UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 **FORM
10-KSB**
 
 [X]
    ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the fiscal year endedJanuary
      31, 2005[
      ]
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACTFor
      the transition period from _________ to ________Commission
      file number000-20685
 
 **American
      Wagering, Inc.**(Name
      of small business issuer 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, Nevada**
    **89119**(Address
      of principal executive offices)
    (Zip
      Code)Issuer’s
      telephone number:702-735-0101Securities
      registered under Section 12(b) of the Exchange Act:Title
      of each class
    Name of each exchange on which registeredNone
    Not
      ApplicableSecurities
      registered under Section 12(g) of the Exchange Act:Common
      Stock, par value $0.01(Title
      of class)
 
 Check
whether the Issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No [
]
 
 Check if
disclosure of delinquent filers in response to Item 405 of Regulation S-B is not
contained in this form, and no disclosure will be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB [ ]
 
 State
issuer’s revenue for its most recent fiscal year. **$11,107,533**
 
 State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the average bid and asked price of such
common equity, as of a specified date within the past 60 days. **$14,733,270
as of April 15, 2005**
 
 Check
whether the issuer has filed all documents and reports required to be filed by
Section 12, 13, or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [X] No [ ]
 
 State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date. **7,836,846
Common Shares as of April 15, 2005**
 
 Transitional
Small Business Disclosure Format (Check One): Yes: __; No X
  1
 ***Table of
Contents***
  **TABLE OF
CONTENTS**
 
  **PART I**
 
 **ITEM**
    
    **PAGE**1
    Description Of Business
    32
    Description Of Property
    173
    Legal Proceedings
    184
    Submission Of Matters To A Vote Of Security
      Holders
    19
 
 **PART II**
 
 5
    Market For Common Equity, Related Stockholder
      Matters
    216
    Management’s Discussion And Analysis
    217
    Financial Statements
    308
    Changes In And Disagreements With Accountants On
      Accounting And Financial Disclosure
    528A
    Controls And Procedures
    528B
    Other Information
    52
 
 **PART III**
 
 9
    Directors , Executive Officers, Promoters and Control
      Persons; Compliance with Section 16(a) of the Exchange
    Act
    5310
    Executive Compensation
    5411
    Security Ownership of Certain Beneficial Owners
      and Management and Related Stockholder Matters
    5612
    Certain Relationships and Related
      Transactions
    5713
    Exhibits
    5814
    Principal Accountant Fees and
      Services
    59
 
  2
 ***Table of
Contents***
  **PART I**
 
 
 **Item
1.****Description
of Business**
 
 **Primary
business formation and operating activities** .
Pursuant to Nevada gaming regulations, a publicly traded company is not eligible
to hold a Nevada gaming license. As such, in August of 1995, American Wagering,
Inc. (“AWI” or the “Company”), a Nevada corporation, was formed to be the
publicly traded holding company for Leroy’s Horse & Sports Place. Over the
years, the Company has grown into a leader in the Nevada race and sports book
industry. Today, the Company operates two primary business segments, Wagering
and Systems, through various wholly owned subsidiaries as follows:
 
 **Leroy’s
Horse & Sports Place, Inc.**
 
 Leroy’s
Horse and Sports Place (“Leroy’s”) was incorporated under the laws of the State
of Nevada on November 14, 1977. Leroy’s, through a central computer system
located at the Company’s Las Vegas headquarters, operates a network of race and
sports wagering facilities on the premises of nonrestricted gaming locations
throughout the state of Nevada. Leroy’s offers a “turn-key” race and sports
wagering operation that allows casinos to satisfy their patron’s desire for race
and sports wagering, but without the casino bearing the risk and overhead
associated with running the operation. By combining volume from a number of
locations, the Company believes that Leroy’s more effectively hedges risks and
more efficiently covers fixed overhead. Leroy’s results of operation are
accounted for in the Wagering Segment. The number of race and sports locations
operated by Leroy’s is as follows:
 
 **As
      of**
      **01-31-2005**
    **As
      of**
      **04-15-2005**Kiosk
      Only; Sports only
    0
    0Kiosk
      Only; Sports with limited race
    11
    16Full
      Book; Sports only
    15
    15Full
      Book; Sports with limited race
    29
    24Full
      Book; Sports with full pari-mutuel race
    3
    6**Total Number of
      Locations**
    **58**
    **61**Kiosk
      Only: The location does not employ any Leroy’s personnel; all wagering
      activity is conducted through a self-service wagering kiosk operated by
      thecustomer.Full
      Book: The location employs Leroy’s personnel; the wagering activity is
      conducted through the Leroy’s ticket writer; a “Full Book” may or may not
      offer a self-service
      wagering kiosk in addition to the manned writer
station.Sports
      Only: The location accepts wagers on sporting events only; the location
      does not accept wagers on any horse races.Sports
      with Limited Race: In addition to accepting wagers on sporting events, the
      location accepts wagers on the four major racing days (Kentucky Derby,Preakness
      Stakes, Belmont Stakes, and Breeder’s Cup); the location does not accept
      horse racing wagers on a daily basis.Sports
      with Full Pari-Mutuel Race: In addition to accepting wagers on sporting
      events, the location accepts wagers on pari-mutuel style horse racing on a
      dailybasis.
 ****
 **Computerized
Bookmaking Systems, Inc.**
  In
October of 1996, the Company acquired all of the shares of capital stock of
Autotote CBS, Inc. (which was subsequently renamed Computerized Bookmaking
Systems, Inc. (“CBS”)), along with certain software and licensing rights
pursuant to the stock transfer agreement.
 
