsurance, which we consider adequate for our size and the nature of ourbusiness.  Except as otherwise noted, wedo not believe the outcome of the above-described proceedings will have amaterial adverse effect on our financial position or results of operations.

# ** **

# **Item4.**                                   Submissionof Matters to a Vote of Security Holders

# ** **

TheCompany held its annual stockholders meeting on December 19, 2007.  Items of business set forth in our proxystatement dated November 30, 2007 that were voted on and approved at theannual meeting are as follows:

 

(1)                                  Election ofDirectors to serve until our next annual meeting and until their successors areelected and qualified:

 
| ** **            | ** ** | **Votes** | ** ** |
|-----------------------|------------|-----------|------------|
| **Nominee**           | ** ** | **For**   | ** ** | **Withheld** | ** ** |
|                  |       |      |       |   |   |
| Robert Barengo        |       | 4,790,029 |       | 27,850 |   |
| Bruce Dewing          |       | 4,748,341 |       | 69,538 |   |
| Victor J.  Salerno    |       | 4,716,929 |       | 100,950 |   |
| W. Larry Swecker      |       | 4,790,029 |       | 27,850 |   |
| Judith L.  Zimbelmann |       | 4,748,341 |       | 69,538 |   |

 

(2)                                  Ratify andapprove amendment to our Directors Stock Option Plan:

 
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-  vote** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|----------------------------|------------|
| 4,571,579 |       | 240,300     |       | 6,000       |       | —                     |       |

 

(3)           Ratify previousstock option grants under our Directors Stock Option Plan:

 
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-  vote** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|----------------------------|------------|
| 4,567,379 |       | 232,500     |       | 18,000      |       | —                     |       |

 

19

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(4)           Ratify theappointment of Piercy Bowler Taylor & Kern as our independentregistered public accounting firm for the fiscal year ending January 31,2008:

 
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-  vote** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|----------------------------|------------|
| 4,726,349 |       | 77,930      |       | 13,600      |       | —                     |       |

 

20

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**PART II**

** **

# **Item5.**                                   Marketfor Common Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities

# ** **

(a)           ***Market information***.  Our common stock is traded on the OTCBulletin Board (“OTCBB”) under the symbol “BETM.”  The following table sets forth the range ofhigh and low closing sale prices for our common stock for each of the periodsindicated as reported by the OTCBB. These quotations reflect inter-dealer prices, without retail mark-up,mark-down or commission and may not represent actual transactions.

 
| **BETM - Fiscal Year Ending January 31, 2008** | ** ** | ** **            | ** ** | ** **     | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------|------------|----------------|------------|
| **Quarter Ended**                                                            | ** ** | **High $ ** | ** ** | **Low $** | ** ** |
| April 30,  2007                                                              |       | 1.29                  |       | 0.95           |       |
| July 31,  2007                                                               |       | 1.25                  |       | 0.85           |       |
| October 31,  2007                                                            |       | 1.00                  |       | 0.79           |       |
| January 31,  2008                                                            |       | 1.10                  |       | 0.79           |       |

 
| **BETM - Fiscal Year Ending January 31, 2007** | ** ** | ** **            | ** ** | ** **     | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------|------------|----------------|------------|
| **Quarter Ended**                                                            | ** ** | **High $ ** | ** ** | **Low $** | ** ** |
| April 30,  2006                                                              |       | 1.83                  |       | 1.30           |       |
| July 31,  2006                                                               |       | 1.54                  |       | 0.98           |       |
| October 31,  2006                                                            |       | 1.60                  |       | 0.97           |       |
| January 31,  2007                                                            |       | 1.45                  |       | 1.04           |       |

 

We consider our common stockto be thinly traded and, accordingly, reported sales prices or quotations maynot be a true market-based valuation of our common stock.

 

(b)           ***Holders***.  As of January 31, 2008, there were 57record holders of our common stock.  Webelieve there are more owners of our common stock whose shares are held bynominees or in street name.

 

(c)           ***Dividends***.  Holders of our common stock are entitled toreceive dividends, as and when declared by our Board of Directors, out of fundslegally available therefore, subject to the dividend and liquidation rights ofpreferred stock issued and outstanding. We have never declared or paid any dividends on our common stock, nor dowe anticipate paying any cash dividends on our common stock in the foreseeablefuture.

 

# **Item6.**                                   SelectedFinancial Data

# ** **

Not required

 

21

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# **Item7.**                                   Management’sDiscussion and Analysis of Financial Condition and Results of Operations

# ** **

**Overview**

** **

Our primary operating strategies for the foreseeable future are tofocus on our core businesses relating to the race and sports industry, and theoperation of Sturgeon’s. Regarding CBS, we intend to continue developing,selling and maintaining computerized race and sports wagering systems for thegaming industry. As to AWIM, we intend to continue developing the self-servicewagering kiosk, installing kiosks in Leroy’s locations to assist in controllingescalating personnel costs, and marketing the kiosk to non-Leroy’s locations toseek strategic international alliances with third party gaming suppliers and/orgaming operators, if economically feasible, that desire to utilize ourexpertise in the race and sports industry. These strategies should enable us togain a competitive advantage by offering the gaming operator and/or the bettingpatron a well-rounded gaming experience, both in the United States and abroad.Regarding the Sturgeon’s facility, we intend to continue to evaluate and changethe slot mix at Sturgeon’s where and when appropriate, and modify existingprocedures to increase efficiency.

 

Concerning Leroy’s, we intend to continue operating existing sportsbooks, adding new books where and when appropriate, based on our businessmodel, and we intend to continue to become more efficient. We are closelyreviewing and analyzing the existing Leroy’s locations in order to close thoselocations that are not operating efficiently. Based on our strategy, the numberof race and sports books operated by Leroy’s may increase or decrease in thefuture, due to the closure of unprofitable locations or host properties,closures due to other factors beyond our control and/or the possible opening ofnew locations with greater potential for profitability. There is no assurancethat Leroy’s will be able to add new locations and/or that any new locationsadded will be profitable.

 

We have implemented, and are continuing to initiate, other cost cuttingmeasures throughout the Company.  In thefirst quarter of fiscal 2009, the Company reduced its workforce by means of a lay-offof several employees in all subsidiaries and began to focus on cost controls.We will continue to evaluate and closely monitor costs, looking forefficiencies and improvements during at least the remainder of fiscal 2009.

 

Duringfiscal 2008, our local, regional and national economy has been negativelyimpacted due to a number of factors, including the subprime mortgage crisis andhigher gasoline and transportation costs. Confidence in the credit market hasalso eroded, which resulted in a tightening of credit availability. Consumerdemand for gambling, due to decreased disposable income, may further declineduring an economic downturn or recession. We face the risk that the effects ofhigher interest rates, continued higher energy costs and pressure on housingprices may place added strain on consumers’ ability to make purchases, repaytheir loans and thus, leave less funds available for travel and leisureactivities. Accordingly, this economic downturn in the United States, couldhurt our financial performance if wagering activity decreases. We may undergoadditional cost reductions due to a decline in the demand for wagering, dependingon the economic conditions.

 

**Liquidity and Capital Resources**

** **

**Cash Flow**

 

As of January 31, 2008, we had working capital of $87,244,compared to working capital of $1,205,572 at January 31, 2007. Thedecrease in working capital is primarily due to fewer systems sales andinstallations in the fiscal year ended January 31, 2008 compared to fiscal2007 and the cash payments regarding the Racusin matter of $1,124,984.

 

22

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We believe our working capital position will improve in the future dueto: (a) an anticipated reduction in costs resulting from our rigorousexpense reduction plan implemented by management in the first quarter of fiscal2009; (b) an increased demand in fiscal 2009 of our CBS equipment due tocertain customers’ desire to obtain new equipment; (c) an improvement inthe timeliness and analysis of financial reporting, leading to a shorterreaction time by management to make strategic changes; (d)  theavailability of an overdraft protection credit line of $500,000 obtained fromU.S. Bank in the first quarter of fiscal 2009, of which $345,000 was unused atApril 24, 2008; and (e) additional or expanded sports book locations infiscal 2008 and the potential for increased locations in fiscal 2009. Inaddition, payments to Racusin will be substantially less in the future years ascompared to fiscal 2008 and we have reduced our general and administrativebudget for fiscal 2009 as compared to fiscal 2008. Based on the foregoing andsubject to the severity of the economic downturn, we believe that we will beable to satisfy our operating cash requirements for at least the next 12 monthsfrom existing cash balances and anticipated cash flows.

 

If our cash flow from operations and available credit is not sufficientto meet our capital requirements, we will be required to raise additionalfunds.  If we cannot locate additionalsources of capital, we may not be able to fund operations, take advantage offuture opportunities, or respond to competitors or changing demands ofcustomers.  In the event we are requiredto raise additional funds to support our operations, we cannot assure you thatthe additional funds will be available on terms favorable to us, or at all.  If adequate funds are not available or arenot available on acceptable terms, it would likely have a material adverseeffect on our financial condition and operating results.

 

We plan to accumulate cash liquidity during the current fiscal year(ending January 31, 2009), as described above, to help us fund thefollowing: payroll and benefits; sports book supplies and improvements;required cash reserves; business insurance; real estate and equipment leases;Racusin obligation; legal expenses; telecommunications; costs related toinventory and to assemble race/sports systems for our CBS customers; compliancecosts associated with gaming regulations and Section 404 of theSarbanes-Oxley Act of  2002; and debtservice. However, there can be no assurance that we will be profitable in thefuture.

 

Our principal cash requirements consist of cash provided by operationsfor fiscal 2008 of $0.2 million as compared to the cash provided by operationsof $3.0 million for fiscal 2007, primarily due to decreased systems sales andinstallations and the payments of $1.1 million in fiscal 2008 for the Racusinmatter compared to no such payments in fiscal 2007. In fiscal 2007, we recordedsystems and software sales and installations of approximately $4.0 millioncompared to approximately $0.9 million in similar sales in the fiscal yearended January 31, 2008.

 

Net cash used in investing activities for fiscal 2008 was approximately$1.2 million as compared to approximately $0.9 million for fiscal 2007,primarily as a result of the purchase of upgraded computers and networks,leasehold improvements, new kiosk locations and other furniture and equipmentand increased deposits of approximately $0.2 million into our restricted cashaccounts, due to increased collateral provided for our gaming bond. SeeRegulation section below.

 

Net cash used in financing activities for fiscal year ended January 31,2008 was approximately $285,000 compared to approximately $190,000 in cashprovided by financing activites for fiscal 2007 primarily due to fewer dollarsborrowed in the current period.

 

**Regulation**

 

Pursuant to NGC Regulation22.040, Leroy’s is required to maintain a reserve (cash, surety bonds,irrevocable standby letter of credit, etc.) in order to cover any outstandingwagering liability such as unpaid winning tickets, future tickets and telephoneaccount deposits.  Leroy’s has met thisrequirement by the purchase of a surety bond issued from Fidelity and DepositCompany of Maryland (a subsidiary of Zurich American Insurance) (“Fidelity”). Priorto September 1, 2006, the amount in this reserve was $2.4 million.  Due to increased wagering activity, theCompany increased this reserve to $3.0 million as of September 1, 2006 andthen to $3.4 million on November 16, 2007.   Due to lower wagering activity subsequent tothe completion of the current year’s football season, on February 22,2008, Leroy’s reduced its surety bond with Fidelity from $3.4 million to $2.8million.  The surety bond is secured by a $1.2 million irrevocable letterof credit (“LOC”) issued by Great Basin Bank of Nevada for the benefit ofFidelity.  The LOC is secured by a $1.2 million certificate of depositheld by Great Basin Bank of Nevada.

 

23

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An inability to maintain orincrease the reserve as necessary would have an adverse impact upon the Companyincluding, but not limited to, requiring a significant reduction in the numberof locations operated by Leroy’s and/or requiring a significant reduction inthe handle (total amount wagered).

 

**CashObligations**

 

We believe we will continueto successfully meet our long-term obligations. The following table summarizes our cash payment obligations, includingshort term debt and long term debt and operating lease obligations for the nextfive fiscal years:

 
| ** **            | ** ** | **2009**  | ** ** | **2010**  | ** ** | **2011**  | ** ** | **2012** | ** ** | **2013** | ** ** | **2014 and**

**Beyond** | ** ** | **Total** | ** ** |
|-----------------------|------------|-----------|------------|-----------|------------|-----------|------------|----------|------------|----------|------------|-------------------------------|------------|-----------|------------|
| **Sturgeon’s**   |       | $         | 291,753    |      | $          | 176,673   |       | $        | 67,489     |     | $          | 37,686                        |       | $         | 40,552     |   | $ | 1,252,875 |   | $ | 1,867,028 |   |
| **Kiosks**            |       | 208,979   |       | 133,600   |       | —    |       | —   |       | —   |       | —                        |       | 342,579   |       |
| **Racusin**           |       | 750,000   |       | 300,000   |       | 300,000   |       | 300,000  |       | 21,662   |       | —                        |       | 1,671,662 |       |
| **Salerno**           |       | —    |       | 94,148    |       | 286,625   |       | —   |       | —   |       | —                        |       | 380,773   |       |
| **Other**             |       | 29,429    |       | 28,775    |       | 6,570     |       | —   |       | —   |       | —                        |       | 64,774    |       |
| **Operating  Leases** |       | 1,380,571 |       | 1,291,865 |       | 509,891   |       | 444,981  |       | 155,169  |       | 17,525                        |       | 3,800,002 |       |
| **Total**             |       | $         | 2,660,732  |      | $          | 2,025,061 |       | $        | 1,170,575  |     | $          | 782,667                       |       | $         | 217,383    |   | $ | 1,270,400 |   | $ | 8,126,818 |   |

 

Note: As of January 31,2008, the amount of Series A Preferred Stock that may be put to us by Mr. Salernofor immediate redemption (without prior approval by our Board of Directors) is$323,800 (3,238 shares). In prior years, Mr. Salerno forwent his right tohave his shares redeemed when we made partial, pro rata calls of Series APreferred Stock for redemption.

 

**Sturgeon’s**

 

In conjunction with the acquisition of Sturgeon’s on March 1,2006, we entered into three financing agreements as follows:

 

(1) A loan from Great BasinBank, which was amended in February 2008. The Great Basin Bank originalloan (1A) was amended to change the payment terms (1B) as follows:

 
| ** **          | ** ** | **(1A) Great Basin Bank Original  Loan**                                                                                                                     | ** ** | **(1B) Great Basin Bank Amended Loan**                                                                                                                       |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Date:               |       | February 21, 2006                                                                                                                                       |       | February 7, 2008                                                                                                                                        |
| Lender:             |       | Great Basin Bank of Nevada                                                                                                                                   |       | Great Basin Bank of Nevada                                                                                                                                   |
| Borrower:           |       | AWIG                                                                                                                                                         |       | AWIG                                                                                                                                                         |
| Guarantor #1:       |       | AWI                                                                                                                                                          |       | AWI                                                                                                                                                          |
| Guarantor #2:       |       | Sturgeon’s                                                                                                                                              |       | Sturgeon’s                                                                                                                                              |
| Facility:           |       | Commercial loan                                                                                                                                              |       | Commercial loan                                                                                                                                              |
| Amount:             |       | $1,500,000                                                                                                                                                   |       | $1,425,000 (Sturgeon’s paid down $75,000 in February 2008)                                                                                         |
| Rate:               |       | Wall Street Journal- prime +2%                                                                                                                               |       | 8% fixed interest rate per annum                                                                                                                             |
| Maturity Date:      |       | March 1, 2008 (interest only is payable prior to maturity)                                                                                              |       | 20 year amortizing loan with a balloon payment at maturity  February 7, 2013                                                                            |
| Collateral:         |       | 1st deed of trust on Sturgeon’s Inn & Casino and  a security interest in Sturgeon’s Inn & Casino personal property and  fixtures |       | 1st deed of trust on Sturgeon’s Inn & Casino and  a security interest in Sturgeon’s Inn & Casino personal property and  fixtures |
| Prepayment Penalty: |       | None                                                                                                                                                         |       | None                                                                                                                                                         |

 

24

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**Negative Covenants-(for Great Basin Bank Amended Loan only)**

** **

AWIG may not do any of thefollowing (unless the bank consents):
| (a) | create,  incur or assume other indebtedness, except for trade debt incurred in the  normal course of business;                                             |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (b) | pledge  assets to secure other borrowings;                                                                                                                 |
| (c) | make  loans to, or investments in, any other person or entity or guaranty any other  parties’ debts other than in the ordinary course of business; or |
| (d) | pay  dividends (including to AWI).                                                                                                                         |

 

(2)                              A loan from Victor andTerina Salerno of $300,000 pursuant  to aGuaranty Agreement at an interest rate of 10.0% per annum and which was repaidin fiscal 2007.

 

(3)           Equipment loans fromInternational Game Technology (“IGT”) for casino equipment were made subsequentto the acquisition of Sturgeon’s. AWI entered into two contracts payable withIGT, of which terms are similar in nature, maturing in March and May of2009, with fixed interest rates of 10.50% and 10.75% per annum for casinoequipment. In fiscal 2008, AWI entered into three additional similar loans withIGT, one maturing in fiscal 2010 and the other two maturing in 2011, with atotal balance outstanding of $442,028 at January 31, 2008.  See table below.

 
| (1A and 1B) Great  Basin Bank Amended Loan, net of a $75,000 principal reduction |   | $       | 1,425,000 |   |
|----------------------------------------------------------------------------------|--------|---------|-----------|--------|
| (3)IGT equipment  loans, of which $264,684 represents the current portion        |   | 442,028 |      |
| Total Sturgeon’s  long-term debt                                            |   | $       | 1,867,028 |   |

 

**Kiosks**

** **

On August 8, 2006, theCompany entered into a sale/lease-back transaction with a finance companyinvolving 75 race/sports kiosks for a sale price of $600,000 (less a $2,500documentation fee and a 5% closing fee). Lease payments are $238,032 per year for 3 years, including interest at11.675%.  At the conclusion of the leaseterm, the Company may exercise a bargain re-purchase option for $1.  Accordingly, the Company has accounted forthis transaction as a capital lease.  Theoutstanding balance as of January 31, 2008 was $342,579.

 

**Racusin**

** **

**As of January 31, 2008,$1,671,662 of long-term debt was outstanding for the Racusin matter.**

** **

**Salerno**

** **

On November 8, 2007, the Board of Directors approved andauthorized Victor and Terina Salerno to borrow $400,000 for the benefit of theCompany pursuant to a line of credit under the terms of a Guaranty Agreementwith AWI.  The Guaranty Agreementprovides for AWI to pay the Salernos interest at the rate of 10.0% per annum(payable monthly) on the outstanding portion of the loan (up to a maximum of$500,000) and to reimburse them for finance charges, fees, payments and otherexpenses they may incur under a personal revolving line of credit with theirbank. This current line of credit expires in November 2010. The GuarantyAgreement expires on February 16, 2011. The personal line of credit issecured by the Salerno’s residence and provides for an interest rate of 0.5%below the prime rate published by the Wall Street Journal, adjusted annually.The outstanding balance of this line of credit was $380,773 at January 31,2008.  The Company paid two principal andinterest payments totaling $25,814 in fiscal 2008 and will pay 12 interest onlypayments of $3,839 per month in fiscal 2009, plus 21 principal 

 

25

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andinterest payments of $12,907 each with a balloon payment due in November 2010of $253,627. In February 2008, an additional $80,000 was also borrowed bythe Company against this line of credit. The payments described above take inconsideration the additional borrowing.

** **

**Other**

** **

**Various automobile loans,totaling $64,774 as January 31, 2008 are also included in long-term debtwith various maturities ranging from one to five years and interest ratesranging from 11.5% to 12.0%. These vehicles are generally the serviceautomobiles utilized in the Leroy’s and CBS operations.**

** **

**Operating Leases**

** **

Included in the operatingleases are rents payable at the Leroy’s sports book operating locations, rentfor our corporate headquarters, and office equipment and vehicles leases.  Rent at the Leroy’s locations includes thebase rent due per the contract terms. The rental leases also include locations in which the rent is calculatedbased on a formula relating to the activity of the location.  The rent to be paid for those locations wasestimated for the purpose of this schedule.

 

**Off-Balance Sheet Arrangements**

** **

We do not have any off-balance sheet financing arrangements orliabilities. We may, from time to time, seek additional capital to fund ouroperations, reduce our liabilities, or fund our expansion plans (includingacquisitions). To raise capital, we may seek to sell additional equitysecurities (common or preferred), issue debt or convertible securities, orobtain credit facilities through financial institutions. The sale of additionalequity or convertible securities would result in dilution to our shareholders.

 

**Results of Operations**

** **

We report our results of operations through three operating segments:Wagering, Hotel/Casino and Systems. Although numerous factors are taken intoconsideration, the operating income (loss) of the segment represents asignificant profitability measure that is used by us in allocating theappropriate level of resources and assessing performance of each segment.

 
| **Summary**                        | ** ** | **2008**   | ** ** | **2007**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
|------------------------------------|------------|------------|------------|------------|------------|-------------------|------------|-------------------|------------|
| Revenues                           |       | $          | 18,732,355 |       | $          | 19,370,393        |       | $                 | (638,038   | ) | (3.29 | ) |
| Costs and  Expenses                |       | 19,413,280 |       | 17,168,929 |       | 2,244,351         |       | 13.07             |       |
| Other Income  (Expense)            |       | (83,088    | )          | (370,764   | )          | 287,676           |       |  (77.59      | )          |
| Income (Loss)  Before Income Taxes |       | (764,013   | )          | 1,830,700  |       | (2,594,713        | )          | (141.73           | )          |
|                                    |            |            |            |            |            |                   |            |                   |            |  |  |  |

 

The decrease in revenues forthe year ended January 31, 2008 is attributed to a decrease in Systemssegment revenues of $2,975,997 (-44.82%); partially offset by an increase inWagering segment revenues of $2,199,675 (+22.25%) and increased Hotel/Casinosegment revenues of $138,284 (+4.86%).