 3
 ***Table of Contents***
 
 CBS is a
technology-driven company that designs, sells, installs and maintains
specialized software, hardware and computer systems for the race and sports
betting industry.
 CBS is the
leading race and sports systems supplier in the state of Nevada and provides
systems and services to the majority of race and sports book in Nevada; at the
present
 time, wagers
placed through a CBS system account for approximately 90% of all sporting event
wagers placed in the state of Nevada (based on handle). CBS’ customers include,
 but are not
limited to, the following: Boyd Group, Caesars Entertainment, Coast Casinos,
Harrah’s, Leroy’s, Mandalay Resort Group, MGM/Mirage Group, Stations Casinos,
etc.
 Casinos and
other sports wagering facilities generally purchase the computerized wagering
system and enter into an agreement for the repair and maintenance of the system
 (software and
hardware). Operating revenues mainly consist of equipment sales and the related
maintenance contract revenues; CBS’ results of operations are accounted for in
 the Systems
Segment. CBS sells its race and sports wagering systems to casinos under
purchase agreements and provides training for the system operators and terminal
clerks.
 CBS does not
provide the operations and supervisory personnel necessary to operate the
system.
  **AWI
Manufacturing, Inc.**
  Originally
named AWI Keno, Inc. (“AWIK”), this subsidiary started by the Company designed,
installed, operated and maintained computerized keno systems; AWIK was
 discontinued
in July of 2002.
  In
preparation of the release of the gaming self-service kiosk, AWIK changed its
name to AWI Manufacturing, Inc. (“AWIM”). AWIM is licensed by the Nevada Gaming
 Commission as
a Manufacturer/Distributor with the stated purpose of designing, selling,
installing, maintaining and leasing self-service race and sports wagering kiosks
to the
 Nevada gaming
industry. AWIM’s results of operations are accounted for in the Wagering
Segment. The number of self-service kiosks operated by AWIM is as
follows:
 
 **As
      of**
      **01-31-2005**
    **As
      of**
      **04-15-2005**Leased
      to Affiliated Companies (Leroy’s)
    32
    36Leased
      to Non-Affiliated Companies
    1
    1**Total Number
      of Locations**
    **33**
    **37**
 ****
 **Contest
Sports Systems, Inc.**
  Originally
named Mega$ports, Inc. (“Mega$ports”), this subsidiary started by CBS developed
and marketed a sports pari-mutuel wagering system; Mega$ports was
 discontinued
in July of 2000.
  In
preparation of the release of the non-gaming self-service kiosk, Mega$ports
changed its name to Contest Sports Systems, Inc. (“CSS”). CSS is a wholly owned
subsidiary of
 CBS with the
stated purpose of designing specialized sports related contests for use on the
self-service kiosk, leasing the self-service contest kiosks to various locations
and
 administering
the contest on behalf of the participating locations. CSS’ results of operations
are accounted for in the Systems Segment. The number of self-service kiosks
 operated by
CSS is as follows:
 
 **As
      of**
      **01-31-2005**
    **As
      of**
      **04-15-2005**Leased
      to Affiliated Companies (Leroy’s)
    0
    0Leased
      to Non-Affiliated Companies
    2
    2**Total
      Number of Locations**
    **2**
    **2**
 
 The
Company’s business model through the Wagering Segment is based on providing our
customers with a competitive product combined with the convenience they have
come to expect. The Wagering Segment derives revenue through the operation of
race and sports books throughout the state of Nevada via the Leroy’s subsidiary
and lease fees related to the self-service wagering kiosk via the AWIM
subsidiary.
 
 The
Company’s business model through the Systems Segment is based on a strategy of
developing next generation hardware and software for the race and sports
wagering industry. The Systems Segment derives revenue through
 
 4
 ***Table of
Contents***
 
 licensing
and software development fees, sales of hardware, and maintenance fees via the
CBS subsidiary and lease fees related to the self-service contest kiosk via the
CSS subsidiary.
 
 The
Company’s goal is to position AWI as the leading race and sports provider in the
state of Nevada; the Company’s various subsidiaries uniquely position AWI to
take advantage of the growth in the gaming industry in general and to provide
the industry with the software necessary to maintain their competitive edge. The
Company’s primary operating strategies for the foreseeable future are to focus
on its core businesses relating to the race and sports industry. In regards to
Leroy’s, the Company intends to continue operating its existing books, adding
new books where and when appropriate, and continuing to become more efficient in
order to reduce expenses. In regards to CBS, the Company intends to continue
developing, selling and maintaining computerized race and sports wagering
systems for the gaming industry. In regards to AWIM, the Company intends to
continue developing the self-service wagering kiosk, installing the kiosk in
Leroy’s locations to assist in controlling escalating personnel costs, and
marketing the kiosk to non-Leroy’s locations. In regards to CSS, the Company
intends to continue developing the contest-related kiosk and marketing the kiosk
to non-Leroy’s locations. The Company has implemented and is continuing to
initiate other cost cutting measures.
 
 **Chapter
11 Filing.**
 
 On July
25, 2003 (the “Petition Date”), AWI and Leroy’s filed voluntary petitions for
relief under Chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the District of Nevada, Northern Division in Reno,
Nevada (the “Bankruptcy Court”).
 
 On
February 28, 2005, the Bankruptcy Court confirmed the Restated Amended Joint
Plan of Reorganization (the “Plan”) of AWI and Leroy’s.
 
 On March
11, 2005 (the “Effective Date”), AWI and Leroy’s consummated the Plan and
formally emerged from Chapter 11 proceedings after completing all required
actions and all remaining conditions. The following is a brief summary of the
Plan; additional information regarding the Plan, including a copy of the Plan,
may be found in the various Form 8-K filings made by the Company.
 
 1.
    All
      general unsecured creditors of AWI and Leroy’s were paid 100% of their
      approved claim, plus interest at the Federal Judgment Rate, on the
      Effective Date.
 
 2.
    The
      claim of Las Vegas Gaming, Inc. (“LVGI”) is current and is being paid
      pursuant to the settlement agreement dated February 23, 2004. Additional
      information regarding the settlement agreement is located in Part I, Item
      3 (“Legal Proceedings”) of this Form
10-KSB.
 
 3.
    The
      claim of Michael Racusin dba M. Racusin & Co. (“Racusin”) is current
      and is being paid pursuant to the settlement agreement dated September 3,
      2004. Additional information regarding the settlement agreement is in Part
      I, Item 3 (“Legal Proceedings”) of this Form
10-KSB.
 
 4.
    All
      preferred shareholders retained their shares of preferred stock. In
      addition, all accrued preferred stock dividends, plus interest at the
      Federal Judgment Rate, were paid in full on the Effective
      Date.
 
 5.
    All
      common shareholders retained their shares of the Company’s common stock.
      In addition, the Company’s common stock has continued to trade on the OTC
      Bulletin Board.
 
 As of the
Effective Date, the Company and Leroy’s have made the following cash payments
pursuant to the terms and conditions of the Plan:
 
 **CATEGORY**
    **GROSS**
    **INTEREST**
    **TOTAL**
    **BALANCE**AWI
      General Creditors
    $90,201
    $1,664
    $91,865
    $0Leroy’s
      General Creditors
    69,815
    1,288
    71,103
    0Accrued
      Payroll
    4,950
    91
    5,041
    0Las
      Vegas Gaming, Inc.
    660,000
    0
    660,000
    340,000AWI
      Preferred Shareholders
    224,264
    1,977
    226,241
    0**Total
      Payments**
    **$1,049,230**
    **$5,021**
    **$1,054,251**
    **$340,000**
 
 5
 ***Table of
Contents***
 
 Although
the Company and Leroy’s have formally emerged from the Chapter 11 proceedings as
of March 11, 2005, the cases have not been “closed” by the Bankruptcy Court as
the Company is disputing several claims. The bankruptcy cases will not be
officially closed until each of these disputes has been resolved by the
Bankruptcy Court. The following is a summary of the disputed claims and the
potential impact on the Company:
 
 **REASON**
    **AMOUNT**
    **NOTES**AWI
    Disputed
      because the claim amount has already been paid
    $23,894
    The
      Company believes these amounts have already been paidAWI
    Disputed
      because the claim amount is not owed
    $2,303
    The
      Company believes these amounts are in error and are not currently due or
      owingAWI
    Disputed
      pursuant to Section 510(b) of the Bankruptcy Code
    $39,467
    The
      Company believes this amount will be satisfied by the issuance of 2,000
      shares of AWI common stockLeroy’s
    Disputed
      because the claim amount has already been paid
    $91,063
    The
      Company believes these amounts have already been paidLeroy’s
    Disputed
      because the claim amount is not owed
    $165,981
    The
      Company believes these amounts are in error and are not currently due or
      owingLeroy’s
    Disputed
      because the claim amount is in error
    $1,020
    The
      Company believes that it owes $200.00 (plus interest) of the claim
      amount
 
 The
disputed claims noted above are immaterial to the overall operation of the
Company and will be immediately paid from existing cash reserves if and when
ordered by the Bankruptcy Court.
 
 For more
information regarding the bankruptcy proceedings, please see the discussion
contained in Part II, Item 6, of this Form 10-KSB.
 
 **Recent
material litigation and related business activities.** The
Company has settled all previous litigation; we are not a party in any
litigation and have no knowledge of any pending legal proceedings in any court
or agency of government or governmental authority. A complete discussion of the
settlements may be found in the “Legal Proceedings” section of this Form 10-KSB
found in Part I, Item 3 (“Legal Proceedings”) of this Form 10-KSB.
 