 

The decrease in other income(expense) for the year ended January 31, 2008 is due, in part, to thefollowing factors: interest income decreased $2,470 (-2.38%); interest expenseincreased $76,963 (+37.85%); litigation expense decreased $319,485 (-82.62%);and other income increased $47,624 (+41.18%).

 

Please refer to thediscussions below (“Wagering Segment,” “Hotel/Casino Segment,” “SystemsSegment,” and “Other Income and Expense”) for additional information,discussion and analysis.

 

26

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**WageringSegment.**

 

The Wagering Segmentincludes the operating results of the sports gaming wagers, net of payouts andexpenses.

 

**Wagering Segment revenuesfor the fiscal year ended January 31, 2008 increased $2,199,675 (+22.25%)from the fiscal year ended January 31, 2007.** This increaseis attributed to the following factors:

 

We experienced increasedbaseball and football handle during fiscal 2008 compared to fiscal 2007 due tohaving more locations and the improvements and expansion of some of ourpreviously existing locations. These increases in handle resulted in increasedrevenues for this period.

 

**Wagering Segment totalcosts and expenses for the fiscal year ended January 31, 2008 increased $3,687,804(+43.86%) from the fiscal year ended January 31, 2007.** This increaseis attributed to the following factors:

 

Direct costs increasedprimarily due to increased expenses related to establishing new locations,advertising expenses, wages due to additional locations, increasedcommunication costs and increases in rent paid for our Leroy’s sports booklocations.

 

Selling, general andadministrative costs increased primarily due to increases in variousadministrative costs in fiscal 2008 compared to fiscal 2007, primarily relatedto the expansion of the new locations and increased build-outs, renovations,televisions, and general operational costs per location.

 

Management fees allocated tothe segments from the AWI parent increased due to increased insurance, legal,public company costs, and severance and bonuses paid pursuant to employmentcontracts.

 

Depreciation andamortization expense increased over the prior fiscal year primarily due to acumulative net increase in capitalized acquisitions, particularly in sportsbook locations, compared to fiscal 2007.

 

Note that an increase ordecrease in handle is not necessarily indicative of an increase or decrease inrevenues or profits, due to the volatility in the win percentage. Eliminationof unprofitable locations, closure of host properties, changes in state and/orfederal regulations, and other factors beyond our control may result indeclines in handle.

 

We intend to continue toopen new locations that we expect to operate profitably and to continue ourreview of existing locations in order to close those locations that are notoperating efficiently. There is no assurance that the number of race and sportsbooks operated by us will not decrease in the future due to elimination ofunprofitable locations, closure of host properties, and other factors beyondour control, that we will be able to add new locations, and/or that any newlocations so added will be profitable.

 

**Hotel/Casino Segment.**

 

The Hotel/Casino Segmentincludes the operating results of Sturgeon’s. Sturgeon’s operations wereacquired on March 1, 2006.

 

**Hotel/Casino Segmentrevenues for the fiscal year ended January 31, 2008 increased $138,284(+4.86%) from the fiscal year ended January 31, 2007.** This increaseis attributed to the following factors:

 

27

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Casino revenues increasedprimarily due to the inclusion of all twelve months in fiscal 2008, compared toeleven months in fiscal 2007, along with increased handle.

 

Hotel revenues increased dueto the inclusion of all twelve months in fiscal 2008, compared to eleven monthsin fiscal 2007, along with increased room occupancies, due to various specialpromotions and a one-time large room contract.

 

Food and Beverage revenuesincreased primarily due to increased banquet and special events in fiscal 2008compared to fiscal 2007.

 

Casino cash incentives andother promotional allowances increased for fiscal 2008 compared to fiscal 2007due to increased casino and food and beverage promotions.

 

**Hotel/Casino Segment totalcosts and expenses for the twelve months ended January 31, 2008 decreased$154,432(-4.97%) from the twelve months ended January 31, 2007.** This decreaseis attributed to the following factors:

 

Direct costs for the casinooperations increased slightly over the prior fiscal year ended January 31,2007 primarily due to the inclusion of all twelve months in the period ended January 31,2008 compared to eleven months in the period ended January 31, 2007,partially offset by the lack of start up costs in fiscal 2008 compared tofiscal 2007.

 

Direct costs for the hoteloperations increased primarily due to the inclusion of all twelve months in theperiod ended January 31, 2008 compared to eleven months in the periodended January 31, 2007, along with increased expenses in repairing andmaintaining the hotel rooms.

 

Direct costs for the foodand beverage operations decreased primarily due to decreased personnel costsand equipment rental expenses in fiscal 2008 compared to fiscal 2007.

 

Selling, general andadministrative costs for Sturgeon’s have increased primarily due to increasedhotel and casino personnel costs and increased utility costs due primarily tothe inclusion of all twelve months in the period ended January 31, 2008compared to the eleven months in the period ended January 31, 2007.

 

**Systems Segment.**

 

The Systems Segment includesthe operating results of our systems sales, installations and maintenance, lessthe related expenses.

 

**Systems Segment revenuesfor the fiscal year ended January 31, 2008 decreased $2,975,997****(-44.82%) from the fiscal year ended January 31, 2007.**This decrease is attributed to the following factors:

 

System sales decreased from the prior fiscal year due to a decreasednumber of sales. Sales and installations to a property typically occur everythree to five years. In the fiscal year ended January 31, 2007, werecorded these type of systems and software sales of approximately $4.0 millioncompared to approximately $0.9 million in similar sales in the fiscal yearended January 31, 2008. These types of infrequent sales are cyclical innature and depend on factors such as new casino openings and the timing ofindividual casino customers’ needs to replace or upgrade the equipment.Additionally, in fiscal 2007 there was a higher than normal demand for manycasinos to upgrade their equipment compared to fiscal 2008.

 

28

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Revenues from maintenancecontracts increased over the prior fiscal year. This increase is attributableto the addition of new customers during fiscal 2007 and 2008, and the cost ofliving increases charged to current customers.

 

**Systems Segment totalcosts and expenses for fiscal year ended January 31, 2008 decreased****$1,289,021 (-22.81%) from the fiscal year ended January 31, 2007.**This decrease is attributed to the following factors:

 

Direct costs for systemsdecreased over the prior twelve months ended January 31, 2007, primarilydue to decreased wages and benefits resulting from a reduction and realignmentof personnel, improving our operational efficiencies and a decline in thenumber of sales installations.

 

Research and developmentcosts decreased from the prior fiscal year primarily due to improvement inefficiencies in this area and decreased demand of additional costs due todecreased sales of equipment in the current year.

 

Management fees allocated tothe segments from the AWI parent increased due to increased insurance, legal,public company costs, and severance and bonuses paid pursuant to employmentcontracts.

 

Depreciation andamortization increased from the prior fiscal year ended January 31, 2007due to increased property acquisitions, primarily due to the equipment andsoftware upgrades to our networks.

 

**Other Income (Expense).**

 

The other income (expense)categories are primarily administrative in nature and, as such, are notdirectly attributable to any operating segment. Accordingly, these items aregenerally not taken into consideration by us when we allocate resources to thesegments or assess the performance of the segments.

 

Interest Income: The majorityof interest income is attributable to interest earned on restricted cashdeposits required for the Regulation 22.040 reserve. (Refer to the discussionregarding this matter located in “Liquidity and Capital Resources” above.) Theslight decrease of the interest income is attributable to lower interest ratesand lower amounts earned in our checking accounts.

 

Interest Expense: The increasein interest expense is primarily due to our financing of Sturgeon’s, includingthree additional loans totaling $295,629 for casino equipment obtained in thesecond quarter of fiscal 2008. (Refer to the discussion regarding the Sturgeon’sacquisition financing located in “Liquidity and Capital Resources” above.)

 

Litigation Expense:  Litigation expense of $67,213 was recorded infiscal 2008 related to interest charges regarding the Racusin litigation,compared to Racusin litigation expense of $329,396 for the prior fiscal year,and is therefore non-operating.

 

Other: Otherincreased $47,624 primarily due to increased rental income and various otherincome in the twelve months ended January 31, 2008 compared to the sameperiod in the prior year.

 

**Critical AccountingEstimates and Policies**

** **

Although our financialstatements necessarily make use of certain accounting estimates by ourmanagement, we believe that, except as discussed below, we do not employ anycritical accounting 

 

29

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policiesor estimates that are either selected from among available alternatives, or requirethe exercise of significant management judgment to apply, or that if changedare likely to affect future periods.  Thefollowing summarizes our critical estimates and policies.

** **

**Wagering**

** **

We record wagering revenuesin compliance with Nevada law and the regulations of the Nevada gamingregulators.  For sports andnon-pari-mutuel race, we use an accrual method wherein the handle (total amountwagered) is recognized on the day the event occurs (rather than the day thewager is accepted) decreased by the total amount owed to patrons with winningwagers.  This gross calculation (handleless payouts) is then adjusted upward to account for any winning wagers thatwere not redeemed (cashed) within the specified time period.  For pari-mutuel race, commission and breakagerevenues are recorded when the wagers are settled, typically the same day asthe wager.  Other sources of revenue arerelatively insignificant.

 

**Hotel/Casino Revenue**

** **

We report the wageringrevenues of Sturgeon’s, which is primarily comprised of slot revenue, hotelroom revenue and food and beverage revenue, in compliance with Nevada law andthe regulations of the Nevada gaming regulators.  These revenues are generally in the form ofcash, personal checks, credit cards, or gaming chips and tokens, which do notrequire estimates.  We do estimatecertain liabilities with payment periods that extend for longer than severalmonths.  We believe these estimates arereasonable based on our assumptions related to possible outcomes in thefuture.  Future actual results mightdiffer materially from these estimates. Slot revenue is the drop (the total amount removed from the machine)less the fills and the payouts.  Bingorevenue is calculated as the total handle (the amount wagered) less thepayouts.  For non-gaming revenues, suchas food and beverage, hotel, etc., we record revenues in compliance withgenerally accepted accounting principles, recognizing revenue when it isearned.  The Sturgeon’s acquisition wascompleted on March 1, 2006 and wagering revenues for the Sturgeon’soperation were reported for the first time in the fiscal year ended January 31,2007 and for fiscal 2008, the entire 12 months of revenues and expenses arereported in this Form 10-K.

 

**System — Software**

** **

We recognize softwarerevenue in accordance with the provisions of Statement of Position (“SOP”)97-2, *Software Revenue Recognition*,as amended by SOP 98-9, *Software RevenueRecognition, With Respect to Certain Transactions*.  Software license fees represent revenuesrelated to licenses for race/sports software delivered to customers forin-house use.  Revenues from softwarelicense agreements (including any related training revenue) are recognized uponinstallation of the software.

** **

**System — Hardware**

** **

We recognize hardwarerevenue (including any related installation revenue) upon installation of thehardware.

 

**System — Maintenance**

** **

We negotiate maintenanceagreements with each of our customers to provide for the long-term care of thesoftware and hardware.  Pursuant to theterms of the various maintenance agreements, a fixed sum is due at thebeginning of each month regardless of whether the customer requires serviceduring that month.  We recognizemaintenance revenue on the first day of each month for which the maintenance

 

30

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agreementis in place; we maintain an allowance for doubtful accounts in the event thatany such revenue recorded is not realized.

 

**Long-Lived Assets**

** **

Owned property and equipmentare recorded at cost and depreciated to residual values over the estimateduseful lives using the straight-line method. Leasehold improvements on operating leases are amortized over the lifeof the lease or the life of the asset, whichever is shorter.  The useful life, currently estimated, of ourequipment generally ranges from 3 to 10 years. We test for impairment losses on long-lived assets used in operationswhen events and circumstances indicate that the assets might be impaired, underthe standards of SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*.  An impairment loss is recognized if thecarrying amount of the asset is not recoverable from its undiscounted cashflows and is measured as the difference between the carrying amount and fairvalue of the asset.

 

**Accounting for IncomeTaxes**

** **

Effective February 1,2007, we adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48,*Accounting for Uncertainty in Income Taxes, aninterpretation of FASB Statement No. 109,**Accountingfor Income Taxes*(“FIN 48”). Accordingly, we have reviewed our previously filed tax returns andparticularly our net operating loss carryforwards available to reduce currentand future tax obligations and assessed the valuation allowance we establishedagainst our deferred tax assets for the possible effect of FIN 48 and toestimate the extent to which it remains needed as of January 31, 2008. Weadditionally believe that we will be sufficiently profitable for the short-termfuture, and it is therefore more likely than not that $440,481 of our netdeferred tax asset, which resulted primarily from net loss carryforwards, willbe realized. Based on our evaluation, management believes that adopting FIN 48did not have a material effect on our opening deficit at the time of adoption,our net operating loss carryforwards or the related deferred tax assets or therelated valuation allowance.

 

**Recent AccountingPronouncements**

** **

In September 2006, theFASB issued Statement of Financial Accounting Standard (“SFAS”) No. 157, *Fair Value Measurements*, which definesfair value, establishes a framework for measuring fair value and expandsdisclosures about fair value measurements. In February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for Financial Assets andFinancial Liabilities – Including an Amendment of SFAS No 115*, whichwill permit the option of choosing to measure certain eligible items at fairvalue at specified election dates and report unrealized gains and losses inearnings.  SFAS No. 157 will becomeeffective for us for financial statements issued for the fiscal year ending January 31,2009, except that for nonfinancial assets and liabilities, it will not becomeeffective for us until the following year unless SFAS No. 159 is adoptedearlier. We do not presently intend to adopt SFAS No. 159, and arecurrently evaluating the likely impact of SFAS No. 157 on our futureconsolidated financial statements.

 

InDecember 2007, the FASB issued SFAS 141R, *Business Combinations*, which will significantly change theaccounting for business combinations and certain other transactions.SFAS 141R will apply prospectively to business combinations and certainother transactions for which the acquisition date is on or after the start ofthe first annual reporting period beginning on or after December 15, 2008,and early adoption is prohibited. Since we are not now contemplating anycovered transactions after its effective date, we currently expect thatSFAS 141R will not have an impact on our future financial position,results of operations and operating cash flows.

 

InDecember 2007, the FASB issued SFAS No. 160, *Noncontrolling Interests in Consolidated*

 

31

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*FinancialStatements — an amendment of Accounting Research Bulletin No. 51* (“SFAS 160”), which establishesaccounting and reporting standards for ownership interests in subsidiaries heldby parties other than the parent, the amount of consolidated net incomeattributable to the parent and to the noncontrolling interest, changes in aparent’s ownership interest and the valuation of retained noncontrolling equityinvestments when a subsidiary is deconsolidated. The Statement also establishesreporting requirements that provide sufficient disclosures that clearlyidentify and distinguish between the interests of the parent and the interestsof the noncontrolling owners. SFAS 160 is effective for fiscal yearsbeginning after December 15, 2008. The Company currently has nononcontrolling interests in any of its subsidiaries.

 

32

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**Item7A.****                        ****Quantitativeand Qualitative Disclosures about Market Risk**

 

Not applicable.

 

# **Item 8.**                                   FinancialStatements and Supplementary Data

# ** **

Audited Financial Statementsfor Years Ended January 31, 2008 and 2007, including:

 

a.             Report of Independent Registered Public Accounting Firm

 

b.             Consolidated Balance Sheets

 

c.             Consolidated Statements of Operations

 

d.             Consolidated Statements of Stockholders’ Equity

 

e.             Consolidated Statements of Cash Flows

 

f.              Notes to the Consolidated Financial Statements

 

33

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** **

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

** **

Board of Directors

American Wagering, Inc.

 

We have audited theaccompanying consolidated balance sheets of American Wagering, Inc. andSubsidiaries (collectively, the “Company”) as of January 31, 2008 and2007, and the related consolidated statements of operations, stockholders’equity and cash flows for the years ended January 31, 2008 and 2007.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audits to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  The Company is not required to have, nor werewe engaged to perform, an audit of its internal control over financialreporting.  Our audits includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of the Company as of January 31, 2008 and2007, and the results of its operations and cash flows for the years ended January 31,2008 and 2007, in conformity with accounting principles generally accepted inthe United States.

 

PIERCY BOWLER TAYLOR &KERN

 
| /s/ Piercy Bowler  Taylor & Kern |   |
|-------------------------------------------|--------|
|                                      |
| Certified Public  Accountants             |
| Las Vegas, Nevada                         |
| May 12, 2008                              |

 

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** **

**AMERICAN WAGERING, INC. ANDSUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**JANUARY31, 2008 and 2007**

 
| ** **                                                                                                                                    | ** ** | **2008**    | ** ** | **2007**    | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| **ASSETS**                                                                                                                                    |       |        |       |        |       |
| CURRENT ASSETS                                                                                                                                |       |        |       |        |       |
| Cash and Cash  Equivalents                                                                                                                    |       | $           | 3,316,595  |        | $          | 4,537,424 |   |
| Restricted Cash                                                                                                                               |       | 1,323,688   |       | 1,113,656   |       |
| Accounts  Receivable, net of allowance for doubtful accounts of $2,835 in 2008                                                                |       | 345,145     |       | 719,855     |       |
| Inventories                                                                                                                                   |       | 443,639     |       | 357,330     |       |
| Deferred Tax  Assets, net of allowance                                                                                                        |       | 440,481     |       | 440,481     |       |
| Prepaid Expenses  and Other                                                                                                                   |       | 497,056     |       | 573,750     |       |
|                                                                                                                                          |       | 6,366,604   |       | 7,742,496   |       |
| Property and  Equipment, net of accumulated depreciation and amortization                                                                     |       | 4,783,451   |       | 4,461,665   |       |
| Goodwill                                                                                                                                      |       | 103,725     |       | 103,725     |       |
| Other                                                                                                                                         |       | 289,192     |       | 864,391     |       |
|                                                                                                                                          |       | $           | 11,542,972 |        | $          | 13,172,277 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                |       |        |       |        |       |
| CURRENT LIABILITIES                                                                                                                           |       |        |       |        |       |
| Current Portion  of Long-Term Debt                                                                                                            |       | $           | 1,280,161  |        | $          | 1,880,617 |   |
| Accounts Payable                                                                                                                              |       | 1,055,547   |       | 788,729     |       |
| Accrued Expenses                                                                                                                              |       | 1,006,310   |       | 1,337,934   |       |
| Unpaid Winning  Tickets                                                                                                                       |       | 1,401,382   |       | 1,198,373   |       |
| Customer  Deposits and Other                                                                                                                  |       | 1,535,960   |       | 1,331,271   |       |
|                                                                                                                                          |       | 6,279,360   |       | 6,536,924   |       |
| Long-Term Debt,  less current portion                                                                                                         |       | 3,046,655   |       | 3,305,029   |       |
| Other Long-Term  Liabilities                                                                                                                  |       | 655,693     |       | 988,292     |       |
|                                                                                                                                          |       | 3,702,348   |       | 4,293,321   |       |
| Redeemable  Series A Preferred Stock (3,238 Shares)                                                                                      |       | 323,800     |       | 323,800     |       |
|                                                                                                                                          |       | 10,305,508  |       | 11,154,045  |       |
| STOCKHOLDERS’  EQUITY                                                                                                                    |       |        |       |        |       |
| Series A  Preferred Stock — 10% cumulative; $100.00 par and liquidation value; 18,924  shares authorized; 10,924 shares outstanding |       | 1,092,400   |       | 1,092,400   |       |
| Common Stock -  $0.01 par value; 25,000,000 shares authorized; 8,129,879 shares issued and  outstanding                                       |       | 81,299      |       | 81,299      |       |
| Additional  Paid-In Capital                                                                                                                   |       | 12,246,651  |       | 12,121,822  |       |
| Deficit                                                                                                                                       |       | (11,855,393 | )          | (10,949,796 | )          |
| Treasury Stock,  at cost (61,100 shares)                                                                                                      |       | (327,493    | )          | (327,493    | )          |
|                                                                                                                                          |       | 1,237,464   |       | 2,018,232   |       |
|                                                                                                                                          |       | $           | 11,542,972 |        | $          | 13,172,277 |   |

 

See notes to consolidatedfinancial statements.

 

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**AMERICAN WAGERING, INC. ANDSUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**FOR THE YEARS ENDED JANUARY31, 2008 AND 2007**

 
| ** **                              | ** ** | **2008**   | ** **   | **2007**   | ** ** |
|-----------------------------------------|------------|------------|--------------|------------|------------|
| **REVENUES:**                           |       |       |         |       |       |
| Wagering                                |       | $          | 12,085,243   |       | $          | 9,885,568 |   |
| Hotel/Casino                            |       | 2,982,610  |         | 2,844,326  |       |
| Systems                                 |       | 3,664,502  |         | 6,640,499  |       |
|                                    |       | 18,732,355 |         | 19,370,393 |       |
| **OPERATING  COSTS AND EXPENSES:**      |       |       |         |       |       |
| **Direct  Costs:**                      |       |       |         |       |       |
| Wagering                                |       | 10,184,125 |         | 6,978,652  |       |
| Hotel/Casino                            |       | 2,325,003  |         | 2,570,895  |       |
| Systems                                 |       | 1,389,255  |         | 2,251,270  |       |
|                                    |       | 13,898,383 |         | 11,800,817 |       |
| **Operating  Expenses:**                |       |       |         |       |       |
| Research and  Development               |       | 952,163    |         | 1,131,265  |       |
| Selling, General  and Administrative    |       | 3,625,376  |         | 3,499,623  |       |
| Depreciation and  Amortization          |       | 937,358    |         | 737,224    |       |
|                                    |       | 5,514,897  |         | 5,368,112  |       |
|                                    |       | 19,413,280 |         | 17,168,929 |       |
| **OPERATING  INCOME (LOSS)**            |       | (680,925   | )            | 2,201,464  |       |
|                                    |       |       |         |       |       |
| **OTHER  INCOME(EXPENSE):**             |       |       |         |       |       |
| Interest Income                         |       | 101,135    |         | 103,605    |       |
| Interest Expense                        |       | (280,276   | )            | (203,313   | )          |
| Litigation  Expense                     |       | (67,213    | )            | (386,698   | )          |
| Other                                   |       | 163,266    |         | 115,642    |       |
|                                    |       | (83,088    | )            | (370,764   | )          |
| **NET  INCOME(LOSS)**                   | ** ** | **$**      | **(764,013** | **)**      | **$**      | **1,830,700** | ** ** |
| **NET  INCOME (LOSS) PER COMMON SHARE** | ** ** | ** ** | ** **   | ** ** | ** ** |
| **BASIC**                               | ** ** | **$**      | **(0.11**    | **)**      | **$**      | **0.21** | ** ** |
| **DILUTED**                             | ** ** | **N/A**    | ** **   | **$**      | **0.21**   | ** ** |

 

See notes toconsolidated financial statements.