 **Historical
background** . On July
28, 1998, the Company acquired certain assets from Advanced Computer Services,
Inc. (“ACS”), a systems competitor of CBS, pursuant to an asset purchase
agreement between the Company and ACS. The Company paid ACS $500,000 in cash and
$250,000 in the Company’s common stock for the assets, including software and
restrictions on ACS and its shareholder not to compete or solicit the Company’s
customers. The Company’s two new subsidiaries, AWI Sports Systems, Inc.
(“AWISSI”) and AWI Hotel Systems, Inc. (“AWIHSI”) were the designated acquirer
of the sports wagering software and hotel systems software, respectively and
assumed certain contractual obligations of ACS, including all customer
contracts. The Company initially owned 80% of AWISSI and 51% of AWIHSI and the
sole shareholder of ACS owned the remaining interests. On June 8, 2000, the
Company terminated a systems consulting agreement and sold the assets of AWIHSI
to the sole owner of ACS in exchange for ACS’s 49% and 20% interests in AWISSI
and AWIHSI. On September 15, 2003 the Company dissolved AWISSI.
 
 In
November 1999, the Company formed Secured Telephone Operating Platform, LLC.
(“STOP”), which designed, installed, and operated a telephone call
identification system for its customers. The system determined the origin of a
telephone call and accepted or rejected the call based on its origination. The
system was used in conjunction with telephone account wagering within the State
of Nevada. On January 24, 2004 the Company dissolved STOP.
 
 **Sports
wagering.** Wagering
on sporting events is legal in the state of Nevada and in numerous foreign
countries. Sports wagering at Nevada’s race and sports books increased from
approximately $290 million in 1980 to $2.1 billion in 2004. During that same
period, the number of sports books in Nevada increased from 24 to 168. With the
advent of cable and satellite television, both commercially and privately,
viewing access to sporting events has
 
 6
 ***Table of
Contents***
 
 increased
significantly. When sporting events are televised, there is increased
excitement, which, the Company believes, leads to more interest in sports
betting.
 
 A sports
wagering facility, or “sports book,” is a gambling establishment that sets odds
and point spreads and 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 final result, but to maintain a
“balanced book” by offering odds or point spreads that will attract equal
amounts of bets on each side of a particular event. As a general matter, a
customer’s odds or point spread (the “line”) are fixed at the time he or she
makes his or her bet, regardless of any subsequent movement in the line. Under
this system, a sports book operator attracts bets by changing or “moving” the
line up or down to encourage wagering on a specific team. To the extent that a
book on a particular event is not balanced, the bookmaking operation takes a
risk on the outcome of the event. This is the fundamental difference from other
forms of organized gambling where profits result from customer play against a
statistical advantage that the gambling operator (the “House”) possesses, or in
pari-mutuel wagering, used by major North American Horse Racing Tracks and jai
alai establishments, where the House receives a guaranteed percentage for
operating expenses, profit and taxes and the remainder is distributed to the
winners.
 
 This
fundamental difference is part of the appeal for many sports customers, but it
also creates risk for the sports book. A bookmaker operates in a system that is
interrelated with oddsmakers and customers. Bookmakers collect bets, adjust odds
to account for the preferences of their patrons and pay the winners and, if the
book is balanced, for each type of sports bet the House has a “theoretical
advantage”. For example, for a straight football bet involving the outcome of
one game, it is common practice that the customer wagers $11 to win $10.
Accordingly, if the book were evenly balanced, the sports book would earn $1 for
each $22 wagered, or 4.55% (the winner would receive $21).
 
 Oddsmakers
(whose services are purchased by the bookmakers) initially set lines to
hopefully split the bets evenly between the betting participants. Customers have
opinions concerning the odds and bet accordingly, which requires initial lines
to be adjusted. As a result, in practice, a sports book is rarely perfectly
balanced. The sports books profit depends upon the reliability of the oddsmaker
and its own acumen at adjusting the odds when required. Because customers are
betting on propositions of uncertain probability and are paid according to the
line at which they make their bets rather than the closing odds (as in a
pari-mutuel system), the sports book is not assured of either a constant profit
over time or for a single event.
 
 A sports
book also attempts to limit the potential risk by setting game limits and line
movement. For example, the opening line for a football game ideally would split
the bets from the time it was posted until kick-off. However, the opening line
generally is unbalanced. Because a sports book does not want to take the risk of
accepting unlimited bets on one side of a game, it creates a game limit, the
maximum amount of money that will be accepted at the posted line. When the game
limit is reached, the line is changed, or “moved,” to attract action on the
“other” side.
 
 The game
limit is established by the sports book based upon the “earn” in a sport, which
is a function of the amount the sports book would earn if the odds guaranteed it
a constant commission regardless of the outcome (the “theoretical hold
percentage”), the quality of the line, and the customer mix. For example, when
the sports book anticipates that the majority of the bets will come from
sophisticated customers who know as much as, or more than, the oddsmaker, the
limit will be relatively low. The Company believes that events with the highest
fan popularity and media coverage, such as professional football, have a
relatively small proportion of sophisticated customers. Accordingly, the sports
books expected earn on such an event would be higher and would justify a higher
game limit.
 
 In order
to effectively balance its books, a bookmaking operation must take a sufficient
volume of wagers to offset large wagers on any given event. While many of the
large casinos have sufficient customer traffic to underwrite the risks inherent
in a sports book, some large and smaller casinos typically do not. Some larger
casinos are not interested in operating their own sports book because of the
associated overhead. As a result, the Company believes that many casinos cannot
profitably operate a sports gambling operation and, if they do, they are exposed
to significant financial risks associated with an “unbalanced book”.
Nevertheless, many of these casinos believe that they need to offer their
customers a sports book to remain competitive with other casinos. The Company
has attempted to fill this need and operates its race and/or sports books
throughout the state of Nevada. Under Nevada gaming law, Leroy’s is permitted to
own and operate sports books located on the premises of other non-restricted
 
 7
 ***Table of
Contents***
 
 gaming
licensees. The remaining sports books in the state are operated primarily by the
casinos in which they reside.
 
 When
Leroy’s began operations in 1978, it was one of only 7 sports and race books in
Las Vegas. Currently, virtually every major casino in Nevada offers its patrons
a sports and race book. The typical sports book location leased by Leroy’s
encompasses approximately 300 square feet, contains a board displaying the odds,
television monitors showing sporting events, betting stations, ticket sellers
and cashiers. Most leases are at fixed rates, are cancelable by either party on
30 to 90 days notice, and some have incentive (or participation) clauses. As a
bet is placed, the wagering data is entered into a computer terminal which is
connected via a communications device to Leroy’s centralized computer system
which confirms the line, determines that the bet is within the limits set for
the particular event, records the information on a central database and issues a
ticket evidencing the bet. The ticket is then distributed to the customer with
Leroy’s simultaneously recording the wager. Personnel at Leroy’s main office
monitor all bets and adjust the odds as necessary to reflect the various bets
throughout all of Leroy’s locations.
 
 The
Company believes that Leroy’s has lower maximum betting limits than many sports
books operated by the larger casinos. It has established these lower limits in
an effort to limit bets from the more sophisticated customers who often place
larger bets. In addition, in order to limit the more sophisticated bettors from
utilizing strategies that would provide an advantage, the Company sets even
lower limits for bets placed over the telephone, which are currently accepted
only from within the State of Nevada and are limited to $2,200 per day per
customer (unless a higher limit for a specific customer is approved by the State
Gaming Control Board). The Company believes that geographical dispersion across
the State of Nevada is more likely to attract bets from customers more evenly on
both sides of a line, thereby further limiting its risk.
 
 Professional
and college football games currently comprise about 40% of the amount bet at the
Leroy’s locations with professional and college basketball games comprising
about 29%. Professional baseball is next at about 24%. Historically, Leroy’s
business has been seasonal in nature with approximately 55% of its handle
arising during the months of September through January. Leroy’s wagering handle
for the September 2004 to January 2005 season consisted primarily of football
with approximately 66%, basketball with approximately 18% and baseball with
approximately 10%.
 
 Leroy’s
does not offer horse race wagering at each of its locations and, with the
exception of those locations offering full pari-mutuel horse race wagering, the
horse race wagering is limited. The following table indicates the breakdown of
locations offering sports only, limited race and full pari-mutuel
race:
 
 **As
      of**
      **01-31-2005**
    **As
      of**
      **04-15-2005**Sports
      only
    15
    15Sports
      with limited race
    40
    40Sports
      with full pari-mutuel race
    3
    6**Total
      Number of Locations**
    **58**
    **61**Sports
      Only: The location accepts wagers on sporting events only; the location
      does not accept wagers on any horse races.Sports
      with Limited Race: In addition to accepting wagers on sporting events, the
      location accepts wagers on the four major racing days (Kentucky Derby,
      Preakness Stakes, Belmont Stakes, and Breeder’s Cup); the location does
      not accept horse racing wagers on a daily basis.Sports
      with Full Pari-Mutuel Race: In addition to accepting wagers on sporting
      events, the location accepts wagers on pari-mutuel style horse racing on a
      daily basis.
 
 Leroy’s
race books utilize the same personnel and facilities as its sports books, but
Leroy’s does not set its own odds for race wagering. Leroy’s accepts wagers for
races by offering race patrons the same odds as the racetracks at which the
races occur. At those locations with limited race, Leroy’s pays full track odds
up to the predetermined limit; at those locations with full pari-mutuel race,
Leroy’s operates a daily race book with wagers merged into the on-track
pari-mutuel pools.
 
 8
 ***Table of
Contents***
 
 With the
popularity and accessibility of personal computers, bettors now have an
additional medium from which to wager on sporting events. While online sports
betting has existed for approximately 20 years, few people had access to a
computer or the Internet. The Company believes that the dynamic growth in home
computing combined with the convenience of betting online will enhance the
continued growth of the sports betting industry in general but may have an
adverse impact upon the Company’s live wagering facilities in the state of
Nevada. At this time, the Company cannot predict what impact, if any, the growth
of online wagering may have on the Company’s overall handle (total amount
wagered).
 
 **Pari-mutuel
race wagering.** In
December of 1997, Leroy’s joined the Nevada Pari-mutuel Association to allow
pari-mutuel race wagering at one or more of its’ licensed locations. Leroy’s, in
association with a disseminator, offers pari-mutuel wagering on numerous events
at racetracks throughout the country. As of April 15, 2005, Leroy’s offers
pari-mutuel race wagering at six of its licensed locations.
 
 **Competition.** There is
intense competition among companies in the gaming industry, most of which have
significantly greater financial, marketing, technical and other resources than
the Company. Leroy’s faces competition from all other sports and race wagering
operations throughout Nevada. There are currently 168 sports books in Nevada, of
which the Company owns and operates 61. Virtually all of the major casinos in
Nevada have sports and race books, some of which are larger and offer more
amenities than the Company’s locations and some casinos operate sports books at
other casinos.
 