 

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** **

**AMERICAN WAGERING, INC. ANDSUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

**FOR THE YEARS ENDED JANUARY31, 2008 AND 2007**

 
| ** **                       | ** ** | ** **               | ** ** | ** **            | ** ** | ** **              | ** ** | **Additional ** | ** ** | ** ** | ** ** | ** **  | ** ** |
|----------------------------------|------------|--------------------------|------------|-----------------------|------------|-------------------------|------------|----------------------|------------|------------|------------|-------------|------------|
| ** **                       | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Treasury Stock** | ** ** | **Paid-In**          | ** ** | ** ** | ** ** | **Total**   | ** ** |
| ** **                       | ** ** | **Shares**               | ** ** | **Dollars**           | ** ** | **Shares**              | ** ** | **Dollars**          | ** ** | **Shares** | ** ** | **Dollars** | ** ** | **Capital** | ** ** | **Deficit** | ** ** | **Equity** | ** ** |
| Balances, February 1, 2006  |       | 10,924                   |       | $                     | 1,092,400  |                    | 8,248,864  |                 | $          | 82,488     |       | 61,100      |       | $ | (327,493 | ) | $ | 14,139,686 |   | $ | (12,638,876 | ) | $ | 2,348,205 |   |
|                             |       |                     |       |                  |       |                    |       |                 |       |       |       |        |       |   |   |   |   |   |   |
| Preferred Stock Dividends        |       |                     |       |                  |       |                    |       |                 |       |       |       |        |       |   |   | (141,620 | ) | (141,620 | ) |
|                             |       |                     |       |                  |       |                    |       |                 |       |       |       |        |       |   |   |   |   |   |   |
| Net Income                       |       |                     |       |                  |       |                    |       |                 |       |       |       |        |       |   |   | 1,830,700 |   | 1,830,700 |   |
|                             |       |                     |       |                  |       |                    |       |                 |       |       |       |        |       |   |   |   |   |   |   |
| Racusin Settlement               |       |                     |       |                  |       | (250,000                | )          | (2,500               | )          |       |       |        |       | (2,377,500 | ) |   |   | (2,380,000 | ) |
|                             |       |                     |       |                  |       |                    |       |                 |       |       |       |        |       |   |   |   |   |   |   |
| Stock options exercised          |       |                     |       |                  |       | 131,016                 |       | 1,311                |       |       |       |        |       | 81,174 |   |   |   | 82,485 |   |
|                             |       |                     |       |                  |       |                    |       |                 |       |       |       |        |       |   |   |   |   |   |   |
| Stock based compensation expense |       |                     |       |                  |       |                    |       |                 |       |       |       |        |       | 278,462 |   |   |   | 278,462 |   |
|                             |       |                     |       |                  |       |                    |       |                 |       |       |       |        |       |   |   |   |   |   |   |
| Balances, January 31, 2007  |       | 10,924                   |       |                  | 1,092,400  |                    | 8,129,880  |                 |       | 81,299     |       | 61,100      |       |   | (327,493 | ) |   | 12,121,822 |   |   | (10,949,796 | ) |   | 2,018,232 |   |
|                             |       |                     |       |                  |       |                    |       |                 |       |       |       |        |       |   |   |   |   |   |   |
| Preferred Stock Dividends        |       |                     |       |                  |       |                    |       |                 |       |       |       |        |       |   |   | (141,584 | ) | (141,584 | ) |
|                             |       |                     |       |                  |       |                    |       |                 |       |       |       |        |       |   |   |   |   |   |   |
| Net Loss                         |       |                     |       |                  |       |                    |       |                 |       |       |       |        |       |   |   | (764,013 | ) | (764,013 | ) |
|                             |       |                     |       |                  |       |                    |       |                 |       |       |       |        |       |   |   |   |   |   |   |
| Stock based compensation expense |       |                     |       |                  |       |                    |       |                 |       |       |       |        |       | 124,829 |   |   |   | 124,829 |   |
|                             |       |                     |       |                  |       |                    |       |                 |       |       |       |        |       |   |   |   |   |   |   |
| Balances, January 31, 2008  |       | 10,924                   |       | $                     | 1,092,400  |                    | 8,129,880  |                 | $          | 81,299     |       | 61,100      |       | $ | (327,493 | ) | $ | 12,246,651 |   | $ | (11,855,393 | ) | $ | 1,237,464 |   |

** **

See notes toconsolidated financial statements.

 

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** **

**AMERICAN WAGERING, INC. ANDSUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**FOR THE YEARS ENDED JANUARY31, 2008 AND 2007**

 
| ** **                                                | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|-----------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| **OPERATING ACTIVITIES**                                  |       |       |       |       |       |   |   |
| **Net cash provided by operating activities**             |       | $          | 237,947    |       | $          | 3,038,802 |   |
|                                                      |       |       |       |       |       |
| **INVESTING ACTIVITIES**                                  |       |       |       |       |       |
| Gross increases in restricted cash                        |       | (1,751,275 | )          | (2,280,869 | )          |
| Withdrawals from restricted cash                          |       | 1,541,243  |       | 2,463,417  |       |
| Proceeds from the sale of property and  equipment         |       | 14,943     |       | 68,033     |       |
| Purchase of property and equipment                        |       | (978,356   | )          | (1,163,462 | )          |
| **Net cash used in investing activities**                 |       | (1,173,445 | )          | (912,881   | )          |
|                                                      |       |       |       |       |       |
| **FINANCING ACTIVITIES**                                  |       |       |       |       |       |
| Proceeds from borrowings                                  |       | 400,000    |       | 900,000    |       |
| Repayment of borrowings                                   |       | (543,747   | )          | (650,807   | )          |
| Dividends on preferred stock                              |       | (141,584   | )          | (141,620   | )          |
| Stock options exercised                                   |       | —     |       | 82,485     |       |
| **Net cash provided by (used in) financing  activities**  |       | (285,331   | )     | 190,058    |       |
|                                                      |       |       |       |       |       |
| **NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS** |       | (1,220,829 | )          | 2,315,979  |       |
| ** **                                                |       |       |       |       |       |
| **CASH AND CASH EQUIVALENTS AT BEGINNING OF  PERIOD**     |       | 4,537,424  |       | 2,221,445  |       |
| ** **                                                |       |       |       |       |       |
| **CASH AND CASH EQUIVALENTS AT END OF PERIOD**            |       | $          | 3,316,595  |       | $          | 4,537,424 |   |
|                                                      |       |       |       |       |       |
| **SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION:**    |       |       |       |       |       |
| ** **                                                |       |       |       |       |       |
| Cash paid for interest                                    |       | $          | 429,410    |       | $          | 203,313 |   |

 

See notes to consolidated financial statements.

 

38

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**AMERICAN WAGERING, INC. ANDSUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**YEARS ENDED JANUARY 31, 2008AND 2007**

** **

**1.**             Natureof Operations and Background Information

** **

**Organization andBusiness**

 

American Wagering, Inc.(“AWI”) is a publicly traded holding company that earns its revenues throughthe consolidated operations of its wholly-owned subsidiaries.  Leroy’s Horse & Sports Place, Inc.(“Leroy’s”) owns and operates 62 (as of April 11, 2008) race and sportswagering locations (“books”) in leased space within nonrestricted casinosthroughout the state of Nevada. Computerized Bookmaking Systems, Inc. (“CBS”), designs, sells,installs, and maintains computerized race and sports wagering systems.  AWI Manufacturing, Inc. (“AWIM”)develops and leases self-service race and sports wagering kiosks to the gamingindustry. AWI Gaming, Inc. (“AWIG”) was formed in June 2005 for thepurpose of acquiring hotel/casino operations, which it did through Sturgeons,LLC, a wholly-owned subsidiary of AWIG, formed in July 2005 for thepurpose of owning and operating Sturgeon’s Inn & Casino in Lovelock,Nevada (“Sturgeon’s”), which acquisition was completed on March 1, 2006.

 

Contest Sports Systems, Inc.(“CSS”), formerly a wholly-owned subsidiary of CBS, was dissolved effective January 29,2007 due to inactivity.  CSS had nosignificant income or expenses in fiscal 2007. AWI International, Inc. (“AWI Int’l”), formed in fiscal 2007, wasestablished to provide various services to gaming suppliers and gamingoperators in foreign jurisdictions where wagering on race and sporting eventsis licensed. AWI Int’l was dissolved effective August 27, 2007. However,the Company still may, through our established CBS subsidiary, seek strategicalliances with third party gaming suppliers and/or gaming operators that desireto utilize our expertise in the race and sports industry. The dissolution ofCSS and AWI Int’l had no significant financial statement impact.

 

**Basisof Presentation**

 

The consolidated financialstatements include the accounts of AWI and all of its subsidiaries forapplicable periods, (collectively referred to hereafter as the “Company”).  All subsidiaries are wholly-owned by AWI,with the exception of Sturgeon’s which is wholly-owned by AWIG.  All significant inter-company accounts andtransactions have been eliminated in the consolidation.

 

**Concentrations**

 

Because the Company operatesprimarily in the larger metropolitan areas of Nevada in the highly regulatedgaming industry, realization of its receivables and its future operations couldbe affected by adverse economic conditions in Nevada and its key feeder marketsin the western United States, and by possible future anti-wagering legislationand regulatory limitations on the scope of wagering.  All of the Company’s wagering revenue comesfrom its Nevada race and sports books and more than one-fourth of that isderived from professional football events. If the professional football season were to be interrupted, this couldhave a significant adverse impact on future operations.  Management also estimates that a significantamount of the Company’s Nevada non-casino wagering relates to college sportsand, therefore, the passage of amateur sports anti-wagering legislation couldhave a material adverse impact upon future operations.  In addition, because the Company generatessubstantial revenue from system sales and maintenance to a relatively smallpopulation of potential customers, a decline in the size, demand or number ofthese contracts could also adversely affect future operations.

 

39

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The Company manages itsconcentrations of credit risk by requesting deposits; evaluating thecreditworthiness of systems’ customers before extending credit; and byperfecting and using, when necessary, security interests in the hardware andsoftware.

 

**AccountsReceivable and Allowance for Doubtful Accounts**

 

****Trade accounts receivable are evaluated quarterlyfor collectability, and carried net of an appropriate allowance, at theirestimated collectible value. Since customer credit is generally extended on ashort-term basis, trade receivables do not bear interest, although a financecharge may be applied to accounts that are more than 30 days past due.****

 

Theallowances for doubtful accounts represent allowances for trade accountsreceivable that are estimated to be partially or entirely uncollectible. Theseallowances are used to reduce gross trade receivables to their estimated netrealizable value. The Company records these allowances as a charge to generaland administrative expenses.

 

Inestablishing an allowance for doubtful accounts, if any, the Company isrequired to make judgments based on historical data and future expectationsregarding the collectability of the amount owed to the Company. The Companyconsiders, among other things, the customer’s financial condition; the relativestrength of the Company’s legal position, including the related cost of anyproceedings; the amounts on the aging schedule; historical payment information;and the general economic conditions.

 

****Generally, accounts for which no payments have beenreceived for three consecutive months are considered delinquent, and thecustomary collection efforts are initiated. Accounts for which no payments havebeen received for 12 months or if management becomes aware that no payment willbe made to the Company, are written off.**** The maximum losses that the Company wouldincur if a customer failed to pay would be limited to the amount due after anyallowances were provided.

 

**Use of Estimates**

 

Timely preparation offinancial statements in conformity with generally accepted accountingprinciples in the United States of America requires management to makeestimates and assumptions that affect reported amounts, which estimates mayrequire revision in future periods. Settings and adjustments of betting lines on sporting events that havenot yet taken place as of the most recent balance sheet date, valuation ofdeferred tax assets, and estimated costs of litigation, claims and assessmentsare subject to change materially within one year.

** **

**Cash and CashEquivalents**

** **

Cash equivalents includehighly liquid investments with initial maturities of three months or less.  Excluded from cash and cash equivalents, butincluded in current assets, are restricted cash amounts primarily required tobe maintained on deposit with a bank under Nevada Gaming Commission Regulation22.040, to fund gaming losses.

 

**Inventories**

** **

Inventories consistingprimarily of systems components and replacement parts are stated at the lowerof cost (based on the first-in, first-out method) or market value.

 

40

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**Property and Equipment**

 

Property and equipment (Note2) is stated at cost, net of accumulated depreciation and amortization,computed using the straight-line method over the estimated useful lives of thedepreciable assets (generally 3 to 10 years for equipment, furniture andfixtures, and 40 years for building improvements, but limited to the lease termfor leasehold improvements).

 

**Goodwill**

 

As of the most recentbalance sheet date, goodwill primarily consists of the excess of the purchaseprice over fair value of net assets acquired in connection with the acquisitionof CBS. Goodwill is evaluated periodically and at least annually, forimpairment as events or circumstances warrant. Such evaluations include, among other analysis, cash flow andprofitability projections, including the impact on other operations of theCompany.  There were no impairmentprovisions taken for the fiscal years ended January 31, 2008 or 2007.

 

**Revenue Recognition**

 

Servicerevenues are principally recognized as products or services are provided to customers;the Company does not bill in advance. Advance deposits, if any, are recorded asdeferred revenue until services are provided to the customer.

 

Salesand similar revenue-based taxes collected from customers are excluded fromrevenue but rather are recorded as a liability, which is payable to theappropriate taxing authority and included in accrued expenses.

 

**Wagering**

 

The Company records wageringrevenues in compliance with Nevada law and with the regulations of the Nevadagaming regulators.  For sports andnon-pari-mutuel race wagering, the Company uses an accrual method wherein thehandle (total amount wagered) is recognized on the day the event occurs (ratherthan the day the wager is accepted) and is decreased by the total amount owedto patrons with winning wagers.  Thisgross calculation (handle less payouts) is then adjusted upward to account forany winning wagers that were not redeemed (cashed) within the specified timeperiod.  For pari-mutuel race, commissionand breakage revenues are recorded when the wagers are settled, typically thesame day as the wager.

 

**Hotel/Casino**

** **

Revenues of Sturgeon’s (Note 11) consist primarily of slot revenue,recorded in compliance with Nevada gaming law and regulations, hotel room andfood and beverage revenue.  Casinorevenue, being reported for the first time for fiscal year ended January 31,2007, and for the full fiscal year ended January 31, 2008, is theaggregate net difference between gaming wins and losses.  Food and beverage and other operating revenuesare recognized as services are performed. Advance deposits, if any, are recorded as deferred revenue until thegoods or services are provided to the customer. Sturgeon’s casino gaming, food and beverage and other operating revenuesare included in hotel/casino revenue. Casino revenues are recognized net of certain sales incentives inaccordance with Emerging Issues Task Force Issue No. 01-9, *Accounting for Consideration Given by a Vendor to aCustomer (Including a Reseller of the Vendor’s Products.)* Accordingly,cash incentives to patrons for gambling, which are not material, have beenrecognized as a direct reduction of casino revenue.  Revenue does not include the retail value of

 

41

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foodand beverage, and other services gratuitously furnished to patrons, which isnot material.  The estimated cost ofproviding such gratuities is included in wagering direct expenses.

 

**System — Software**

 

The Company recognizessoftware development revenue in accordance with the provisions of Statement ofPosition (“SOP”) 97-2, *Software RevenueRecognition*, as amended by SOP 98-9, *Software Revenue Recognition, With Respect to Certain Transactions*.  Software license fees represent revenuesrelated to licenses for race/sports software delivered to customers forin-house use.  Revenues from softwarelicense agreements (including any related training revenue) are recognized uponinstallation of the software.

 

**System — Hardware**

 

The Company recognizesrevenue from the sale of hardware (and any related installation revenue) uponinstallation of the hardware.

 

**System — Maintenance**

 

The Company negotiatesmaintenance agreements with each of its customers to provide for the long-termcare of the software and hardware. Pursuant to the terms of the various maintenance agreements, a fixed sumis due at the beginning of each month regardless of whether the customerrequires service during that month.  TheCompany recognizes maintenance revenue on the first day of each month for whichthe maintenance agreement is in place.

 

**Advertising**

 

The Company expenses alladvertising costs as incurred. Advertising expense was $683,037 and $395,091 for the fiscal years endedJanuary 31, 2008 and 2007, respectively.

 

**Stock-Based Compensation**

 

On February 1, 2006,the Company adopted the Financial Accounting Standards Board (“FASB”) SFAS No. 123(R),*Share Based Payment*(“SFAS No. 123(R)”),as interpreted by SEC Staff Accounting Bulletin No. 107, *Share-Based Payment*.

 

Prior to February 1,2006, the Company accounted for stock-based employee compensation (Note 5)using the intrinsic value method in APB Opinion No. 25, *Accounting for Stock Issued to Employees*,as permitted by SFAS No. 148, *Accountingfor Stock-Based Compensation — Transition and Disclosure, an amendment of FASBStatement No. 123*.

 

The adoption of SFAS No. 123(R) resultedin incremental stock-based compensation expense for the years ended January 31,2008 and 2007, causing income before and after income tax provision to decreaseby $124,829 ($0.02 per share, basic and diluted) and $278,462 ($0.03 per share,basic and diluted), respectively.  Inaddition, SFAS No. 123(R) requires the excess tax benefits from stockoption exercises, tax deductions in excess of the tax benefits recorded forcompensation cost recognized, to be classified as a financing activity.  There were no excess tax benefits recognizedin fiscal 2008 or 2007, because of the utilization of our net operating losscarryforward.

 

The estimated per shareweighted-average fair value of stock options granted during fiscal 2008 and2007, was $0.96 and $1.09, respectively. Stock options expected to be exercised currently and in 

 

42

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futureperiods are measured at estimated fair value with the expense associated withthese awards being recognized on a straight-line basis over the award’s vestingperiod.  We have estimated the fair valueof options granted at the date of grant using the Black-Scholes Multiple Optionpricing model with the following weighted-average assumptions in the fiscalyears ended January 31:

 
| ** **                           | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
| Risk-free interest rate              |       | 4.0      | %          | 4.0      | %          |
| Expected life of  options (in years) |       | 5.47     |       | 6.23     |       |
| Expected  volatility of stock price  |       | 82.43    | %          | 75.41    | %          |
| Expected  dividend yield             |       | 0.0      | %          | 0.0      | %          |

 

The expected life (estimatedperiod of time outstanding) of options granted was estimated using the expectedexercise behavior of employees.  Therisk-free rate used was based on the U.S. Treasury yield curve in effect at thetime of grant.  The expected volatilitywas based on historical volatility for the Company over the past two years postbankruptcy.  The expected dividend yieldis based on the historical information that the Company did not have dividendsin prior years.

 

The Company granted stockoptions for 30,800 and 40,000 shares of common stock to employees andnon-employee directors in fiscal 2008 and 2007, respectively.

 

**Legal Defense Costs**

 

Inaccordance with an interpretation of SFAS No. 5, *Accounting for Contingencies*, the Companyhas recorded allowances for probable losses equal to the lower end of theestimated probable loss range for the matters discussed in Note 6b andperiodically revises these estimates as known facts and circumstances change.The Company does not accrue for estimated future legal and related defensecosts, if any, to be incurred in connection with outstanding or threatenedlitigation and other disputed matters but rather, records such as period costswhen the services are rendered.

 

**Net Income (Loss) PerCommon Share**

 

Basic loss per common share is calculated based on the weighted averagenumber of shares of common stock outstanding during the reporting period.  Diluted net income per common share iscalculated giving effect to all potentially dilutive common shares, assumingsuch shares were outstanding during the reporting period.  Except for loss periods, net income percommon share considers potentially dilutive securities, which consist solely ofstock options of 3,200 and 112,400 at January 31, 2008 and 2007,respectively.  Diluted net loss percommon share is not presented for loss periods, since the effect of includingpotentially dilutive common shares would be anti-dilutive because of thelosses. The amounts of potentially anti-dilutive common shares that have beenexcluded from the calculation of basic net income (loss) per share were 551,283and 261,444 at January 31, 2008 and 2007, respectively.

 

Following is areconciliation of the numerators and denominators of the net income (loss) percommon share computations for the periods presented.

 

43

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| ** **                                | ** ** | **Net  Income (Loss)  (numerator)** | ** ** | **Weighted  Average  Common  Shares  (denominator)** | ** ** | **Per  Share  Amount** | ** ** |
|-------------------------------------------|------------|------------------------------------------|------------|------------------------------------------------------|------------|------------------------|------------|
| **2008**                                  |       |                                     |       |                                                 |       |                   |       |
| Net loss                                  |       | $                                        | (764,013   | )                                                    |       |                   |       |   |
| Less preferred  stock dividends (Note 4)  |       | (141,584                                 | )          |                                                 |       |                   |       |
| **Basic  net loss per common share:**     |       |                                     |       |                                                 |       |                   |       |
| Net loss  available to common shares      |       | (905,597                                 | )          | 8,128,369                                            |       | $                      | (0.11      | ) |
| Effect of  dilutive stock options         |       |                                     |       | *                                                    |       |                   |       |
| **Diluted  net loss per common share:**   |       |                                     |       |                                                 |       |                   |       |
| Net loss  available to common shares      |       | $                                        | *          |                                                 | *          |                   | $          | * |   |
|                                      |       |                                     |       |                                                 |       |                   |       |
| **2007**                                  |       |                                     |       |                                                 |       |                   |       |
| Net income                                |       | $                                        | 1,830,700  |                                                 |       |                   |       |   |
| Less preferred  stock dividends (Note 4)  |       | (141,620                                 | )          |                                                 |       |                   |       |
| **Basic  net income per common share:**   |       |                                     |       |                                                 |       |                   |       |
| Net income  available to common shares    |       | 1,689,080                                |       | 8,178,991                                            |       | $                      | 0.21       |   |
| Effect of  dilutive stock options         |       |                                     |       | 10,518                                               |       |                   |       |
| **Diluted  net income per common share:** |       |                                     |       |                                                 |       |                   |       |
| Net income  available to common shares    |       | $                                        | 1,689,080  |                                                 | 8,189,509  |                   | $          | 0.21 |   |

 

----

* Diluted income (loss) pershare is not applicable for loss periods.