 CBS faces
competition from the larger casinos who may or may not develop their own race
and sports wagering systems as well as keeping up with the rapidly growing field
of technology. In addition, the CBS product competes directly with the
over-the-counter system offered by Virtgame Corp., which currently has
approximately 10% of the Nevada market.
 
 The
Company is not aware of any company that directly competes with the products
offered by AWIM and/or CSS.
 
 Gaming
has become more accepted by society in recent years. However, the gaming
industry is subject to shifting consumer preferences and perceptions. A dramatic
shift in consumer acceptance or interest in gaming could adversely affect the
Company. In addition, the Company’s operations compete, to varying degrees, with
gaming operations in other parts of the United States and the world and with
state-sponsored lotteries, on and off-track wagering, card parlors, riverboat
and Native American gaming ventures and other forms of legalized gaming. While
the Nevada market is continuing to offer expanded tourist attractions, there can
be no assurance that this market will be able to sustain its current growth or
current levels of tourism. Legalized casino gaming in other states and on Native
American reservations provide competition to the Company and its primary market
and could adversely affect the Company’s operations, particularly if such gaming
were to occur in areas close to the Company’s operations.
 
 Future
operating results of the Company are subject to significant business, economic,
regulatory and competitive uncertainties and contingencies, many of which are
beyond the control of the Company. There can be no assurance that the Company’s
overall business strategy will be successful in achieving the Company’s goal of
attracting additional customers to the Company or increasing the Company’s
gaming revenues and operating profits.
 
 **Leroy’s
locations.** Leroy’s
operates its race and/or sports books on the premises of nonrestricted gaming
licensees throughout the state of Nevada. The Leroy’s locations are as
follows:
 
 **Number
      of**
      **Locations
      at**
      **01-31-2005**
    **Percentage
      of**
      **Handle
      FYE**
      **01-31-2005**
    **Number
      of**
      **Locations
      at**
      **04-15-2005**Las
      Vegas Area Market
    25
    64.13%
    27Reno
      Area Market
    6
    8.12%
    5Remainder
      of State
    27
    27.75%
    29**Total**
    **58**
    **100.00%**
    **61**
 
 **Las
Vegas area market.** The
Company’s primary market (based upon wagering activity) for race and sports book
operations is the Las Vegas Valley and surrounding areas (the “Las Vegas Area”).
At December 31, 2004, the Las
 
 9
 ***Table of
Contents***
 
 Vegas
Area included 103 sports books and 61 pari-mutuel race books. The Las Vegas Area
attracts both local residents and Las Vegas visitors. The Las Vegas population
was approximately 1.7 million in 2004. Las Vegas is Nevada’s principal tourist
destination. Gaming and entertainment are the major attractions, complemented by
warm weather and the availability of many year-round recreational activities.
The number of visitors traveling to Las Vegas in 2004 was approximately 37.4
million. Las Vegas’ principal tourist market is the western region of the United
States, most significantly Southern California, Arizona and Texas. Las Vegas is
also among the nation’s most popular convention sites, having hosted conventions
in 2004 that were attended by more than 5.7 million people who, it is estimated,
spent $6.9 billion, excluding gaming activity.
 
 From 1989
to 2004, gaming revenues for Clark County (which consists principally of the Las
Vegas Area) have increased 155.9%, from approximately $3.4 billion in 1989 to
approximately $8.7 billion in 2004. The Clark County gaming market has
historically achieved significant growth despite adverse economic, regulatory
and competitive events during the past decade, including the expansion of gaming
in other jurisdictions across the United States.
 
 **Reno
area market.** A
secondary market (based upon wagering activity) for the Company is Reno and the
surrounding areas (the “Reno Area”). At December 31, 2004, the Reno Area
included 29 sports books and 5 pari-mutuel race books. The Reno/Sparks area, the
second largest metropolitan center in Nevada, has a combined population of
approximately 267,500 for 2004. Reno is located at the base of the Sierra Nevada
Mountains along Interstate 80, approximately 135 miles east of Sacramento,
California. The Reno Area is a popular resort spot, which attracts tourists by
offering gaming as well as numerous summer and winter recreational activities.
 
 **Remainder
of the state.** Another
secondary market (based upon wagering activity) for the Company is the remainder
of the state (the “Remainder of the State”). At December 31, 2004, the Remainder
of the State included 36 sports books and 7 pari-mutuel race books. The
Remainder of the State includes municipalities such as Laughlin, Beatty, Elko,
Wendover, Jackpot, Winnemucca, Lake Tahoe, Carson City, Minden, etc. with a
combined population of approximately 262,000.
 
 **Marketing.** Our
customer base includes retail customers (i.e., the bettors who choose Leroy’s as
their supplier for race and sports wagers) as well as resellers (i.e., the
establishments who choose CBS, AWIM or CSS as their supplier for race and sports
related equipment and software). The Leroy’s operation markets to its customers
through radio, television and print advertisements as well as utilizing free
contests, player rewards and other promotional means to attract new customers
and retain existing customers. The CBS, AWIM and CSS operations engage primarily
in direct marketing efforts aimed at the gaming operations that offer race and
sports wagering to their customers. The Company believes that our products and
services are well known in the industry.
 
 An
important element of our business strategy is to promote changes in federal and
state law that allow for greater application of our software products. To this
end, we endeavor to educate state and federal legislators and state agencies
that regulate the gaming industry of our ability to offer our products over a
secure system that guarantees jurisdictional screening.
 
 **Intellectual
property.** The
Company regards our technology as proprietary and attempts to protect it by
relying on trademark, service mark, copyright and trade secret laws and
restrictions on disclosure and transferring title and other methods. The Company
generally enters into confidentiality and/or license agreements with our
employees and consultants, and generally control access to and distribution of
our documentation and other proprietary information. Despite these precautions,
it may be possible for a third party to copy or otherwise obtain and use our
proprietary information without authorization or to develop similar technology
independently.
 
 **Research
and development.** The
Company spent $951,490 in research and development in the fiscal year ending
January 31, 2005, as compared to $1,025,891 in the fiscal year ending January
31, 2004, all of which was expensed as incurred. The Company intends to conduct
continuing development and innovation of our products in accordance with
changing consumer preferences, demographics, and the evolution of new
technologies. The Company’s development strategy is to leverage our proprietary
technology and regulatory approvals to integrate third party developed solutions
such as age verification, biometrics, identification and security in order to
provide fully-integrated applications that are competitive and innovative in the
regulated gaming industry.
 
 10
 ***Table of
Contents***
 ****
 **Proposed
government regulation.** The
Company intends to continue to present casinos with a “turn key” race and sports
book operation that allows the casinos to satisfy their patron’s desires for
race and sports gaming without the casino bearing the risk and overhead
associated with operating the book themselves. Leroy’s anticipates continuing to
utilize its computer and communication expertise and equipment, by operating its
satellite locations from one central hub, thereby reducing the overhead that
each individual location would have in personnel and equipment. The Company
believes that as televised sporting events continue to proliferate, sports
betting will continue to grow and the Company expects that it can capitalize on
such growth. In the past, the U.S. Congress has submitted bills that, if passed,
would prohibit wagering on the Olympics and on high school and college games.
Leroy’s currently accepts wagers on college games and estimates that wagering on
college events represents approximately 29% of its revenues. Passage of any such
legislation would have a significant negative impact on the Company’s
operations.
 
 **Regulation
and licensing.** The
ownership and operation of race and sports books in Nevada are subject to
extensive state and local regulation. The Company’s gaming operations are
subject to the Nevada Gaming Control Act and its regulations (hereinafter
collectively referred to as the “Nevada Act”) and various local regulations. The
Company’s gaming operations also are subject to the licensing and regulatory
control of the Nevada Gaming Commission (the “Commission”), the State Gaming
Control Board (the “Board”), the Clark County Liquor Gaming Licensing Board, the
City of Las Vegas and other local jurisdictions. The Commission, the Board, the
Clark County Liquor Gaming Licensing Board, the City of Las Vegas and such other
local jurisdictions are hereinafter collectively referred to as the “Nevada
Gaming Authorities.”
 
 The laws,
regulations and supervisory procedures of the Nevada Gaming Authorities have
their genesis in various declarations of public policy which are concerned with,
among other things: (i) the prevention of unsavory or unsuitable persons from
having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and
fraudulent practices; and (v) the creation of a source of state and local
revenues though taxation and licensing fees. Changes in such laws, regulations
and procedures could have an adverse effect on the Company’s gaming
operations.
 
 The
Company has been found suitable as the publicly traded parent of entities
holding Nevada gaming licenses. Leroy’s is licensed by the Nevada Gaming
Authorities as the owner/operator of non-restricted race and/or sports book
licenses; AWIM is licensed by the Nevada Gaming Authorities as a Manufacturer
and a Distributor; however, CBS does not maintain any gaming-related licenses
because they are not required. Gaming licenses require the periodic payment of
fees and taxes. Furthermore, gaming licenses are not transferable.
 
 The
Company is registered in Nevada as a publicly traded corporation and, as such,
is required to submit, on a periodic basis, detailed financial and operating
reports to the Commission. Additionally, the Company may be required to furnish
any other information requested by the Commission. No person may become a
stockholder of, or receive any percentage of profits from Leroy’s and/or AWIM
(as non-public entities) without first obtaining licenses and approvals from the
appropriate Nevada Gaming Authorities. The Company, Leroy’s, CBS and AWIM have
received from the Nevada Gaming Authorities the various registrations,
approvals, permits and licenses required to engage in gaming activities in
Nevada.
 
 The
Nevada Gaming Authorities may investigate any individual who has a material
relationship, or involvement with the Company in order to determine whether such
individual is suitable or should be licensed as a business associate of a gaming
licensee. Officers, directors and certain key employees must file applications
with the Nevada Gaming Authorities and may be required to be licensed or found
suitable by the Nevada Gaming Authorities. Officers, directors and key employees
of the Company who are actively and directly involved in the gaming activities
may be required to be licensed or found suitable by the Nevada Gaming
Authorities. The Nevada Gaming Authorities may deny an application of licensing
for any cause deemed reasonable. A finding of suitability is comparable to
licensing, and both require the submission of detailed personal and financial
information followed by a thorough investigation. An applicant for licensing or
a finding of suitability must pay all of the costs of the investigation. Changes
in licensed positions must be reported to the Nevada Gaming Authorities. In
addition to their authority to deny an application for a finding of suitability
or licensure, the Nevada Gaming Authorities also have jurisdiction to disapprove
a change in a corporate position. The officers and directors of the Company and
its subsidiaries have been found suitable by the Nevada Gaming
Authorities.
 