 

**2.             Property and Equipment**

 

Prior to the year ended January 31,2006, the Company completed a sale and leaseback of a building with anunrelated party.  The Company realized again of $1,638,000 on the sale of the building. However, pursuant to SFAS No. 28, *Accountingfor Sales with Lease-backs*, only a portion of the gain, consistingof $327,600, was recognized in each of the years ended January 31, 2008and 2007.  The remainder of the gain hasbeen deferred and will be amortized against the lease payments over the initiallease term (ending in December 2009); the deferred gain balance is carriedon the consolidated balance sheet as “Other Long-Term Liabilities.”

 

Property and equipmentconsists of the following as of January 31, 2008 and 2007:

 
| ** **                                      | ** ** | **2008**  | ** ** | **2007**  | ** ** |
|-------------------------------------------------|------------|-----------|------------|-----------|------------|
| Land                                            |       | $         | 505,558    |      | $          | 505,558 |   |
| Building and  building improvements             |       | 823,540   |       | 813,824   |       |
| Leasehold  improvements                         |       | 195,477   |       | 147,207   |       |
| Equipment,  furniture and fixtures              |       | 7,298,981 |       | 6,122,131 |       |
|                                            |       | 8,823,556 |       | 7,588,720 |       |
| Less accumulated  depreciation and amortization |       | 4,040,105 |       | 3,127,055 |       |
|                                            |       | $         | 4,783,451  |      | $          | 4,461,665 |   |

 

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**3.**                                      Long-termDebt

 

Total long-term debtmaturities as of January 31, 2008 are as follows:

 
| ** **      | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **2014 and   Beyond** | ** ** | **Total** | ** ** |
|-----------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|---------------------------------|------------|-----------|------------|
| Sturgeon’s |       | $        | 291,753    |     | $          | 176,673  |       | $        | 67,489     |     | $          | 37,686                          |       | $         | 40,552     |   | $ | 1,252,875 |   | $ | 1,867,028 |   |
| Kiosks          |       | 208,979  |       | 133,600  |       | —   |       | —   |       | —   |       | —                          |       | 342,579   |       |
| Racusin         |       | 750,000  |       | 300,000  |       | 300,000  |       | 300,000  |       | 21,662   |       | —                          |       | 1,671,662 |       |
| Salerno         |       | —   |       | 94,148   |       | 286,625  |       | —   |       | —   |       | —                          |       | 380,773   |       |
| Other           |       | 29,429   |       | 28,775   |       | 6,570    |       | —   |       | —   |       | —                          |       | 64,774    |       |
| Total           |       | $        | 1,280,161  |     | $          | 733,196  |       | $        | 660,684    |     | $          | 337,686                         |       | $         | 62,214     |   | $ | 1,252,875 |   | $ | 4,326,816 |   |

 

**Sturgeon’s**

 

On March 1, 2006, AWIGacquired Sturgeon’s for $1,800,000, which originally included a loan of$1,500,000 from a bank, collateralized by a 1st deed of trust on the Sturgeon’sreal estate and a security interest in the personal property and fixtures ofSturgeon’s and a loan for $300,000 from Victor Salerno, AWI’s CEO, and hiswife, Terina Salerno, AWI’s General Counsel, which was repaid prior to January 31,2007.  Interest on the bank loan waspayable monthly at the Wall Street Journal-listed prime rate plus 2.00% and theprincipal was due in a single payment on March 1, 2008. On February 7,2008, the terms of this loan agreement were amended, extending the maturitydate to February 4, 2013, with the payments amortized over 20 years, andchanging the interest to a fixed rate of 8.0% per annum.

 

Subsequent to theacquisition, AWI entered into two casino equipment contracts payable withInternational Game Technology (“IGT”), of which terms are similar in nature,maturing in March and May of 2009, with fixed interest rates of10.50% and 10.75% per annum. In fiscal 2008, AWI entered into three additionalsimilar loans with IGT, one maturing in fiscal 2010 and the other two maturingin 2011, with a total balance outstanding of $442,028 at January 31, 2008.  See table below.

 

| Bank Loan, net  of a $75,000 principal reduction                       |   | $       | 1,425,000 |   |
|------------------------------------------------------------------------|--------|---------|-----------|--------|
| IGT equipment  loans, of which $264,684 represents the current portion |   | 442,028 |      |
| Total Sturgeon’s  long-term debt                                  |   | $       | 1,867,028 |   |

 

**Kiosks**

 

On August 8, 2006, theCompany entered into a sale/lease-back transaction with a finance companyinvolving 75 race/sports kiosks for a sale price of $600,000 (less a $2,500documentation fee and a 5% closing fee). Lease payments are $238,032 per year for 3 years, including interest at 11.675%.  At the conclusion of the lease term, theCompany may exercise a bargain re-purchase option for $1.  Accordingly, the Company has accounted forthis transaction as a capital lease.

 

**Racusin**

 

The total amount of Racusinlong-term debt was $1,671,662 outstanding at January 31, 2008, bearinginterest at a rate of 8.0% per annum.

 

**Salerno**

 

On November 8, 2007, the Board of Directors approved andauthorized Victor and Terina Salerno to borrow $400,000 for the benefit of theCompany pursuant to a line of credit under the terms of a 

 

45

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GuarantyAgreement with AWI.  The GuarantyAgreement provides for AWI to pay the Salernos interest at the rate of 10.0%per annum (payable monthly) on the outstanding portion of the loan (up to amaximum of $500,000) and to reimburse them for finance charges, fees, paymentsand other expenses they may incur under a personal revolving line of creditwith their bank. This current line of credit expires in November 2010. TheGuaranty Agreement expires on February 16, 2011. The personal line ofcredit is secured by the Salerno’s residence and provides for an interest rateof 0.5% below the prime rate published by the Wall Street Journal, adjustedannually. The outstanding balance of this line of credit was $380,773 at January 31,2008.  The Company paid two principal andinterest payments totaling, $25,814 in fiscal 2008 and will pay 12 interestonly payments of $3,839 per month in fiscal 2009, plus 21 principal and interestpayments of $12,907 each with a balloon payment due in November 2010 of $253,627.In February 2008, an additional $80,000 was also borrowed by the Companyagainst this line of credit. The payments described above take in considerationthe additional borrowing.

 

**Other**

 

Other consists primarily ofvarious automobile loans, most of which mature in 2010, with interest ratesranging from 11.5% to 12.0%.

 

**4.**                                      Series APreferred Stock

** **

The Series A PreferredStock is held by two persons.  Oneshareholder is an officer and director of the Company (the “Officer/DirectorShareholder”); owning a total of 8,900 shares (5,662 regular shares and 3,238redeemable shares).  The othershareholder is a director of the Company (the “Director Shareholder”); owning atotal of 5,262 shares (all regular shares).

 

Holders of the Series APreferred Stock are entitled to receive, upon declaration by the Board ofDirectors, cumulative cash dividends monthly at the annual rate of 10% pershare.  Interest at the rate of 10%,compounded annually, accrues on Series A Preferred Stock dividends thathave accumulated but have not been paid. The Series A Preferred Stock is not convertible but is callable, inwhole or (on a pro- rata basis) in part, at any time at the option of theCompany.  There were no shares calledduring the fiscal years ending January 31, 2008 or 2007.  The holders of Series A Preferred Stockare not entitled to vote  (on acumulative basis or otherwise) as a class or with AWI’s common stock (the “CommonStock”) upon any matters submitted to shareholders for a vote, except asmandated under Nevada law.  In the eventof any voluntary or involuntary liquidation, dissolution or winding up of theCompany, the holders of the Series A Preferred Stock shall be entitled toreceive, prior and in preference to any distribution of any assets or surplusfunds, an amount equal to $100 per share plus all accumulated and unpaiddividends thereon and any unpaid interest due.

 

Over the years, theOfficer/Director Shareholder has forgone his right to have shares redeemed inaccordance with the pro-rata provision applicable when shares were called, andaccordingly, the affected 3,238 shares have been reclassified as “Redeemable Series APreferred Stock” (in the liabilities section); these may be put to the Companyfor redemption at any time.

 

**5.**                                      CapitalStock and Stock Options

 

**Stock Repurchase**

 

In 1999, the Board ofDirectors approved a program to repurchase up to 250,000 shares of the Company’spublicly held Common Stock from time to time in the open market.  As of January 31, 2008, 61,100 shareshad been repurchased and are held by the Company as treasury stock, andaccordingly are 

 

46

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non-voting.  The timing and amount of future share repurchases,if any, will depend on various factors, including market conditions, availablealternative investments and the Company’s financial position.

 

**2001 Stock Option Plan**

 

In general, the Company may,upon approval from the Board of Directors, award options to any employee at anytime except that no employee may receive in excess of 250,000 options per yearand no more than 1,150,000 options in total may be granted under the 2001Employee Stock Option Plan (the “2001 Plan”). The 2001 Plan does not requireany specific vesting schedule and/or term; as such, the vesting and term is atthe discretion of the Board of Directors. Pursuant to the terms of the 2001Plan, the exercise price of options must be equal to or greater than the marketvalue of the Common Stock on the date of the grant. The 2001 Plan is scheduledto terminate on August 8, 2011, except as to the outstanding stock optionson that date.

 

The following tablessummarize the current status of the 2001 Plan:

 
| ** **                               | ** ** | **2008**                   | ** ** | **2007**                               | ** ** |
|------------------------------------------|------------|----------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | **NUMBER OF  SHARES** | ** ** | **WEIGHTED  AVERAGE  EXERCISE  PRICE** | ** ** | **NUMBER OF  SHARES** | ** ** | **WEIGHTED  AVERAGE  EXERCISE  PRICE** | ** ** |
| Outstanding at  Beginning of Fiscal Year |       | 737,749                    |       | $                                      | 1.81       |   | 887,998 |   | $ | 1.64 |   |
| Granted Price  > or = Market Price    |       | 30,000                     |       | 0.96                                   |       | 30,000 |   | 1.50 |   |
| Exercised                                |       | —                     |       | —                                 |       | (131,016 | ) | 0.62 |   |
| Cancelled                                |       | (39,250                    | )          | 2.00                                   |       | (49,233 | ) | 1.79 |   |
| Outstanding at  End of Fiscal Year       |       | 728,499                    |       | 1.76                                   |       | 737,749 |   | 1.81 |   |
| Exercisable at  End of Fiscal Year       |       | 468,499                    |       |                                   |       | 362,000 |   |   |   |
|                                          |            |                            |            |                                        |            |  |  |  |  |  |  |

 

Outstandingand Exercisable by Price Range as of January 31, 2008:

 
| ** **           | ** ** | **OPTIONS OUTSTANDING** | ** ** | **OPTIONS EXERCISABLE** | ** ** |
|----------------------|------------|------------------------------|------------|------------------------------|------------|
| **PRICE RANGE** | ** ** | **NUMBER  OUTSTANDING**      | ** ** | **REMAINING  LIFE**          | ** ** | **WEIGHTED  AVERAGE  EXERCISE  PRICE** | ** ** | **NUMBER  EXERCISABLE** | ** ** | **WEIGHTED  AVERAGE  EXERCISE  PRICE** | ** ** |
| $                    | 0.96       |                         | 30,000     |                         | 9.51       |   | $ | 0.96 |   | — |   | $ | 0.96 |   |
| $                    | 1.25       |                         | 100,000    |                         | 5.87       |   | 1.25 |   | 40,000 |   | 1.25 |   |
| $                    | 1.50       |                         | 30,000     |                         | 4.34       |   | 1.50 |   | 10,000 |   | 1.50 |   |
| $                    | 1.80       |                         | 250,000    |                         | 7.36       |   | 1.80 |   | 100,000 |   | 1.80 |   |
| $                    | 2.00       |                         | 318,499    |                         | 3.46       |   | 2.00 |   | 318,499 |   | 2.00 |   |
|                 |       | 728,499                      |       | 5.41                         |       | 1.76 |   | 468,499 |   | 1.86 |   |
| Available For  Grant |       | 189,567                      |       |                         |       |   |   |   |   |   |   |
|                      |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |

 

**VestingSchedule**

 
| Vested at  January 31, 2008                        |   | 468,499 |   |
|---------------------------------------------------------|--------|---------|--------|
| Vesting, fiscal  year ending January 31, 2009      |   | 90,000  |   |
| Vesting, fiscal  year ending January 31, 2010      |   | 90,000  |   |
| Vesting, fiscal  year ending January 31, 2011      |   | 80,000  |   |
| Vesting, fiscal  year ending January 31, 2012      |   | —  |   |
| Number of  Options Outstanding at January 31, 2008 |   | 728,499 |   |

 

47

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**Directors Stock OptionPlan**

 

In 1996, the Company adoptedthe Directors Stock Option Plan (the “Directors Plan”). The Directors Plan wasextended in August 2006 to terminate on April 30, 2011. Beginning infiscal year 2002, each non-employee director of the Company has been awardedoptions for 400 shares of stock on the last day of each fiscal year, in lieu of100 shares of stock per committee on which such non-employee director serves.In October 2007, the Board of Directors ratified this practice as anamendment to the Directors Plan and such prior grants and amendments to theDirectors Plan were approved by the stockholders at the last AnnualStockholders’ Meeting held in December 2007. No more than 40,000 optionsmay be granted pursuant to the Directors Plan, which will be exercisable on theanniversary of the date of grant and will expire no later than 10 years fromthe grant date. Pursuant to the terms of the Directors Plan, the exercise priceof options must be equal to the market value of the Company’s common stock onthe date of the grant.

 

The following tablessummarize the current status of the Directors Plan:

 
| ** **                            | ** ** | **2008**                   | ** ** | **2007**                               | ** ** |
|---------------------------------------|------------|----------------------------|------------|----------------------------------------|------------|
| ** **                            | ** ** | **NUMBER OF  SHARES** | ** ** | **WEIGHTED  AVERAGE  EXERCISE  PRICE** | ** ** | **NUMBER OF   SHARES** | ** ** | **WEIGHTED  AVERAGE  EXERCISE  PRICE** | ** ** |
| Outstanding at  Beginning of Year     |       | 20,000                     |       | $                                      | 1.30       |   | 10,000 |   | $ | 1.59 |   |
| Granted Price  > or = Market Price |       | 800                        |       | 0.79                                   |       | 10,000 |   | 1.00 |   |
| Outstanding at  End of Year           |       | 20,800                     |       | 1.28                                   |       | 20,000 |   | 1.30 |   |
| Exercisable at  End of Year           |       | 20,000                     |       |                                   |       | 6,200 |   |   |   |
|                                       |            |                            |            |                                        |            |  |  |  |  |  |  |

 

Outstandingand Exercisable by Price Range as of January 31, 2008:

 
| ** **             | ** ** | **OPTIONS OUTSTANDING** | ** ** | **OPTIONS EXERCISABLE** | ** ** |
|------------------------|------------|------------------------------|------------|------------------------------|------------|
| **PRICE RANGE**   | ** ** | **NUMBER  OUTSTANDING**      | ** ** | **REMAINING  LIFE**          | ** ** | **WEIGHTED  AVERAGE  EXERCISE  PRICE** | ** ** | **NUMBER  EXERCISABLE** | ** ** | **WEIGHTED  AVERAGE  EXERCISE  PRICE** | ** ** |
| $                      | 0.12       |                         | 400        |                         | 5.00       |   | $ | 0.12 |   | 400 |   | $ | 0.12 |   |
| $                      | 0.15       |                         | 800        |                         | 6.00       |   | 0.15 |   | 800 |   | 0.15 |   |
| $                      | 0.35       |                         | 400        |                         | 4.00       |   | 0.35 |   | 400 |   | 0.35 |   |
| $                      | 0.55       |                         | 800        |                         | 7.00       |   | 0.55 |   | 800 |   | 0.55 |   |
| $                      | 0.79       |                         | 800        |                         | 1.00       |   | 0.79 |   | — |   | 0.79 |   |
| $                      | 1.00       |                         | 10,000     |                         | 8.52       |   | 1.00 |   | 10,000 |   | 1.00 |   |
| $                      | 2.00       |                         | 7,600      |                         | 7.58       |   | 2.00 |   | 7,600 |   | 2.00 |   |
| January 31,  2008 |       | 20,800                       |       | 9.16                         |       | 1.30 |   | 20,000 |   | 1.33 |   |
| Available For  Grant   |       | 19,200                       |       |                         |       |   |   |   |   |   |   |
|                        |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |

 

**VestingSchedule**

 
| Vested at  January 31, 2008                        |   | 20,000 |   |
|---------------------------------------------------------|--------|--------|--------|
| Vesting, fiscal  year ending January 31, 2009      |   | 800    |   |
| Vesting, fiscal  year ending January 31, 2010      |   | — |   |
| Number of  Options Outstanding at January 31, 2008 |   | 20,800 |   |

 

48

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**6.             Commitments and Contingencies**

 

**a. Gaming ReserveRequirement**

 

Pursuant to NGC Regulation22.040, Leroy’s is required to maintain a reserve (cash, surety bonds,irrevocable standby letter of credit, etc.) in order to cover any outstandingwagering liability such as unpaid winning tickets, future tickets and telephoneaccount deposits.  Leroy’s has met thisrequirement by the purchase of a surety bond.  Prior to September 1,2006, the amount in this reserve was $2.4 million.  Due to increased wagering activity, theCompany increased this reserve to $3.0 million as of September 1, 2006 andthen to $3.4 million on November 16, 2007.   Due to lower wagering activity subsequent tothe completion of the current year’s football season, on February 22,2008, Leroy’s reduced its surety bond from $3.4 million to $2.8 million. The surety bond is secured by a $1.2 million irrevocable letter of credit (“LOC”). The LOC is secured by a $1.2 million certificate of deposit held by a bank.

 

An inability to maintain orincrease the reserve as necessary would have an adverse impact upon the Companyincluding, but not limited to, requiring a significant reduction in the numberof locations operated by Leroy’s and/or requiring a significant reduction inthe handle (total amount wagered).

 

**b. Litigation Judgmentsand Settlements**

 

Currently, the Company isnot a party in any litigation and has no knowledge of any pending material legalproceedings in any court or agency of government or governmental authority,except as noted below.

 

**Racusin**

 

On October 6, 2006, the9th Circuit reversed the BAP, which previously (April 14, 2005) ruled inour favor that the bankruptcy claim of Racusin was subject to subordinationunder Section 510(b) of the U.S. Bankruptcy Code (the “Code”).  In reversing the BAP’s ruling, the 9thCircuit ruled that Racusin’s claim was not subject to subordination andremanded the case for further proceedings.

 

On October 20, 2006, wepetitioned the 9th Circuit for a panel rehearing or, in the alternative, arehearing *en banc*.

 

On June 28, 2007, inthe case titled Michael Racusin, d/b/a M. Racusin & Company v.American Wagering, Inc. et al., Case No. 05-15969, the 9th Circuitissued a decision that reversed the ruling in our favor by the BAP on the issueof whether a July 8, 2003 judgment (the “Judgment”) by the United StatesDistrict Court for the District of Nevada in favor of Racusin, in a breach ofcontract action against us, was subject to subordination under Section 510(b) ofthe Code pursuant to our prior plan of reorganization under Chapter 11 of theCode (the “Plan”). In all material respects, the 9th Circuit’s June 28,2007 decision has the same effect as its October 6, 2006 decision in whichit ruled that the Judgment was not subject to subordination (as to which we hadfiled a petition for rehearing), but the 9th Circuit withdrew the April 14,2005 decision and replaced it with the June 28, 2007 decision. The 9thCircuit also ruled that no further petitions for a rehearing may be filed.

 

As a result of the 9thCircuit’s reversal of the BAP’s ruling, and in accordance with our September 3,2004 Settlement Agreement with Racusin described and included as Exhibit 99.1in our Form 8-K filed on September 7, 2004 (the “Settlement Agreement”),the 9th Circuit issued its original decision reversing the BAP’s ruling duringour fiscal year ended January 31, 2007.

 

49

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A hearing was scheduled for September 12,2007 in order to determine the manner and timing of the payments, however, wereceived notice on September 7, 2007 that the Bankruptcy Court continuedthe matter until November 2, 2007. On November 2, 2007, the Bankruptcy Court heard an argument todetermine whether the Company could withdraw its 250,000 shares of common stockand whether it could begin depositing funds pursuant to the SettlementAgreement attached to the Company’s motion (the “Revised Payment Schedule”).

 

The Bankruptcy Court orderedin pertinent part that pursuant to the Order Approving the Plaintiff’s Motionto Deposit Shares of Stock with the Clerk of the Court Pursuant to Fed. R.Bankr. P. 7067 (“Interpleader Order”) previously entered into by the BankruptcyCourt on August 2, 2005, (i) we were to deposit with the BankruptcyCourt amounts provided for in Revised Payment Schedule commencing November 6,2007, less sums distributed to any lienholders of the Racusin Claim, andcontinuing each month; and (ii) the clerk of the court was ordered torelease and return our previously deposited 250,000 shares of common stockdeposited pursuant to the Interpleader Order.

 

The Interpleader Order didnot preclude either party from requesting the court to modify the RevisedPayment Schedule in the future.  TheCompany filed its Corrected Amortization Schedule on March 17, 2008 (“CorrectedAmortization Schedule”).  Interest wasincorrectly calculated in the Company’s Revised Payment Schedule. Federal Rule ofAppellate Procedure 37(b) provides in pertinent part that “[i]f the courtmodifies or reverses a judgment with a direction that a monetary judgment beentered in the district court, the mandate must contain instructions about theallowance of interest.”  The 9th Circuit’sJune 28, 2007 decision did not contain instructions about the allowance ofinterest, which was incorporated in the Revised Payment Schedule.  Hence, the Company began depositing monieswith the Bankruptcy Court according to the Corrected Amortization Schedulecommencing March 1, 2008, and will continue to do so unless or untildirected otherwise by the Bankruptcy Court. If a complaint is filed by Racusin,there can be no assurance that the Bankruptcy Court will approve our CorrectedAmortization Schedule.

 

The 250,000 shares werereturned to the Company and we began payment on November 6, 2007 tosatisfy the decision on November 2, 2007. For fiscal year ended January 31, 2008, the Company has paid$1,124,984 to the U.S. Bankruptcy Court and other lienholders as directed.Payments from February 1 through March 3, 2008 totaled $325,462. At January 31,2008, approximately $1,671,662 remained outstanding to Racusin.

 

**c. Operating Leases**

** **

The Company has operatinglease commitments for the majority of its race and sports book locations andfor leased office equipment.  Futureminimum lease payments under non-cancelable operating leases are as follows:

 

50

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** **
| ** **                      | ** ** | **2009** | ** ** | **2010** | ** ** | **2011**  | ** ** | **2012** | ** ** | **2013** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|-----------|------------|----------|------------|----------|------------|
| Sports book locations           |       | $        | 962,350    |     | $          | 879,300   |       | $        | 475,550    |     | $          | 418,000 |   | $ | 145,900 |   |
| Office equipment  and  vehicles |       | 39,996   |       | 34,341   |       | 34,341    |       | 26,981   |       | 9,269    |       |
| Building rent                   |       | 378,225  |       | 378,224  |       | —    |       | —   |       | —   |       |
| Total                           |       | $        | 1,380,571  |     | $          | 1,291,865 |       | $        | 509,891    |     | $          | 444,981 |   | $ | 155,169 |   |

 

Rent expense for alloperating leases was $1,740,964 and $631,500 during the fiscal years ended January 31,2008 and 2007, respectively.

 

**d. Long-Term EmploymentCommitments**

** **

The Company has employmentagreements with the following executive officers:

 

***Victor J. Salerno:***  Mr. Salerno’s employment agreement waseffective July 1, 2002 with automatic renewals for successive five-yearterms as of January 31, 2008.  Mr. Salerno’scurrent annual base salary is $240,000 and he is entitled to an annualperformance bonus equal to 5% of our pre-tax earnings (as defined in hisagreement) for the prior fiscal year, employer contributions to aprofit-sharing or retirement plan of not less than 4% of his base salary,health and life insurance coverage, and use of an automobile that we providefor him. Mr. Salerno’s agreement also entitles him to certain benefits ifhis employment terminates within 24 months after a change in control ofAWI. 

 

***Bruce Dewing:***  Mr. Dewing’s employment agreement waseffective on July 1, 2005 with automatic renewals for successivethree-year terms on January 31, 2008. Mr. Dewing’s current annualbase salary is $180,000, and he is entitled to a performance bonus each yearequal to 2% of our pre-tax earnings (as defined in his agreement) for the priorfiscal year, employer contributions to a profit-sharing or retirement plan ofnot less than 4% of his base salary, health insurance coverage for him and hiswife, use of an automobile that we provide for him, and options to purchase 250,000shares of our common stock under a five-year vesting schedule. Mr. Dewing’sagreement also entitles him to certain benefits if his employment terminateswithin 24 months after a change in control of AWI. 

 

***Melody Sullivan: ***Ms. Sullivan’semployment agreement was effective on August 6, 2007, expiring on August 6,2009. Ms. Sullivan’s current base salary is $180,000 per year with anannual performance bonus of 1% of Consolidated Income Before Income Taxes. Ms. Sullivanalso received non-qualified stock options of 30,000 shares upon hire withone-third vesting on each anniversary of her hiring date, at an exercise priceequal to the closing market price of the Company’s stock on her hire date.Along with other standard employee benefits, the Company will pay one-timeonly, the employer paid matching amount of 4% for her 401(k) contributionsfor the first year, since she is not otherwise eligible to participate for oneyear. Ms. Sullivan’s agreement also entitles her to certain benefits ifher employment terminates without cause.

 

The following tablesummarizes our long-term employment commitments through the existing terms ofthe agreements.  This table considersonly base salary and retirement plan contributions; it does not considerautomatic renewals, annual increases in base salary, value of health and/orlife insurance, value of automobile allowance or performance bonus payments assuch factors are variable from year-to-year.

 

51

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| **Fiscal Year Ending January 31,** | ** ** | **Base Salary** | ** ** | **Retirement  Plan** | ** ** | **Total** | ** ** |
|--------------------------------------------------------|------------|----------------------|------------|----------------------|------------|-----------|------------|
| 2008                                                   |       | $                    | 503,077    |                 | $          | 16,434    |       | $ | 519,511 |   |
| 2009                                                   |       | $                    | 600,000    |                 | $          | 24,000    |       | $ | 624,000 |   |

** **

**7.**             RelatedParty Transactions

** **

The Company has engaged inthe following related-party transactions during the years ended January 31,2008 and 2007:

 

On November 8, 2007, the Board of Directors approved andauthorized Victor and Terina Salerno to borrow $400,000 for the benefit of theCompany pursuant to a line of credit under the terms of a Guaranty Agreementwith AWI. The Guaranty Agreement provides for AWI to pay the Salernos interestat the rate of 10.0% per annum (payable monthly) on the outstanding portion ofthe loan (up to a maximum of $500,000) and to reimburse them for financecharges, fees, payments and other expenses they may incur under a personalrevolving line of credit with their bank. Victor Salerno is the President andChief Executive Officer of AWI. Terina Salerno is the spouse of Victor Salernoas well as General Counsel of AWI.

 

The current line of credit for up to a maximum amount of $500,000 underthe Guaranty Agreement expires in November 2010. The Guaranty Agreementexpires on February 16, 2011. The personal line of credit is secured bythe Salerno’s residence and provides for an interest rate of 0.5% below theprime rate published by the Wall Street Journal, adjusted annually. Theoutstanding balance of this line of credit was $380,773 at January 31,2008.  The Company paid two principal andinterest payments totaling $25,814 in fiscal 2008 and will pay 12 interest onlypayments of $3,839 per month in fiscal 2009, plus 21 principal and interestpayments of $12,907 each with a balloon payment due in November 2010 of $253,627.In February 2008, an additional $80,000 was also borrowed by the Companyagainst this line of credit. The payments described above take the additionalborrowing into consideration.

 

Related party interest expense for fiscal 2008 and 2007 was $6,587 and$0, respectively.

 

See Note 11 for details ofrelated party transaction relative to financing the acquisition of Sturgeon’sin March 2006.

 

**8.**             IncomeTaxes

** **

The tax effect ofsignificant temporary differences representing deferred tax assets andliabilities for the Company as of January 31, 2008 and 2007 is as follows:

 
| ** **                                    | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|-----------------------------------------------|------------|------------|------------|------------|------------|
| Deferred tax assets:                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net operating  loss carryforward              |       | $          | 1,975,413  |       | $          | 1,601,889 |   |
| Depreciation and  amortization                |       | 95,815     |       | 88,797     |       |
| Deferred gain on  sale and leaseback of asset |       | 209,294    |       | 320,678    |       |
| Accrued  liabilities                          |       | 350,819    |       | 353,575    |       |
| Customer deposits                             |       | —     |       | 53,958     |       |
| Other                                         |       | 39,228     |       | 29,205     |       |
|                                          |       | 2,670,569  |       | 2,448,102  |       |
| Valuation  allowance                          |       | (2,122,823 | )          | (1,891,407 | )          |
|                                          |       | 547,746    |       | 556,695    |       |
| Deferred tax  liabilities:                    |       |       |       |       |       |
| Advance payments                              |       | (107,265   | )          | (116,214   | )          |
| Net deferred tax  assets                      |       | $          | 440,481    |       | $          | 440,481 |   |

 

52

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The difference between thenormal federal statutory tax rate of 34.00% applied to income from continuingoperations before income taxes and the Company’s effective tax rate is:

 
| ** **                                              | ** ** | **2008** | ** ** | **2007**   | ** ** |
|---------------------------------------------------------|------------|----------|------------|------------|------------|
| Income tax  expense (benefit) at federal statutory rate |       | $        | (259,764   | )          | $          | 622,438 |   |
| Non-deductible  expenses                                |       | 51,460   |       | 92,321     |       |
| CSS dissolution                                         |       | —   |       | (1,106,283 | )          |
| Increase in Net  Operating Loss carryforwards           |       | 373,524  |       | 593,603    |       |
| Other temporary  differences                            |       | (396,636 | )          | (483,053   | )          |
| Increase in  deferred tax valuation allowances          |       | 231,416  |       | 280,974    |       |
|                                                    |       | $        | —     |       | $          | — |   |

 

At January 31, 2008,the Company had federal tax net operating loss (“NOL”) carryforwards availableto potentially reduce future tax obligations in the aggregate amount of approximately$5.8 million; of which approximately $1.9 million is expected to expire in2019.  In assessing the realizability ofdeferred tax assets, the Company considers whether it is more likely than notthat some portion or all of the deferred tax assets will not be realized.  The ultimate realization of deferred taxassets is dependent upon the generation of future taxable income during theperiods in which those temporary differences become deductible.  Management believes that the Company will beprofitable for at least the short-term future and that it is therefore morelikely than not that our net deferred tax asset of $440,481, which resultedprimarily from NOLs, will be fully realized. The determination of profitability in the future is partially based onthe market penetration of our kiosks and potential systems sales;implementation of cost reductions; our sports betting volumes and otherfactors.

 

Effective February 1,2007, we adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48,*Accounting for Uncertainty in Income Taxes, aninterpretation of FASB Statement No. 109,**Accountingfor Income Taxes*(“FIN 48”). Accordingly, we have reviewed our previously filed tax returns andparticularly our net loss operating carryforwards available to reduce currentand future tax obligations and assessed the valuation allowance we establishedagainst our deferred tax assets for the possible effect of FIN 48 and toestimate the extent to which it remains needed as of January 31, 2008. Weadditionally believe that we will be sufficiently profitable for the short-termfuture, and it is therefore more likely than not that $440,481 of our netdeferred tax asset, which resulted primarily from net loss carryforwards, willbe realized.  Based on our evaluation,management believes that adopting FIN 48 did not have a material effect on ouropening deficit at the time of adoption, our net operating loss carryforwardsor the related deferred tax assets or the related valuation allowance.

 

**9.**             **Business Segments**

 

The Company reports itsresults of operations through three operating segments: Wagering, Hotel/Casino,and Systems.

 

53

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** **

**Wagering Segment**

** **

The following tableindicates the primary components of revenue and operating costs resulting inthis segment’s operating income (loss).

 
| ** **                           | ** ** | **Year Ended January 31,** | ** **     |
|--------------------------------------|------------|-------------------------------------------|----------------|
| ** **                           | ** ** | **2008**                                  | ** **     | **2007** | ** ** |
| **Revenue**                          | ** ** | **$**                                     | **12,085,243** | ** ** | **$** | **9,885,568** | ** ** |
| Direct Costs                         |       | 10,184,125                                |           | 6,978,652 |   |
| Selling, General  and Administrative |       | 1,638,263                                 |           | 1,233,791 |   |
| Depreciation and  Amortization       |       | 274,044                                   |           | 196,185 |   |
|                                 |       | 12,096,432                                |           | 8,408,628 |   |
| **Operating  Income (Loss)**         |       | **$**                                     | **(11,189**    | **)** | **$** | **1,476,940** | ** ** |

 

**Hotel/Casino Segment**

** **

The following tableindicates the primary components of revenue and operating costs resulting inthis segment’s operating income (loss).

 
| ** **                                                     | ** ** | **Year Ended January 31,** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                     | ** ** | **2008**                                  | ** ** | **2007** | ** ** |
| **Revenue:**                                                   | ** ** | ** **                                | ** ** | ** ** | ** ** |
| Casino                                                         |       | $                                         | 1,383,654  |   | $ | 1,447,918 |   |
| Hotel                                                          |       | 670,980                                   |       | 550,391 |   |
| Food/Beverage                                                  |       | 1,068,699                                 |       | 966,927 |   |
| Less: Casino  Cash Incentives and Other Promotional Allowances |       | (140,723                                  | )          | (120,910 | ) |
|                                                           |       | 2,982,610                                 |       | 2,844,326 |   |
|                                                                |            |                                           |            |  |  |  |  |

 
| ** **                           | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|
| **Direct Costs and Expenses:**       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Casino                               |       | 667,300    |       | 660,643    |       |
| Hotel                                |       | 232,965    |       | 221,226    |       |
| Food/Beverage                        |       | 986,791    |       | 1,009,135  |       |
| Unallocated                          |       | 437,947    |       | 679,891    |       |
|                                 |       | 2,325,003  |       | 2,570,895  |       |
| Selling, General  and Administrative |       | 374,031    |       | 352,661    |       |
| Depreciation and  Amortization       |       | 254,858    |       | 184,768    |       |
|                                 |       | 2,953,892  |       | 3,108,324  |       |
| **Operating  Income (Loss)**         | ** ** | **$**      | **28,718** | ** ** | **$**      | **(263,998** | **)** |
|                                      |            |            |            |            |            |  |  |

 

**Systems Segment**

** **

The following tableindicates the primary components of revenue and operating costs resulting inthis segment’s operating income (loss).

 
| ** **                           | ** ** | **Year Ended January 31,** | ** **    |
|--------------------------------------|------------|-------------------------------------------|---------------|
| ** **                           | ** ** | **2008**                                  | ** **    | **2007** | ** ** |
| **Revenue**                          | ** ** | **$**                                     | **3,664,502** | ** ** | **$** | **6,640,499** | ** ** |
| Direct Costs                         |       | 1,389,255                                 |          | 2,251,270 |   |
| Research and  Development            |       | 952,163                                   |          | 1,131,265 |   |
| Selling, General  and Administrative |       | 1,613,082                                 |          | 1,913,171 |   |
| Depreciation and  Amortization       |       | 408,456                                   |          | 356,271 |   |
|                                      |            |                                           |               |  |  |  |  |

 

54

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|                         |       | **Year Ended January 31,** |         |
|------------------------------|------------|-------------------------------------------|--------------|
|                         |       | **2008**                                  |         | **2007** |   |
|                         |       | 4,362,956                                 |         | 5,651,977 |   |
| **Operating  Income (Loss)** | ** ** | **$**                                     | **(698,454** | **)** | **$** | **988,522** | ** ** |
|                              |            |                                           |              |  |  |  |  |

 

**Operating Income (Loss)to Net Income (Loss)**

** **

The following tablereconciles the operating income (loss) from each segment to income beforetaxes.

 
| ** **                   | ** ** | **Year Ended January 31,** | ** **   |
|------------------------------|------------|-------------------------------------------|--------------|
| ** **                   | ** ** | **2008**                                  | ** **   | **2007** | ** ** |
| **Operating  Income (Loss)** |       |                                      |         |   |   |
| Wagering                     |       | $                                         | (11,189      | ) | $ | 1,476,940 |   |
| Hotel/Casino                 |       | 28,718                                    |         | (263,998 | ) |
| Systems                      |       | (698,454                                  | )            | 988,522 |   |
|                         |       | (680,925                                  | )            | 2,201,464 |   |
| **Other  Income (Expense)**  |       |                                      |         |   |   |
| Interest Income              |       | 101,135                                   |         | 103,605 |   |
| Interest Expense             |       | (280,276                                  | )            | (203,313 | ) |
| Litigation  Expense          |       | (67,213                                   | )            | (386,698 | ) |
| Other                        |       | 163,266                                   |         | 115,642 |   |
|                         |       | (83,088                                   | )            | (370,764 | ) |
| **Net  Income (Loss)**       | ** ** | **$**                                     | **(764,013** | **)** | **$** | **1,830,700** | ** ** |

 

55

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** **

**Other Information**

** **

Other information regardingthe Wagering Segment, Hotel/Casino Segment, and Systems Segment and certainother unallocated items are set forth below.

 
| ** **                     | ** ** | **2008**  | ** ** | **2007**  | ** ** |
|--------------------------------|------------|-----------|------------|-----------|------------|
| **Capital  Expenditures**      |       |      |       |      |       |
| Wagering                       |       | $         | 425,008    |      | $          | 438,223 |   |
| Hotel/Casino                   |       | 372,503   |       | 2,402,840 |       |
| Systems                        |       | 420,206   |       | 356,515   |       |
| Unallocated                    |       | 56,268    |       | 20,888    |       |
|                           |       | $         | 1,273,985  |      | $          | 3,218,466 |   |
| **Identifiable  Property (1)** |       |      |       |      |       |
| Wagering                       |       | $         | 1,077,100  |      | $          | 904,920 |   |
| Hotel/Casino                   |       | 2,275,062 |       | 2,165,679 |       |
| Systems                        |       | 1,824,206 |       | 2,359,182 |       |
|                           |       | $         | 5,176,368  |      | $          | 5,429,781 |   |

 

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(1)   Includes property and equipment, shown net ofaccumulated depreciation and amortization; goodwill; intangibles; and otherassets. Goodwill, in the amount of $103,725, for the fiscal years ended January 31,2008 and 2007, is a component of the Systems Segment.

 

**10.**          SupplementaryCash Flow Information

** **

The reconciliation of netincome to net cash provided by operating activities is as follows:

 
| ** **                                                      | ** ** | **2008**   | ** **   | **2007**   | ** ** |
|-----------------------------------------------------------------|------------|------------|--------------|------------|------------|
| **Net  income (loss)**                                          | ** ** | **$**      | **(764,013** | **)**      | **$**      | **1,830,700** | ** ** |
| Depreciation and  amortization of property and equipment        |       | 937,358    |         | 737,224    |       |
| Amortization of  Loan Fees                                      |       | 31,746     |         | —     |       |
| Deferred gain on  sale/leaseback realized                       |       | (327,600   | )            | (327,600   | )          |
| SFAS  123(R) stock based compensation                      |       | 124,829    |         | 278,462    |       |
| Non-cash bad  debt/provision expense                            |       | 2,835      |         | —     |       |
| Non-cash  litigation judgments                                  |       | —     |         | 302,374    |       |
| **Decrease  (increase) in operating assets:**                   |       |       |         |       |       |
| Accounts  receivable                                            |       | 371,875    |         | (385,705   | )          |
| Inventories                                                     |       | (86,309    | )            | 206,513    |       |
| Prepaid expenses                                                |       | 76,694     |         | (166,054   | )          |
| Other                                                           |       | 73,058     |         | (569,640   | )          |
| **Increase  (decrease) in operating liabilities:**              |       |       |         |       |       |
| Accounts payable                                                |       | 266,818    |         | 304,877    |       |
| Accrued expenses                                                |       | (331,624   | )            | 453,737    |       |
| Principal  payments on Racusin litigation judgment              |       | (1,010,711 | )            | —     |       |
| Unpaid winning  tickets                                         |       | 203,009    |         | 459,299    |       |
| Customer  deposits and other                                    |       | 669,982    |         | (85,385    | )          |
| **Net  cash provided by operating activities**                  | ** ** | **$**      | **237,947**  | ** ** | **$**      | **3,038,802** | ** ** |
| Supplemental  disclosure of cash flow information:              | ** ** | ** ** | ** **   | ** ** | ** ** |
| Cash paid for  interest                                         | ** ** | $          | 205,843      |       | $          | 203,313 |   |
| Non-cash  investing and financing activities:                   | ** ** |       |         |       |       |
| Property and  equipment acquired with bank and vendor financing | ** ** | $          | 259,629      |       | $          | 1,916,256 |   |

 

**11.**          Acquisitionof Sturgeon’s

** **

On March 1, 2006, AWIGacquired Sturgeon’s for $1,800,000.  Thepurposes of the acquisition of Sturgeon’s were to diversify and strengthen ourcash flows and broaden our revenue base by operating 

 

56

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this small casino.  In connection with the acquisition, AWIGincurred original indebtedness of $1,800,000, which included a loan of$1,500,000 from a bank, collateralized by a 1st deed of trust on theSturgeon’s real estate and a security interest in the personal property andfixtures of Sturgeon’s. Interest on the bank loan was payable monthly at theWall Street Journal-listed prime rate plus 2.00% and the principal was due in asingle payment on March 1, 2008. An additional loan of $300,000 was madeto the Company by Victor and Terina Salerno, but was repaid prior to January 31,2007.

 

On February 7, 2008,the terms of this loan agreement were amended, extending the maturity date to February 4,2013 and changing the interest to a fixed rate of 8.0% per annum. Additionally,principal and interest are based on a 20 year amortization.

 

In accordance with SFAS No. 141,*Business Combinations*, theCompany performed a valuation to determine, among other things, the cost of theacquired entity and to assign that cost to the assets acquired on the basis oftheir fair values.  Based upon thisvaluation process, the Company determined an overall asset value for Sturgeon’sof $2,091,570, which amount exceeded the purchase price of $1,800,000 andresulted in tentative negative goodwill in the amount of $291,570.  Pursuant to paragraphs 44 and 45 of SFAS No. 141,the negative goodwill was apportioned to all of the acquired assets on a pro ratabasis, subject to the applicable exceptions listed in paragraph 44.

 
| Land                  |   | $       | 505,558   |   |
|-----------------------|--------|---------|-----------|--------|
| Buildings             |   | 795,618 |      |
| Other                 |   | 498,824 |      |
| Total Purchase  Price |   | $       | 1,800,000 |   |

 

The following unaudited proforma consolidated financial information has been prepared assuming that theacquisition of Sturgeon’s had occurred on February 1, 2006, the beginningof fiscal year 2007.

 
| Revenues                    |   | $          | 19,554,416 |   |
|-----------------------------|--------|------------|------------|--------|
| Operating  Expenses         |   | 17,428,299 |       |
| Operating Income            |   | 2,126,117  |       |
| Other Expense               |   | (356,432   | )          |
| Income Before  Income Taxes |   | 1,769,685  |       |
| Income Tax  Provision       |   | —     |       |
| Net Income                  |   | $          | 1,769,685  |   |
| Basic Income Per  Share     |   | $          | 0.21       |   |
| Diluted Income  Per Share   |   | $          | 0.21       |   |

 

These unaudited pro formaresults are presented for comparative purposes only.  The pro forma results are not necessarilyindicative of what the actual results would have been had the acquisition beencompleted as of the beginning of the fiscal year, or of future results.

 

**12.**          FinancialInstruments

** **

The Company’s financialinstruments consist of cash and cash equivalents, restricted cash, accounts andnotes receivable, accounts payable, accrued expenses, unpaid winning tickets,advance deposits, and long-term debt. The Company’s cash equivalents are diversified among security types andissuers, and approximate fair value.  Thefair values of other financial instruments that are short-term or that havelittle or no risk are considered to have a fair value equal to book value.  Assets and liabilities

 

57

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thatare included in this category are cash, accounts receivable, accounts payable,accrued expenses, unpaid winning tickets and advance deposits.  The Company believes the fair values of notesreceivable and long-term liabilities are also not materially different fromtheir carrying values due to the instruments’ interest rates approximatingmarket rates for similar borrowings at January 31, 2008 and 2007.

 

**13.**         SubsequentEvent

** **

On April 21, 2008, a bank approved a revolving credit note for $500,000for the Company.  The purpose of thiscredit note is to serve as overdraft protection on our checking accounts.  Any negative balances on our checkingaccounts will sweep into this overdraft protection credit note and then will beautomatically repaid when the funds in the checking accounts return to apositive balance. The maturity date of this credit note is December 31, 2008,but may be renewed at that time. The Company paid an origination fee to thebank of $5,000. The unpaid principal balance will bear interest at an annualrate equal to the prime rate announced by the bank. The interest rate will beadjusted each time that the prime rate changes. Interest is payable monthlycommencing on May 1, 2008.  On April 24,2008, the Company had drawn down approximately $155,000 under the revolvingcredit note.

 

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# **Item 9.**                                   Changesin and Disagreements With Accountants on Accounting and Financial Disclosure

# ** **

None.

 

# **Item 9A.**                          Controlsand Procedures

# ** **

**Evaluationof Disclosure Controls and Procedures**

** **

Our management, with the participation of our ChiefExecutive Officer and Chief Financial Officer, evaluated the effectiveness ofour disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act) as of January 31, 2008. We determined thatour disclosure controls and procedures, specifically with respect to a lateForm 8-K filed on February 29, 2008 (which should have been filed on or beforeFebruary 13, 2008) were not effective. Management has implemented aprocedure requring that any material agreement or amendment thereto besubmitted to and reviewed by our Chief Financial Officer and in-house counselprior to execution thereof. We believe that we have made progress towardremediation of the material weaknesses disclosed in Item 8A, Controls andProcedures, of our 2007 Form 10-KSB. Other than described below, there havebeen no changes in the Company’s internal control over  financial reporting  during the mostrecently completed  fiscal quarter thathave  materially  affected or are  reasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

**Changesin Internal Control over Financial Reporting**

 

In our Form 10-KSB forthe prior fiscal year ended January 31, 2007, the Company reported havingineffective disclosure controls and procedures due to several factors: the lackof a permanent CFO for several months; the lack of personnel and extremely highturnover in accounting; and non-timely SEC filings.

 

We have since then commencedefforts to address and remediate the material weaknesses and theineffectiveness of the Company’s disclosure controls and procedures. TheCompany has remediated these items by successfully implementing the followingactions:

 

·                 we hired a newChief Financial Officer (“CFO”) in August, 2007

 

·                  the new CFO hasreorganized the Accounting department and hired new accounting employees thatare competent, knowledgeable and experienced in order to perform accounting andfinancial reporting functions

 

·                 we outsourcedthe income tax provision work with a reputable outside firm

 

·                 we changedother supporting outside services to enhance financial reporting

 

·                 we havesupplemented the existing resources with consultants where needed

 

·                  we have improvedthe timeliness and accuracy of internal management reporting as appropriate toallow timely management strategic decisions and required disclosure

 

·                  the CFO hasinstituted and carefully monitored several new procedures in the accountingdepartment that provide greater confidence in disclosure controls and internalcontrols over financial reporting, such as, but not limited to:

 

·                  established awell defined process for financial reporting and analysis (e.g. monthly closingschedules, journal entry checklists and accountability, balance sheet accountreconciliations with accountability and completeness controls, journal entriesapproved by appropriate personnel)

 

·                  identify,monitor and document any significant events, non-routine or specialized disclosures(e.g. CFO attends and participates in weekly 

 

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managementmeetings and is in communication with the CEO and in-house counsel on a dailybasis)

 

·                  regular andfrequent meetings and communications with the audit committee regarding anysignificant transactions, issues or questions related to the finances,accounting and controls of the Company.

 

**Management’s Annual Reporton Internal Control over Financial Reporting**

 

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting, as such term is defined in Exchange Act Rule 13a-15(f).  Underthe supervision and with the participation of our management, including ourChief Executive Officer and Chief Financial Officer, we conducted an evaluationof the effectiveness of our internal control over financial reporting based onthe framework in *Internal Control - Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles and includes those policies and procedures that (a) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the Company; (b) providereasonable assurance that transactions are recorded as necessary to permit thepreparation of financial statements in accordance with generally acceptedaccounting principles and that receipts and expenditures of the Company arebeing made only in accordance with authorizations of the management anddirectors; and (c) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use or disposition of the Company’sassets that could have a material effect on the financial statements. Inthe course of this evaluation and in accordance with Section 302 of theSarbanes Oxley Act of 2002, we sought to identify material weaknesses in ourcontrols, to determine whether we had identified any acts of fraud involvingpersonnel who have a significant role in our internal control over financialreporting that would have a material effect on our consolidated financialstatements, and to confirm that any necessary corrective action, includingprocess improvements, were being undertaken.

 

Based on our evaluationunder the framework in *Internal Control -Integrated Framework*, our management concluded that our internalcontrol over financial reporting was effective as of January 31, 2008.

 

 Because of inherentlimitations, disclosure controls and procedures and internal control overfinancial reporting may not prevent or detect misstatements.  Inaddition, projections of any evaluation of effectiveness to future periods aresubject to the risk that controls may become inadequate because of changes inconditions or that the degree of compliance with the policies or procedures maydeteriorate.  Management applies its judgment in assessing thebenefits of controls relative to their costs.  Because of theinherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within the company have been detected.  The design of any systemof controls is based in part upon certain assumptions about the likelihood offuture events, and there can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions, regardless ofhow remote.

 

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This  annual report  on Form 10-K does notinclude an  attestation  report by the  Company’s registered  public accounting  firm regarding  internal control over financial reporting. Management’s report was not subject to attestation by the Company’sregistered  public accounting firm pursuantto temporary rules of the Securities and Exchange  Commission that permit the Company to provide only  management’s report in thisyear’s annual report on Form 10-K.

 

# **Item 9B.**                          OtherInformation

# ** **

None.

 

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** **

**PART III**

** **

# **Item 10.**                            Directors,Executive Officers and Corporate Governance

# ** **

Our directors and executiveofficers are as follows:

 
| **Name**             | ** ** | **Age** | ** ** | **Position**                                    |
|----------------------|------------|---------|------------|-------------------------------------------------|
| Victor  J. Salerno   |       | 64      |       | President,  CEO, COO, and Chairman of the Board |
| Melody Sullivan      |       | 51      |       | Chief Financial Officer  and Treasurer          |
| Robert R. Barengo    |       | 66      |       | Director                                        |
| W. Larry Swecker     |       | 63      |       | Director                                        |
| Judith L. Zimbelmann |       | 56      |       | Director                                        |
| Bruce Dewing         |       | 58      |       | Director and President of  AWIG                 |

 

Victor J. Salerno has beenour President, CEO, COO, and Chairman of the Board since our inception.  Mr. Salerno has been the President, CEOand a Director of Leroy’s since September 1979.  Mr. Salerno served as an ExecutiveVice-President and Director of Autotote CBS Corporation (subsequently purchasedby us and renamed Computerized Bookmaking Systems, Inc.).  He is a past President of the NevadaAssociation of Race and Sports Operators

 

Melody Sullivan, a CertifiedManagement Accountant, has been our Chief Financial Officer since August 2007.Prior to joining the Company, Ms. Sullivan worked for a year as anindependent consultant specializing in SEC reporting, accounting, finance andSarbanes-Oxley compliance requirements for the Company and anotherpublicly-traded gaming company in Las Vegas, NV. Prior to her consulting work, Ms. Sullivanserved in several senior financial management positions including CFO of GamingPartners International Corporation, a publicly held, international gamingsupply company, from December 2002 until August 2006.

 

Robert R. Barengo became aDirector on July 1, 2005 and previously served on our Board of Directorsfrom 1992 to 2000.  Mr. Barengo hasowned and operated his own law practice for over 30 years during which he hashandled, among other matters, general business, municipal finance, bonding,investment banking, government and administration law, and gaming law.  Mr. Barengo has extensive elected officeand legislative experience as a Nevada Assemblyman (1972-1982) where he servedon various committees including Interim Finance, Ways and Means, Commerce andJudiciary; Chairman of the Judiciary Committee (1973-1979); Speaker Pro Tempore(1978-1981); Chairman of the Legislative Commission (1981-1983); Speaker of theAssembly (1981-1983); and Judge Pro-Tem for the City of Sparks Municipal Court andthe City of Reno Municipal Court (1976-1995). Mr. Barengo also served on the Board of Directors of RivieraHoldings Corporation, a publicly reporting company, from 1992 to April 2005and also served as that company’s Director of Government and Public Affairsfrom January 2001 to April 2005. Mr. Barengo serves as Chairman of the audit committee.

 

W. Larry Swecker became aDirector in April 2000.  Mr. Swecker,a Certified Public Accountant, has been President of Swecker &Company, Ltd., Certified Public Accountants, since January 1979.  Prior to that, he was a partner in the firmof Keltner Milam & Company, Certified Public Accountants, from 1975 to1979.  Mr. Swecker was employed as arevenue agent with the Internal Revenue Service from 1972 to 1975.  He has a Bachelor of Science in BusinessAdministration from the University of Nevada Reno.  Mr. Swecker is a member of the auditcommittee, serving as our Financial Expert; and is Chairman of the compensationcommittee the Board of Directors.

 

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Judith L. Zimbelmann becamea Director in January 2001 and serves on the audit committee and thecompensation committee. Ms. Zimbelmann is the daughter of Leroy Merillat,the founder of Leroy’s Horse & Sports Place, and was formerly marriedto Victor Salerno.  Ms. Zimbelmannis a private investor with numerous holdings and is a member and officer of UVDoctor, LLC (which provides ultra-violet lighting for sterilization).

 

Bruce Dewing became aDirector in July 2003 and President of AWIG in July 2005.  Mr. Dewing has over thirty years ofprogressive experience in hotel/casino senior level management positions.  Mr. Dewing was formerly the President ofthe Holder Hospitality Group, Inc. where he oversaw the daily operationsof five casinos, an AM radio station, a statewide (Nevada) slot route, severalevent companies and over 1,500 executives and employees.  Mr. Dewing is a founding member of theAir Service Task Force for Washoe County (Nevada) Airport Authority, a member ofthe Advisory Board to Washoe Airport Authority, a Board member of the Reno AirRace Association, and a Board member of the Nevada Hotel and LodgingAssociation. Mr. Dewing is currently chairman of the Pershing County TourismBoard.

 

**Licensing**

** **

Pursuant to Nevada gamingregulations/statutes and the status of Leroy’s, AWIM, AWIG and Sturgeon’s asgaming licensees, officers and directors of Leroy’s, AWIM, AWIG and Sturgeon’smust be investigated and licensed by the Commission, a process that may be bothlengthy and expensive.  Mr. Salernois licensed by the Commission to be an officer and director of Leroy’s, AWIMand AWIG.  In addition, Mr. Dewingis licensed by the Commission to be an officer and director of AWIG.  Judith Zimbelmann is licensed by the Commissionto be an officer and director of Leroy’s, AWIM and AWIG. Ms. Sullivan isin the process of being investigated in order to be licensed by the Commission.

 

**Involvement in CertainLegal Proceedings**

** **

To the best of ourknowledge, during the past five years, none of the following occurred withrespect to our directors or executive officers: (1) any bankruptcypetition filed by or against any business of which such person was a generalpartner or executive officer either at the time of the bankruptcy or within twoyears prior to that time (with the exception of the Chapter 11 proceedings forAWI and Leroy’s, during which Mr. Salerno held his positions with us); (2) anyconviction in a criminal proceeding or being subject to a pending criminalproceeding (excluding traffic violations and other minor offenses); (3) beingsubject to any order, judgment or decree, not subsequently reversed, suspendedor vacated, of any court of any competent jurisdiction, permanently ortemporarily enjoining, barring, suspending or otherwise limiting his or herinvolvement in any type of business, securities or banking activities; and (4) beingfound by a court of competent jurisdiction (in a civil action), the SEC or theCommodities Futures Trading Commission to have violated a federal or statesecurities or commodities law, and the judgment has not been reversed,suspended or vacated.

 

**AuditCommittee**

 

The Company has a separately designatedstanding audit committee established in accordance with Section 3(a)(58)(A) ofthe Exchange Act. The members of the audit committee are Robert Barengo, W.Larry Swecker and Judith L. Zimbelmann.

 

**Audit CommitteeFinancial Expert**

** **

Our Board of Directors hasdetermined that a member of our audit committee, W. Larry Swecker, whomeets the audit committee independence criteria prescribed by NASDAQ, qualifiesas an audit 

 

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committee financial expertunder the applicable rules of the SEC. Mr. Swecker’s qualifications include, among other things, hispractice as a certified public accountant for the past 30 years.

 

**Section 16(a) BeneficialOwnership Reporting Compliance**

** **

**Section 16(a) ofthe Exchange Act requires our directors and executive officers and persons whobeneficially own more than 10% of our common stock to file with the SEC certainreports regarding their stock ownership (“Section 16(a) Reports”).Such persons are required to furnish us with copies of all Section 16(a) Reportsthey file. Based solely on our review of such reports (and amendments thereto)that were furnished to us and written representations made to us by reportingpersons in connection with certain of these reporting requirements, we believethat all the reporting persons met their Section 16(a) reportingobligations on a timely basis during our last fiscal year, except asfollows:  Melody Sullivan’s Form 3as filed for her appointment as CFO on August 6, 2007 was filed late on September 25,2007. Additionally, Mr. Barengo’s and Mr. Swecker’s  Form 4 filing to report the annual grantof their stock options were also a late filing for fiscal 2008.**

** **

**Codeof Ethics**

** **

We have adopted, and havefiled with the SEC, a Code of Ethics for Financial Executives, which includeour principal executive officer, principal financial officer, principalaccounting officer or controller, or persons performing similar functions.

 

# **Item 11.**                            ExecutiveCompensation

# ** **

The following tablesummarizes the compensation for the periods indicated of our Chief ExecutiveOfficer and the two most highly compensated executive officers who served asexecutive officers as of January 31, 2008, including one who leftemployment in fiscal 2007.

 

**SummaryCompensation Table**

 
| **Name and  principal  position**                    | ** ** | **Year  Ended  01/31** | ** ** | **Salary** | ** ** | **Bonus** | ** ** | **Stock  Awards** | ** ** | **Option  Awards  (6)** | ** ** | **Non-equity  incentive  plan  compensation  (8)** | ** ** | **Non-qualified  deferred  compensation  earnings** | ** ** | **All other  compensation  (9)** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|------------|------------|-----------|------------|-------------------|------------|-------------------------|------------|----------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------|------------|-----------|------------|
| **(a)**                                                   | ** ** | **(b)**                | ** ** | **(c)**    | ** ** | **(d)**   | ** ** | **(e)**           | ** ** | **(f)**                 | ** ** | **(g)**                                            | ** ** | **(h)**                                             | ** ** | **(i)**                               | ** ** | **(j)**   | ** ** |
| Victor Salerno,                                      |       | 2008                   |       | $          | 240,000    | (1)       | —     |              | —     |                    | $          | 9,542                                              |       | $                                                   | 91,535     |                                  | —     |      | $          | 18,147 |   | $ | 359,224 |   |
| CEO, COO,  President                                      |       | 2007                   |       | $          | 240,000    | (1)       | —     |              | —     |                    | $          | 30,104                                             |       | $                                                   | 21,791     |                                  | —     |      | $          | 18,780 |   | $ | 310,675 |   |
| Melody Sullivan,                                          |       | 2008                   |       | $          | 135,435    | (2)       | $          | 1,000             |       | —                  |       | $                                                  | 2,613      |                                                | —     |                                  | —     |      | $          | 3,323 | (9) | $ | 142,371 |   |
| CFO and Treasurer                                         |       |                   |       |       |       |      |       |              |       |                    |       |                                               |       |                                                |       |                                  |       |      |       |
| Timothy F.                                                |       | 2008                   |       | $          | —     |      | —     |              | —     |                    | —     |                                               | —     |                                                | —     |                                  | $          | 270,000   | (5)        | $ | 270,000 |   |
| Lockinger, Former CFO, Secretary, Treasurer and  Director |       | 2007                   |       | $          | 144,231    | (3)       | —     |              | —     |                    | $          | 30,104                                             | (7)        | $                                                   | 8,717      |                                  | —     |      | $          | 8,557 |   | $ | 191,609 |   |
| Bruce Dewing,                                             |       | 2008                   |       | $          | 180,000    |      | —     |              | —     |                    | $          | 73,451                                             |       | $                                                   | 36,614     |                                  | —     |      | $          | 12,780 |   | $ | 302,845 |   |
| Director of AWI  and President of AWIG                    |       | 2007                   |       | $          | 180,000    | (4)       | —     |              | —     |                    | $          | 109,139                                            |       | $                                                   | 8,717      |                                  | —     |      | $          | 10,890 |   | $ | 308,746 |   |
|                                                           |            |                        |            |            |            |           |            |                   |            |                         |            |                                                    |            |                                                     |            |                                       |            |           |            |  |  |  |  |  |  |

 

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(1)         Mr. Salerno’scompensation does not include amounts of principal and interest paid to him inrepayment of his loan to the Company.

 

(2)         Ms. Sullivan was hiredas Chief Financial Officer and Treasurer on August 6, 2007 with an annualsalary of $180,000. Her actual year to date paid amount was $83,077 for fiscalyear ended January 31, 2008.   Thebonus amount in column 

 

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(d)  represents an end of year holiday bonus. Additionally,the amount paid to Ms. Sullivan during fiscal 2008 while a contractemployee was $52,358.

 

(3)         Mr. Lockinger (a) resignedhis positions as CFO, Secretary, and Treasurer effective December 14, 2006and resigned his position as Director on February 9, 2007.  (See footnotes 5 and 7 in this sectionbelow.)

 

(4)         Mr. Dewing’s (a) annualsalary as President of AWIG is $180,000 since being employed by AWIG in July 2005,Mr. Dewing no longer receives compensation as a non-employee Director ofAWI.

 

(5)         The Company accrued $270,000for severance pursuant to Mr. Lockinger’s severance agreement in fiscal2007 which was paid to him in February 2008.

 

(6)         The dollar amounts in column (f) arethe same amounts recognized in our consolidated financial statements forstock-based compensation expense in accordance with FAS 123(R) for theseexecutive officers for fiscal 2008 and 2007. We included those amounts in the “Selling General and AdministrativeExpenses” line item in our Consolidated Statements of Operations for the yearended January 31, 2008 and 2007, which appear in our financial statementsin this Form 10-K.  Please referalso to notes 1 and 5 to those financial statements for further informationabout our calculation of those amounts, which we based on the reported marketprice of our common stock on the OTCBB on the date we granted the options.

 

(7)         Options for 25,000 shares,representing $30,104, which were previously granted to Mr. Lockinger, wereterminated on December 14, 2006 in connection with the termination of hisemployment.

 

(8)         These amounts in column (g) arethe annual performance bonuses that the executives earned under theirrespective employment agreements, which are based on a pre-establishedpercentage of our pre-tax earnings (as defined in their agreements) for thereported fiscal year (5% for Mr. Salerno; 2% for Mr. Dewing and Mr. Lockingerand 1% for Ms. Sullivan).

 

(9)         These amounts (i) includethe Company’s matching contributions under our 401(k) plan.  Mr. Dewing was not eligible for our 401(k)plan until he completed one year of service (on June 30, 2006). Ms. Sullivanis also not eligible for our 401(k) plan until she completes one year ofservice (August 5, 2008 is the completion of one year of service but thenext allowable enrollment date for the plan is October 1, 2009). Pursuantto her employment agreement, she will receive a payment in the amount of $3,323($83,077 * 4%) in fiscal 2009, representing 4% of her salary that would havebeen matched by the Company, if she were a participant in the 401(k) planupon her hire date. In fiscal 2010, she will receive the final payment in theamount of $4,800 ($120,000 * 4%), representing the remainder of the 4% of hersalary that would have been matched by the Company, if she were a participantin the 401(k) plan upon her hire date, paid to the next allowableenrollment date of October 1, 2009. Mr. Salerno’s and Mr. Dewing’svehicle expenses are also included in the amounts in this column (i).  Ms. Sullivan has no vehicle expensereimbursement.

 

**Employment Agreements**

** **

We have the followingemployment agreements with the following executive officers;

 

***Victor Salerno:***  Mr. Salerno’s employment agreementbecame effective on July 1, 2002 with the initial term expiring on January 31,2008. The employment agreement automatically renewed for successive five-yearterms as of January 31, 2008. The agreement provides that Mr. Salernomay resign without cause upon 30 days’ written notice to us. Mr. Salerno’scurrent annual base salary is $240,000, which is subject to annual review. Inaddition, Mr. Salerno is entitled to an annual performance bonus equal to5% of our pre-tax earnings (as defined in his agreement) for the prior fiscal year,employer contributions to a profit-sharing or retirement plan of not less than4% of his base salary, health and life insurance coverage, and use of anautomobile that we provide for him. Mr. Salerno is also entitled toparticipate in our benefit plans available to our officers and employeesgenerally. Mr. Salerno’s agreement also entitles him to certain benefitsif his employment terminates within 24 months after a change in control ofAWI, as described below under “Payments in the Event of a Change in Control.”

 

***Bruce Dewing:***  Mr. Dewing’s employment agreement becameeffective on July 1, 2005 with the initial term expiring on January 31,2008. The employment agreement automatically renewed for successive three-yearterms on January 31, 2008. The agreement provides that Mr. Dewing mayresign without cause upon 30 days’ written notice to us. Mr. Dewing’scurrent annual base salary is $180,000, 

 

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which is subject to annualreview. In addition, Mr. Dewing is entitled to a performance bonus eachyear equal to 2% of our pre-tax earnings (as defined in his agreement) for theprior fiscal year, employer contributions to a profit-sharing or retirementplan of not less than 4% of his base salary, health insurance coverage for himand his wife, use of an automobile that we provide for him, and options topurchase 250,000 shares of our common stock under a five-year vesting schedule.Mr. Dewing is also entitled to participate in our benefit plans availableto our officers and employees generally. Mr. Dewing’s agreement alsoentitles him to certain benefits if his employment terminates within24 months after a change in control of AWI, as described below under “Paymentsin the Event of a Change in Control.”

 

For two years following thetermination of Mr. Salerno’s or Mr. Dewing’s employment with us, heis restricted from (1) contacting, soliciting or accepting business from any ofour customers with whom he had business contact on our behalf or (2) solicitingour employees or prospective employees to leave their employment with us.

 

***Melody Sullivan: ***Ms. Sullivan’semployment agreement became effective on August 6, 2007 and the initialterm expires on August 6, 2009. Ms. Sullivan’s current base salary is$180,000 per year with an annual performance bonus of 1% of Consolidated IncomeBefore Income Taxes. Ms. Sullivan also received non-qualified stockoptions of 30,000 shares upon hire with one-third vesting on each anniversaryof her hiring date, at an exercise price equal to the closing market price ofthe Company’s stock on her hire date. Along with other standard employeebenefits, the Company will pay one-time only, the employer paid matching amountof 4% for her 401(k) contributions for the first year, since she is nototherwise eligible to participate for one year. If the Company terminates Ms. Sullivan’semployment without cause during the term of the employment agreement and sheprovides the Company with a separation agreement and release, she will receivethe payout of her base salary through the term of the employment agreement, sixmonths’ severance pay, continuation of Company-provided health insurance forsix months, any bonuses awarded but not previously paid and immediate vestingand exercisability of stock options, in addition to compensation earned throughthe date of termination.

 

The following tablesummarizes our long-term employment commitments through the existing terms ofthe agreements. For fiscal 2009, 401(k) amounts are assumed to be themaximum allowable per the agreements of 4%. This table considers only base salary and retirement plan contributions,including those made to Melody Sullivan, pursuant to her employment agreement;it does not consider automatic renewals, annual increases in base salary, valueof health and/or life insurance, value of automobile allowance or performancebonus payments as such factors are variable from year-to-year.

 
| **Fiscal Year Ending January 31,** | ** ** | **Base Salary** | ** **    | **Retirement  Plan** | ** ** | **Total**    | ** ** |
|--------------------------------------------------------|------------|----------------------|---------------|----------------------|------------|--------------|------------|
| 2008                                                   |       | $                    |  503,077 |                 | $          |  16,434 |       | $ |  519,511 |   |
| 2009                                                   |       | $                    | 600,000       |                 | $          | 24,000       |       | $ | 624,000 |   |

** **

The following table providesinformation concerning executive officers’ unexercised stock options as of January 31,2008.

 

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** **

**OUTSTANDING EQUITY AWARDS AT FISCALYEAR-END**

 
| **Option awards** | ** ** |
|------------------------|------------|
| **Name**               | ** ** | **Number of  securities  underlying  unexercised  options  # exercisable  (1)** | ** ** | **Number of  securities  underlying  unexercised  options  # unexercisable  (1)** | ** ** | **Equity  incentive plan  awards:  Number of  securities  underlying  unearned  options  #** | ** ** | **Option  exercise  price  $** | ** ** | **Option  expiration  date** | ** ** |
| **(a)**                | ** ** | **(b)** | ** ** | **(c)** | ** ** | **(d)** | ** ** | **(e)** | ** ** | **(f)** | ** ** |
| Victor J.  Salerno     |       | 50,000 |   | — |   | — |   | $ | 2.00 |   | 08/31/2012 |   |
| Bruce Dewing           |       | 100,000 |   | 150,000 |   | — |   | $ | 1.80 |   | 06/10/2015 |   |
| Bruce Dewing           |       | 400 |   | 400 |   | — |   | $ | 0.15 |   | 01/31/2014 |   |
| Bruce Dewing           |       | 400 |   | 400 |   | — |   | $ | 0.55 |   | 01/31/2015 |   |
| Melody Sullivan        |       | — |   | 30,000 |   | — |   | $ | 0.96 |   | 08/06/2017 |   |

 

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(1)          For information on vestingdates, see the schedule of stock option grants following the DirectorCompensation table below.

 

**Payments in the Event ofa Change in Control**

** **

Our employment agreementswith Mr. Salerno and Mr. Dewing, which are described above following theSummary Compensation Table, provide for certain payments to each of them inconnection with a termination of their employment within 24 months after achange in control of AWI. Ms. Sullivan’s employment agreement also provides forcertain payments in connection with a termination or a change of control.

 

Mr. Salerno’s agreementprovides that if his employment terminates for any reason (other than death,disability or his resignation without cause during the initial term of hisagreement, which ended on January 31, 2008, but was automatically renewed forfive more years) within 24 months after a change in control of AWI, then wewill pay, as termination benefits to Mr. Salerno, an amount equal to five timeshis base salary then in effect and we will continue his coverage under ourhealth and welfare benefit plans for five years. Also in the event of a changein control of AWI, all of his stock options and any other stock-based awardswill become exercisable or non-forfeitable.

 

Mr. Dewing’s agreementprovides that if his employment terminates for any reason (other than death,disability or his resignation without cause during the initial term of hisagreement, which ended on January 31, 2008, but was automatically renewed forthree more years) within 24 months after a change in control of AWI, then wewill pay, as termination benefits to Mr. Dewing, an amount equal to three timeshis base salary then in effect and we will continue his coverage under ourhealth and welfare benefit plans for 30 months. Also in the event of a changein control of AWI, all of his stock options and any other stock-based awardswill become exercisable or non-forfeitable.

 

In addition, Ms.Sullivan’s employment agreement provides that if she resigns for Good Reasonother than due to a Change of Control (as those terms are defined in heremployment agreement), she will receive the payout of her base salary throughthe term of the employment agreement, 12 months’ severance pay, continuation ofCompany-provided health insurance for 12 months, any bonuses awarded but notpreviously paid and immediate vesting and exercisability of stock options, inaddition to compensation earned through the date of resignation. If Ms.Sullivan resigns for Good Reason due to a Change of Control, she will receivethe greater of (i) her compensation for the remainder of the employmentagreement term or (ii) 12 months’ severance pay, along with a pro rata share ofbonus and vested and unvested stock options.

 

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** **

**Compensation ofDirectors**

** **

Directors who are not ouremployees or consultants receive a fee of $1,000 per month plus travelexpenses.  In addition, each CommitteeChairman (audit committee, compensation committee, etc.) receives an additional$1,000 per month for each committee chaired. The following table summarizes the compensation paid to the directorsfor the fiscal year ended January 31, 2008.

 

**Director Compensation**

 
| **Name**          | ** ** | **Fees  Earned or  Paid in  Cash  $** | ** ** | **Stock  Awards  $** | ** ** | **Option  Awards  $** | ** ** | **Non-Equity  Incentive Plan  Compensation  $** | ** ** | **Non-qualified  Deferred  Compensation  Earnings  $** | ** ** | **All Other  Compensation  $** | ** ** | **Total  $**  | ** ** |
|-------------------|------------|---------------------------------------|------------|----------------------|------------|-----------------------|------------|-------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------|------------|---------------|------------|
| **(a)**           | ** ** | **(b)**                               | ** ** | **(c)**              | ** ** | **(d)**               | ** ** | **(e)**                                         | ** ** | **(f)**                                                | ** ** | **(g)**                        | ** ** | **Sum (b-g)** | ** ** |
| W. Larry Swecker  |       | $                                     | 24,000     |                 | —     |                  | —     |                                            | —     |                                                   | —     |                           | —     |          | $          | 24,000 |   |
| Robert R. Barengo |       | $                                     | 24,000     |                 | —     |                  | —     |                                            | —     |                                                   | —     |                           | —     |          | $          | 24,000 |   |

 

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(a)   This table includes onlynon-employee directors whose compensation is not reported in the SummaryCompensation Table.

 

(b)   W. Larry Swecker is chairmanof the compensation committee for fiscal 2007 and 2008.  Robert R. Barengo became chairman of theaudit committee in August 2006 and continues as Chairman for fiscal 2007and 2008.

 

(c)   No stock awards were given toany non-employee Directors.  The dollaramounts in column (d) are the same amount recognized in our consolidatedfinancial statements for stock-based compensation expense in accordance withFAS 123(R) for these Directors.  Mr. Sweckerand Mr. Barengo were issued 400 each in stock option awards on January 31,2008, generated stock based compensation expense amounts, due to the grant datebeing on the last day of the fiscal year. Otherwise, these amounts would appearin the “Selling General and Administrative” line item in our ConsolidatedStatement of Operations for the year ended January 31, 2008, which appearsin our financial statements in this Form 10-K.  Please also refer to notes 1 and 5 to thosefinancial statements for further information about our calculation of thoseamounts, which we based on the reported market price of our common stock on theOTCBB on the date we granted the options.

 

(d)   Mr. Swecker had 10,800in stock option awards outstanding at January 31, 2008.  Mr. Barengo had 9,200 in stock optionawards outstanding at January 31, 2008.

 

We have granted thefollowing stock options to our Directors (excluding terminated options):

 
| **DATE**   | ** ** | **GRANTED TO**       | ** ** | **NUMBER  OF  SHARES** | ** ** | **TERMS**                                                                                                                 |
|------------|------------|----------------------|------------|------------------------|------------|---------------------------------------------------------------------------------------------------------------------------|
| 08/09/2001 |       | Victor J. Salerno    |       | 30,000                 | (1)        | $0.70 exercise price  per share; became fully exercisable on August 9, 2001; exercised on  August 8, 2006  |
| 08/09/2001 |       | Judith L. Zimbelmann |       | 1,200                  | (1)        | $0.60 exercise price per share; became fully exercisable on  August 9, 2001; exercised on August 3, 2006   |
| 01/31/2002 |       | W. Larry Swecker     |       | 400                    | (2)        | $0.35 exercise price per share; became fully exercisable on  January 31, 2003; expires on January 31, 2012 |
| 01/31/2003 |       | W. Larry Swecker     |       | 400                    | (2)        | $0.12 exercise price per share; became fully exercisable on  January 31, 2004; expires on January 31, 2013 |
| 01/31/2004 |       | W. Larry Swecker     |       | 400                    | (2)        | $0.15 exercise price  per share; became fully exercisable January 31, 2005; expires on  January 31, 2014   |
| 01/31/2004 |       | Bruce Dewing         |       | 400                    | (2)        | $0.15 exercise price per share; became fully exercisable on  January 31, 2005; expires on January 31, 2014 |
| 01/31/2005 |       | W. Larry Swecker     |       | 400                    | (2)        | $0.55 exercise price per share; became fully exercisable on  January 31, 2006; expires on January 31, 2015 |
| 01/31/2005 |       | Bruce Dewing         |       | 400                    | (2)        | $0.55 exercise price per share; became fully exercisable on  January 31, 2006; expires on January 31, 2015 |

 

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| **DATE**   | ** ** | **GRANTED TO**    | ** ** | **NUMBER  OF  SHARES** | ** ** | **TERMS**                                                                                                                                                               |
|------------|------------|-------------------|------------|------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 07/11/2005 |       | Bruce Dewing      |       | 250,000                | (1)        | $1.80 exercise price per share; fully exercisable over a 5-year  vesting schedule (20% per year commencing June 10, 2006); expires on  June 10, 2015     |
| 08/31/2005 |       | Robert R. Barengo |       | 3,800                  | (2)        | $2.00 exercise price per share; fully exercisable over a 2-year  vesting schedule (50% per year commencing August 31, 2006); expires on  August 31, 2015 |
| 08/31/2005 |       | Victor J. Salerno |       | 50,000                 | (1)        | $2.00 exercise price per share; fully exercisable over a 2-year  vesting schedule (50% per year commencing August 31, 2006); expires on  August 31, 2012 |
| 08/31/2005 |       | W. Larry Swecker  |       | 3,800                  | (2)        | $2.00 exercise price per share; fully exercisable over a 2-year  vesting schedule (50% per year commencing August 31, 2006); expires on  August 31, 2015 |
| 08/31/2005 |       | Judith Zimbelmann |       | 3,000                  | (1)        | $2.00 exercise price per share; fully exercisable over a 2-year  vesting schedule (50% per year commencing August 31, 2006); expires on  August 31, 2012      |
| 08/07/2006 |       | Robert R. Barengo |       | 5,000                  | (2)        | $1.50 exercise price per share; fully exercisable over a 2-year  vesting schedule (50% per year commencing August 7, 2007); expires on  August 7, 2011   |
| 08/07/2006 |       | W. Larry Swecker  |       | 5,000                  | (2)        | $1.50 exercise price per share; fully exercisable over a 2-year  vesting schedule (50% per year commencing August 7, 2007); expires on  August 7, 2011   |
| 01/31/2008 |       | Robert R. Barengo |       | 400                    | (2)        | $0.79 exercise price per share; fully exercisable on the first  anniversary of grant date (100% on January 31, 2009); expires on  January 31, 2013       |
| 01/31/2008 |       | W. Larry Swecker  |       | 400                    | (2)        | $0.79 exercise price per share; fully exercisable on the first  anniversary of grant date (100% on January 31, 2009); expires on  January 31, 2013       |

 

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(1)   Stock options were issuedpursuant to our 2001 Stock Option Plan.

 

(2)   Stock options were issuedpursuant to our Directors Stock Option Plan.

 

# **Item 12.**         SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters

# ** **

The following table setsforth, as of April 11, 2008, the number and percentage of outstandingshares of our common stock, which, according to information supplied to us, arebeneficially owned by: (i) each person who is a beneficial owner of morethan 5.00% of our outstanding common stock; (ii) each of our directors,and named executive officers individually; and (iii) all of our currentdirectors and executive officers as a group. Under SEC rules, a person is deemed a beneficial owner of our commonstock with respect to which he or she has or shares voting power (whichincludes the power to vote or to direct the voting of the security), orinvestment power (which includes the power to dispose of, or to direct thedisposition of, the security).

 

A person is also deemed thebeneficial owner of shares with respect to which he or she could obtain votingor investment power within 60 days of April 11, 2008 (such as upon theexercise of options or warrants).  Thepercentage of outstanding common stock represented by each named person’s stockownership assumes the exercise by that person of all stock options that areexercisable within 60 days of April 11, 2008 but does not assume theexercise of stock options by any other persons. The percentage of outstanding common stock represented by the stockownership of all directors and executive officers as a group assumes theexercise by all members of that group of their respective stock options thatare 

 

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exercisablewithin 60 days of April 11, 2008, but does not assume the exercise ofoptions by any persons outside of that group.

 

Except as otherwiseindicated below, the persons named in the table have sole voting and investmentpower with respect to all shares of our common stock held by them.  The address of each person named in the tableis c/o American Wagering, Inc., 675 Grier Drive, Las Vegas, Nevada 89119.

 
| **Name**                                                           | ** ** | **Number of Shares** | ** ** | **Percentage of  Outstanding Shares** | ** ** |
|--------------------------------------------------------------------|------------|----------------------|------------|---------------------------------------|------------|
| Victor J. Salerno (1)                                              |       | 2,488,054            |       | 30.42                                 | %          |
|                                                               |       |                 |       |                                  |       |
| Judith L. Zimbelmann (2)                                           |       | 1,004,200            |       | 12.35                                 | %          |
| Robert R. Barengo (3)                                              |       | 531,300              |       | 6.53                                  | %          |
| W. Larry Swecker (4)                                               |       | 27,900               |       | 0.34                                  | %          |
| Bruce Dewing (5)                                                   |       | 195,600              |       | 2.36                                  | %          |
| Melody Sullivan (6)                                                |       | —               |       | —                                |       |
| All directors and executive officers as a group (six  persons) (7) |       | 4,247,054            |       | 50.88                                 | %          |

 

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(1)   Mr. Salerno has 50,000in vested stock options that he has the right to exercise to acquire shareswithin the next 60 days which are included in the table above.

 

(2)   Ms. Zimbelmann has 3,000in vested stock options that she has the right to exercise to acquire shareswithin the next 60 days which are included in the table above.

 

(3)   Mr. Barengo has 6,300 invested stock options that he has the right to exercise to acquire shares withinthe next 60 days which are included in the table above.

 

(4)   Mr. Swecker has 7,900 invested stock options that he has the right to exercise to acquire shares withinthe next 60 days which are included in the table above.

 

(5)   Mr. Dewing and his wifeshare the voting and investment power with respect to 44,800 shares includedabove.  Mr. Dewing has 150,800 invested stock options that he has the right to exercise to acquire shares withinthe next 60 days which are included in the table above.

 

(6)   Ms. Sullivan does notbeneficially own any of our shares and none of her stock options have vested orwill vest within the next 60 days.

 

(7)   Our current directors andexecutive officers as a group have options for 218,000 shares, which they canexercise within the next 60 days.  Thoseshares are included in the table above.

 

**Securitiesauthorized for issuance under equity compensation plans**.

 

The following table providesinformation regarding the securities underlying outstanding options andsecurities remaining available for issuance under our equity compensation plansas of January 31, 2008.

 

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**EquityCompensation Plans Approved by Security Holders:**

 
| **Plan Category**                                           | ** ** | **(a)  Number of securities  to be issued upon  exercise of  outstanding options,  warrants and rights** | ** ** | **(b)  Weighted-average   exercise price of  outstanding options,  warrants and rights** | ** ** | **(c)  Number of securities  remaining available  for future issuance  under equity compen-  sation plans (exclud-  ing securities reflected  in column (a))** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders:    |       |                                                                                                     |       |                                                                                     |       |                                                                                                                                                           |       |
| 2001 Stock  Option Plan                                     |       | 737,749                                                                                                  |       | $                                                                                        | 1.89       |                                                                                                                                                           | 180,317    |   |
| Directors Stock  Option Plan                                |       | 20,800                                                                                                   |       | 1.30                                                                                     |       | 19,200                                                                                                                                                         |       |
| Equity  compensation plans not approved by security holders |       | None                                                                                                     |       | None                                                                                     |       | None                                                                                                                                                           |       |
| Total                                                       |       | 758,549                                                                                                  |       | $                                                                                        | 1.87       |                                                                                                                                                           | 199,517    |   |

 

# **Item 13.**         CertainRelationships and Related Transactions, and Director Independence

# ** **

Other than as set forthbelow, there have been no transactions since the beginning of our last fiscalyear, nor are there any proposed transactions, to which we were or are to be aparty, in which any of the following persons had or is to have a direct orindirect material interest:

 

(a)           any director or executiveofficer;

 

(b)           any person who beneficiallyowns more than 5% of our outstanding common stock; or

 

(c)           any member of the immediatefamily (including spouse, parents, children, siblings and in-laws) of any ofthe foregoing persons.

 

Our policy regarding relatedtransactions requires that any director or executive officer who has aninterest in any transaction disclose the presence and the nature of theinterest to our Board of Directors prior to any approval of the transaction byour Board of Directors.  The transactionmay then be approved by a majority of our disinterested directors, providedthat an interested director may be counted in determining the presence of aquorum at the meeting of our Board of Directors to approve thetransaction.  Our policy regardingcompensation for directors and executive officers is that our Board ofDirectors may, without regard to personal interest, establish the compensation ofdirectors for services in any capacity.

 

Victor J. Salerno (ourPresident, CEO, COO and Chairman of the Board of Directors) owns 8,900 sharesof Series A Preferred Stock (5,662 regular shares and 3,238 redeemableshares).  Judith Zimbelmann (one of our directors)owns 5,262 shares of Series A Preferred Stock (all regular shares).

 

Holders of the Series APreferred Stock are entitled to receive, upon declaration by our Board ofDirectors, cumulative cash dividends monthly at the annual rate of 10% per share.  Interest at the annual rate of 10%,compounded annually, accrues on Series A Preferred Stock dividends thathave accumulated but have not been paid. The Series A Preferred Stock is not convertible but is callable, inwhole or (on a pro rata basis) in part, at any time at our option.  There were no shares called since thebeginning of our last fiscal year.  Theholders of Series A Preferred Stock are not entitled to vote (on acumulative basis or otherwise) as a class or with our common stock upon any matterssubmitted to shareholders for a vote, except as mandated under Nevada law.

 

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In prior years, Mr. Salernoforwent his right to have his shares redeemed when we made partial, pro ratacalls of Series A Preferred Stock for redemption.  Those affected shares have been classified as“Redeemable Series A Preferred Stock” in the liabilities section of ourConsolidated Balance Sheet, and may be put to us by Mr. Salerno forredemption at any time.  As of January 31,2008, the amount of Series A Preferred Stock that may be put to us by Mr. Salernofor immediate redemption (without prior approval by our Board of Directors) is$323,800 (3,238 shares).  When we andLeroy’s filed Chapter 11 Petitions, this Redeemable Series A PreferredStock became subject to compromise under the Bankruptcy Code.  (Under the Bankruptcy Code, the ordinary Series APreferred Stock, which is classified in the equity section of our ConsolidatedBalance Sheet, was not designated as subject to compromise.) Pursuant to thePlan that we and Leroy’s consummated on March 11, 2005 (the “EffectiveDate”), the Redeemable Series A Preferred Stock is no longer consideredsubject to compromise, and we will pay the redemption price in the ordinary courseof business.

 

From the filing of theChapter 11 Petitions on July 25, 2003 through the Effective Date (March 11,2005), dividends were accrued but not paid on the Series A PreferredStock.  The following table indicates theaccruals and payments to the preferred shareholders through the Effective Date:

 
| ** **                    | ** ** | **PAID** | ** ** | **ACCRUED** | ** ** | **UNPAID** | ** ** |
|-------------------------------|------------|----------|------------|-------------|------------|------------|------------|
| 02/2003 through 07/2003       |       | $        | 72,195     |        | $          | 0          |       | $ | 0 |   |
| 08/2003 through 01/2004       |       | $        | 0          |        | $          | 71,392     |       | $ | 71,392 |   |
| 02/2004 through 01/2005       |       | $        | 0          |        | $          | 142,008    |       | $ | 213,400 |   |
| 02/2005                       |       | $        | 0          |        | $          | 10,864     |       | $ | 224,264 |   |
| 03/11/2005                    |       | $        | 226,241    |        | $          | 0          |       | $ | 0 |   |
| 03/12/2005 through 01/31/2006 |       | $        | 141,620    |        | $          | 0          |       | $ | 0 |   |
| Fiscal 2007                   |       | $        | 141,620    |        | $          | 0          |       | $ | 0 |   |
| Fiscal 2008                   |       | $        | 141,584    |        | $          | 0          |       | $ | 0 |   |

 

The payment on March 11, 2005 includes$1,977 of interest at the Federal Judgment Rate.

 

AWIG’s acquisition of Sturgeon’s wasfinanced, in part, through a $300,000 loan from Victor and Terina Salerno undertheir Guaranty Agreement with the Company. The Guaranty Agreement provides forthe Company to pay the Salernos interest at the rate of 10% per annum (payablemonthly) on the outstanding portion of the loan and to reimburse them forfinance charges, fees, payments and other expenses they incur under a personalrevolving line of credit with their bank that they used to provide the funding.The Guaranty Agreement expires on February 16, 2011. Terina Salerno is thespouse of Victor Salerno as well as General Counsel of AWI. From May 1,2006 through November 7, 2007, the outstanding balance of the loan hasbeen zero. During fiscal 2007, we paid the Salernos a total of $2,055 ofinterest under the Guaranty Agreement in addition to the $300,000 loanprincipal amount repayment.

 

On November 8, 2007, the Board of Directorsapproved and authorized Victor and Terina Salerno to borrow $400,000 for the benefitof the Company pursuant to the terms of a line of credit under the GuarantyAgreement. This current line of credit for up to a maximum amount of $500,000under the Guaranty Agreement expires in November 2010. The GuarantyAgreement expires on February 16, 2011. The personal line of credit issecured by the Salerno’s residence and provides for an interest rate of 0.5%below the prime rate published by the Wall Street Journal, adjusted annually.From May 1, 2006 through November 7, 2007, the outstanding balancewas $0. The outstanding balance of this line of credit was $380,773 at January 31,2008.  The Company paid two principal andinterest payments totaling, $25,814 in fiscal 2008 and will pay 12 interestonly payments of $2,839 per month in fiscal 2009, plus 21 principal andinterest payments of $12,907 each with a balloon payment due in November 2010of $264,331. In February 2008, an additional $80,000 was also borrowed bythe Company against this line of credit. The 

 

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paymentsdescribed above take in consideration the additional borrowing.

 

We employ on a full-time basis TerinaSalerno, the wife of Victor Salerno, as our General Counsel. For our fiscalyear ended January 31, 2008, her total compensation was $108,160.

 

We employ on a full-time basis John Salerno,the son of Victor Salerno and Judith Zimbelmann, as a Vice President and gaminganalyst of Leroy’s. For our fiscal year ended January 31, 2008, his totalannual compensation was $65,000.

 

**Director Independence**

** **

We follow the directorindependence standards prescribed by NASDAQ. We are not listed on NASDAQ, but we are required by SEC rules toselect a standard for determining independence for disclosure purposes. Assuch, the members of our Board of Directors who are considered independent areRobert Barengo and W. Larry Swecker.

 

Under the audit committeeindependence standards prescribed by NASDAQ, two of our three audit committeemembers, namely Robert Barengo (Chairman) and W. Larry Swecker areindependent and Judith Zimbelmann is not.

 

Under the directorindependence standards prescribed by NASDAQ, one of our two compensationcommittee members, namely W. Larry Swecker, is independent and JudithZimbelmann is not.

 

Our entire Board of Directorsserves as our nominating committee.

 

# **Item 14.**         PrincipalAccountant Fees and Services

# ** **

Our audit committee selectedand our Board of Directors approved the firm of Piercy Bowler Taylor &Kern (“PBTK”) as our independent registered public accounting firm to audit ourannual consolidated financial statements and perform quarterly financialstatement review services for the fiscal year ended January 31, 2008.  PBTK previously performed similar audit andreview services for the years ended January 31, 2001 through January 31,2007.  PBTK’s primary offices are locatedat 6100 Elton Avenue, Suite 1000, Las Vegas, Nevada, 89107.

 

**Audit Committee’sPre-Approval of Engagement**

** **

Our policy is that before weengage our principal accountants annually to render audit or non-auditservices, the engagement is reviewed and approved by our audit committee.  All of our principal accountants’ servicesfor which we paid tax-related fees or other non-audit fees for our last twofiscal years, as described below, were within the scope of the engagement thatour audit committee approved before we entered into the engagement.

 

**Total Fees.**  Total fees paid and accrued to PBTK are asfollows:

 
| ** **           | ** ** | **Year Ending January 31,** | ** ** |
|----------------------|------------|----------------------------------|------------|
| **Service Provided** | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Audit Service Fees   |       | $                                | 148,113    |   | $ | 95,432 |   |
| Tax Service Fees     |       | 32,580                           |       | 22,648 |   |
| Other Fees           |       | 21,085                           |       | 15,434 |   |
| Total                |       | $                                | 201,778    |   | $ | 133,514 |   |

 

73

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**Audit Service Fees**

** **

The aggregate fees for auditservices were for the audits of our annual consolidated financial statementsand review of our quarterly consolidated financial statements.  There were no Audit Related Services.

 

**Tax Fees**

** **

The aggregate fees for taxservices were for professional services relating to tax compliance, tax advice,and tax planning.

 

**Other Fees**

** **

The aggregate Other Feeswere for audits of our 401(k) plan and all gaming compliance auditservices.

 

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**PART IV**

** **

# **Item 15.**         Exhibits,Financial Statement Schedules

 

(a)(1)       ***Financial Statements***

 

Included in Part II of this report: 

 

Consolidated Balance Sheets atJanuary 31, 2008 and 2007 

 

Consolidated Statements ofOperations for the Years Ended January 31, 2008 and 2007

 

Consolidated Statements ofStockholders’ Equity for the Years Ended January 31, 2008 and 2007

 

Consolidated Statements of CashFlows for the Years Ended January 31, 2008 and 2007 

 

Notes to Consolidated Financial Statements 

 

(a)(2)***       Financial StatementSchedules***

*** ***

All required schedules are omitted because of theabsence of conditions under which they are required or because the requiredinformation is given in the financial statements or notes thereto. 

 

(a)(3) and (c)             ***Exhibits***

 
| **EXHIBIT  NUMBER** | ** ** | **DESCRIPTION**                                                                                                                                                                                                                                                                                                 |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1*                |       | Restated Amended Joint  Plan of Reorganization of American Wagering Inc. and Leroy’s Horse &  Sports Place, Inc. (see Exhibit 2.1 to Form 10-KSB filed  May 1, 2006, SEC File No. 000-20685)                                                                             |
|                |       |                                                                                                                                                                                                                                                                                                            |
| 3.1*                |       | Amended and Restated  By-Laws of American Wagering, Inc. (see Exhibit 3.1 to  Form 8-K filed November 20, 2007, SEC File No. 000-20685)                                                                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                            |
| 3.2*                |       | Amended and Restated  Articles of Incorporation of American Wagering, Inc. (see  Exhibit 3.1 to Registration Statement on Form SB-2 filed  December 13, 1995, SEC File No. 33-80431)                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                            |
| 3.3*                |       | Certificate of  Designations, Preferences and Rights of Series A Preferred Stock of  American Wagering, Inc. (see Exhibit 3.1.1 to Form 8-K filed  December 10, 1998, SEC File No. 000-20685)                                                                                     |
|                |       |                                                                                                                                                                                                                                                                                                            |
| 10.1* (A)           |       | American  Wagering, Inc. 2001 Stock Option Plan (see Exhibit 99 to our  Definitive Schedule 14A filed October 16, 2001, SEC File  No. 000-20685)                                                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                            |
| 10.2*               |       | Amended and Restated  Guaranty Agreement dated June 8, 2006, between American  Wagering, Inc. and Victor and Terina Salerno (see Exhibit 10.1 to  Form 10-QSB filed June 14, 2006, SEC File No. 000-20685)                                                                        |
|                |       |                                                                                                                                                                                                                                                                                                            |
| 10.3*               |       | Purchase and Sale  Agreement for the acquisition of Sturgeon’s Inn & Casino (see  Exhibit 10.1 to Form 8-K filed June 21, 2005, SEC File  No. 000-20685)                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                            |
| 10.4*               |       | Lease Schedule No. 1  (with Options), dated July 14, 2006 by and between AWI Manufacturing  Inc., American Wagering, Inc. and PDS Gaming Corporation-Nevada, and  Master Lease Agreement. (see Exhibit 10.2 to Form 10-QSB filed  December 26, 2006, SEC File No. 000-20685) |
|                |       |                                                                                                                                                                                                                                                                                                            |
| 10.5* (A)           |       | Executive Employment  Agreement between American Wagering, Inc. and Victor J. Salerno dated  June 28, 2002 (see Exhibit 10.1 to Form 10-QSB filed  September 14, 2005, SEC File No. 000-20685)                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                            |
| 10.6* (A)           |       | Severance Agreement  between American Wagering, Inc. and Timothy F. Lockinger dated  February 9, 2007 (see Exhibit 10.6 to Form 10-KSB filed  May 31, 2007, SEC File No. 000-20685)                                                                                               |
|                |       |                                                                                                                                                                                                                                                                                                            |
| 10.7* (A)           |       | Executive Employment  Agreement between American Wagering, Inc. and Bruce Dewing dated  June 14, 2005 (see Exhibit 99.1 to Form 8-K filed  June 15, 2005, SEC File No. 000-20685)                                                                                                 |

 

75

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| **EXHIBIT  NUMBER** | ** ** | **DESCRIPTION**                                                                                                                                                                                                                                                                                                                                          |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.8*(A)            |       | Executive Employment  Agreement between American Wagering, Inc. and Melody Sullivan, dated  August 6, 2007 (See Exhibit 10.19 to Form 8-K filed  August 8, 2007, SEC File No. 000-20685)                                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                     |
| 10.9*(A)            |       | Compensation terms for  American Wagering, Inc. directors (see Exhibit 10.8 to  Form 10-KSB filed May 1, 2006, SEC File No. 000-20685)                                                                                                                                                                                               |
|                |       |                                                                                                                                                                                                                                                                                                                                                     |
| 10.10* (A)          |       | American  Wagering, Inc. Amended and Restated Directors Stock Option Plan (see  Appendix A to our Definitive Proxy Statement on Schedule 14A filed  November 30, 2007, SEC File No. 000-20685)                                                                                                                                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                     |
| 10.11*              |       | Commercial Loan Agreement,  dated February 21, 2006, between AWI Gaming, Inc. and Great Basin  Bank of Nevada (see Exhibit 10.12 to Form 10-KSB filed May 31,  2007, SEC File No. 000-20685)                                                                                                                               |
|                |       |                                                                                                                                                                                                                                                                                                                                                     |
| 10.12*              |       | Promissory Note, dated  February 21, 2006, executed by AWI Gaming, Inc. in favor of Great  Basin Bank of Nevada (see Exhibit 10.13 to Form 10-KSB filed  May 31, 2007, SEC File No. 000-20685)                                                                                                                             |
|                |       |                                                                                                                                                                                                                                                                                                                                                     |
| 10.13*              |       | Commercial Guaranty, dated  February 21, 2006, executed by American Wagering, Inc. in favor of  Great Basin Bank of Nevada (see Exhibit 10.14 to Form 10-KSB filed  May 31, 2007, SEC File No. 000-20685)                                                                                                                  |
|                |       |                                                                                                                                                                                                                                                                                                                                                     |
| 10.14*              |       | Commercial Guaranty, dated  February 21, 2006, executed by Sturgeons, LLC in favor of Great Basin  Bank of Nevada (see Exhibit 10.15 to Form 10-KSB filed May 31,  2007, SEC File No. 000-20685)                                                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                                                                     |
| 10.15*              |       | Commercial Security  Agreement, dated February 21, 2006, executed by AWI Gaming, Inc. in  favor of Great Basin Bank of Nevada (see Exhibit 10.16 to  Form 10-KSB filed May 31, 2007, SEC File No. 000-20685)                                                                                                               |
|                |       |                                                                                                                                                                                                                                                                                                                                                     |
| 10.16*              |       | Deed of Trust, dated  February 21, 2006, among AWI Gaming, Inc., Great Basin Bank of  Nevada and Western Title Company Inc. (see Exhibit 10.17 to  Form 10-KSB filed May 31, 2007, SEC File No. 000-20685)                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                                     |
| 10.17*              |       | Settlement Agreement by  American Wagering, Inc., Leroy’s Horse & Sports  Place, Inc. and Michael Racusin d/b/a M. Racusin & Co., dated  September 3, 2004 (see Exhibit 99.1 to Form 8-K filed September 7, 2004,  SEC File No. 000-20685)                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                                                                     |
| 10.18               |       | Corrected Amortization  Schedule as filed with the U.S. Bankruptcy court on March 17, 2008 related to  the Settlement Agreement by American Wagering, Inc., Leroy’s Horse &  Sports Place, Inc. and Michael Racusin d/b/a M. Racusin & Co.,  dated September 3, 2004                                               |
|                |       |                                                                                                                                                                                                                                                                                                                                                     |
| 10.19               |       | Changes in Terms Agreement,  dated February 4, 2008, between AWI Gaming, Inc., and Great Basin  Bank of Nevada; Commercial Guaranty, dated February 4, 2008, by American  Wagering, Inc. in favor of Great Basin Bank of Nevada; Commercial Guaranty,  dated February 4, 2008, by Sturgeon’s, LLC in favor of Great Basin Bank of  Nevada |
|                |       |                                                                                                                                                                                                                                                                                                                                                     |
| 10.20               |       | Revolving Credit  Agreement, dated April 17, 2008, between American Wagering, Inc. and U.S.  Bank, N.A.; Addendum to Revolving Credit Agreement and Note, dated April 17,  2008, between American Wagering, Inc. and U.S. Bank, N.A.; Revolving Credit  Note, dated April 17, 2008, by American Wagering, Inc. in favor of U.S. Bank,  N.A.              |
|                |       |                                                                                                                                                                                                                                                                                                                                                     |
| 10.21               |       | Line of Credit  Confirmation Letter, dated April 21, 2008, between Victor and Terina Salerno  and AWI, under the terms of the Guaranty Agreement dated June 8, 2006, with  Loan Amortization Schedule.                                                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                     |
| 14.1*               |       | Code of Business Conduct  and Ethics (see Exhibit 14.1 to Form 10-QSB filed June 14,  2005, SEC File No. 000-20685)                                                                                                                                                                                                                  |
|                |       |                                                                                                                                                                                                                                                                                                                                                     |
| 21.1                |       | Subsidiaries of American  Wagering, Inc.                                                                                                                                                                                                                                                                                                            |
|                |       |                                                                                                                                                                                                                                                                                                                                                     |
| 23.1                |       | Consent of Independent  Registered Public Accounting Firm                                                                                                                                                                                                                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                                                                     |
| 31.1                |       | Certification of Principal  Executive Officer pursuant to Exchange Act Rule 13a-14(a)                                                                                                                                                                                                                                                               |

 

76

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| **EXHIBIT  NUMBER** | ** ** | **DESCRIPTION**                                                                                                                                               |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                          |
| 31.2                |       | Certification of Principal  Financial Officer pursuant to Exchange Act Rule 13a-14(a)                                                                    |
|                |       |                                                                                                                                                          |
| 32.1                |       | Certification of Chief  Executive Officer and Chief Financial Officer pursuant to Exchange Act  Rule 13a-14(b) and 18 U.S.C. Section 1350 |

 

----

*      These documents are incorporated herein by referenceas exhibits hereto.  Following thedescription of each such exhibit is a reference to the document as it appearedin a specified report previously filed with the SEC, to which there have beenno amendments or changes unless otherwise indicated.

 

(A)  Management contract orcompensatory plan or arrangement.

 

77

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**SIGNATURES**

** **

In accordance with Section 13or 15(d) of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 

 
|         | AMERICAN WAGERING, INC. |
|--------------|-------------------------|
| May 13, 2008 |                    |
|         |                    |
|         | By:                     | /s/ Victor Salerno |
|         |                    | Victor Salerno |
|         |                    | President and Chief  Executive Officer |

 

In accordance with theExchange Act, this report has been signed by the following persons on behalf ofthe registrant and in the capacities and on the dates indicated.

 
| **Signature**         | ** ** | **Title**                                       | ** ** | **Date**     |
|-----------------------|------------|-------------------------------------------------|------------|--------------|
| ** **            | ** ** | ** **                                      | ** ** | ** **   |
| /s/ Victor Salerno    |       | President and Chief  Executive Officer          |       | May 13, 2008 |
| Victor Salerno        | * *   | *(Principal Executive Officer)*                 |       |         |
|                  |       |                                            |       |         |
| /s/ Melody Sullivan   |       | Chief Financial Officer  and Treasurer          |       | May 13, 2008 |
| Melody Sullivan       | * *   | *(Principal Financial and Accounting  Officer)* | * *   | * *     |
| * *              | * *   | * *                                        | * *   | * *     |
| /s/ Robert R. Barengo |       | Director                                        |       | May 13, 2008 |
| Robert R. Barengo     |       |                                            |       |         |
|                  |       |                                            |       |         |
| /s/ W. Larry Swecker  |       | Director                                        |       | May 13, 2008 |
| W. Larry Swecker      |       |                                            |       |         |
|                  |       |                                            |       |         |
| /s/ Judith Zimbelmann |       | Director                                        |       | May 13, 2008 |
| Judith Zimbelmann     |       |                                            |       |         |
|                  |       |                                            |       |         |
| /s/ Bruce Dewing      |       | Director                                        |       | May 13, 2008 |
| Bruce Dewing          |       |                                            |       |         |

 

78

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**EXHIBIT INDEX**

 
| **Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                          |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.18      |       | Corrected Amortization  Schedule as filed with the U.S. Bankruptcy court on March 17, 2008 related to  the Settlement Agreement by American Wagering, Inc., Leroy’s  Horse & Sports Place, Inc. and Michael Racusin d/b/a M.  Racusin & Co., dated September 3, 2004                                               |
|       |       |                                                                                                                                                                                                                                                                                                                                                     |
| 10.19      |       | Changes in Terms Agreement,  dated February 4, 2008, between AWI Gaming, Inc., and Great Basin  Bank of Nevada; Commercial Guaranty, dated February 4, 2008, by American  Wagering, Inc. in favor of Great Basin Bank of Nevada; Commercial Guaranty,  dated February 4, 2008, by Sturgeon’s, LLC in favor of Great Basin Bank of  Nevada |
|       |       |                                                                                                                                                                                                                                                                                                                                                     |
| 10.20      |       | Revolving Credit  Agreement, dated April 17, 2008, between American Wagering, Inc. and U.S.  Bank, N.A.; Addendum to Revolving Credit Agreement and Note, dated April 17,  2008, between American Wagering, Inc. and U.S. Bank, N.A.; Revolving Credit  Note, dated April 17, 2008, by American Wagering, Inc. in favor of U.S. Bank,  N.A.              |
|       |       |                                                                                                                                                                                                                                                                                                                                                     |
| 10.21      |       | Line of Credit  Confirmation Letter, dated April 21, 2008, between Victor and Terina Salerno  and AWI, under the terms of the Guaranty dated June 8, 2006, with Loan Amortization  Schedule                                                                                                                                                              |
|       |       |                                                                                                                                                                                                                                                                                                                                                     |
| 21.1       |       | Subsidiaries of American  Wagering, Inc.                                                                                                                                                                                                                                                                                                            |
|       |       |                                                                                                                                                                                                                                                                                                                                                     |
| 23.1       |       | Consent of Independent  Registered Public Accounting Firm                                                                                                                                                                                                                                                                                                |
|       |       |                                                                                                                                                                                                                                                                                                                                                     |
| 31.1       |       | Certification  of Principal Executive Officer pursuant to Exchange Act Rule 13a-14(a)                                                                                                                                                                                                                                                               |
|       |       |                                                                                                                                                                                                                                                                                                                                                     |
| 31.2       |       | Certification  of Principal Financial Officer pursuant to Exchange Act Rule 13a-14(a)                                                                                                                                                                                                                                                               |
|       |       |                                                                                                                                                                                                                                                                                                                                                     |
| 32.1       |       | Certification  of Chief Executive Officer and Chief Financial Officer pursuant to Exchange  Act Rule 13a-14(b) and 18 U.S.C. Section 1350                                                                                                                                                                                                           |

 

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