 11
 ***Table of
Contents***
 
 If the
Nevada Gaming Authorities were to find an officer, director or key employee
unsuitable for licensing or unsuitable to continue having a relationship with
the Company, the companies involved would be required to sever all relationships
with such a person. Additionally, the Commission may require the Company to
terminate the employment of any person who refuses to file appropriate
applications. Determinations of suitability or questions pertaining to licensing
are not subject to judicial review in Nevada.
 
 If it
were determined that the Nevada Act was violated by the Company or its
subsidiaries, the gaming licenses or registration held by the Company and its
subsidiaries could be limited, conditioned, suspended or revoked subject to
compliance with certain statutory and regulatory procedures. However, at the
discretion of the Commission, the Company and any person involved could be
subject to substantial fines for each separate violation of the Nevada Act.
Furthermore, a supervisor could be appointed by the Commission to operate the
Company’s gaming properties and, under certain circumstances, earnings generated
during the supervisor’s appointment (except for the reasonable rental value of
the Company’s gaming properties) could be forfeited to the State of Nevada.
Limitation, conditioning or suspension of any gaming license or the appointment
of a supervisor could, and certainly the revocation of any gaming license would,
materially adversely affect the Company’s gaming operations.
 
 A
beneficial holder of the Company’s voting securities, regardless of the number
of shares owned, may be required to file an application, be investigated, and
have his or her suitability as a beneficial holder of the Company’s voting
securities be determined if the Commission has reason to believe that such
ownership would otherwise be inconsistent with the declared policies of the
State of Nevada. The applicant must pay all costs of the investigation incurred
by the Nevada Gaming Authorities in conducting such an investigation. In
addition, the Clark County Liquor Gaming Licensing Board has taken the position
that it has the authority to approve all persons owning or controlling the stock
of any corporation controlling a gaming license.
 
 The
Nevada Act requires any person who acquires more than 5% of the Company’s voting
securities to report the acquisition to the Commission. The Nevada Act requires
that beneficial owners of more 10% of the Company’s voting securities apply to
the Commission for a finding of suitability within 30 days after the Chairman of
the Board mails written notice requiring such a filing. Under certain
circumstances, an “institutional investor”, as defined in the Nevada Act, which
acquires more than 10%, but not more than 15%, of the Company’s voting
securities may apply to the Commission for a waiver of such a finding of
suitability if such institutional investor holds the voting securities for
investment purposes only. An institutional investor shall not be deemed to hold
the voting securities for investment purposes only unless the voting securities
were acquired and are held in the ordinary course of business as an
institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the Board of Directors
of the Company, any change in the Company’s corporate charter, bylaws,
management, policies or operations of the Company, or any of its gaming
affiliates, or any other action which the Commission finds to be inconsistent
with holding the Company’s voting securities for investment purposes only.
Activities which are not deemed to be inconsistent with holding voting
securities for investment purposes only include: (i) voting on all matters voted
on by stockholders; (ii) making financial and other inquiries of management of
the type normally made by securities analysts for informational purposes and not
to cause a change in its management, policies or operations; and (iii) such
other activities as the Commission may determine to be consistent with such
investment intent. If the Commission grants a waiver to an “institutional
investor,” the waiver does not include a waiver or exemption from the
requirement for prior approval to “acquire control” of a registered corporation.
If the beneficial holder of voting securities who must be found suitable is a
corporation, partnership or trust, it must submit detailed business and
financial information, including a list of the beneficial owners. The applicant
is required to pay all costs of investigation.
 
 Any
person who fails or refuses to apply for a finding of suitability or a license
within 30 days after being ordered to do so by the Commission, or the Chairman
of the Board, may be found unsuitable. The same restrictions apply to a record
owner if the record owner, after request, fails to identify the beneficial
owners. Any stockholder found unsuitable and who holds, directly or indirectly,
any beneficial ownership of the Common Stock of a registered corporation beyond
such period of time as may be prescribed by the Commission may be guilty of a
criminal offense. The Company is subject to disciplinary action if, after it
receives notice that a person is unsuitable to be a stockholder or to have any
other relationship with the Company or its Subsidiaries, the Company: (i) pays
that person any dividend or interest upon voting securities of the Company; (ii)
allows that person to exercise, directly or indirectly, any voting right
conferred through securities held by that person; (iii) pays remuneration in any
form to that person for services rendered or otherwise; or (iv) fails to pursue
all lawful efforts to require such unsuitable
 
 12
 ***Table of
Contents***
 
 person to
relinquish his voting securities for cash at fair market value. Any person
required by the Commission to be found suitable but who is found unsuitable
shall be guilty of a criminal offense if he holds, directly or indirectly, the
beneficial ownership of the voting or debt securities beyond the time prescribed
by the Commission.
 
 The
Company is required to maintain a current stock ledger in Nevada, which may be
examined by the Nevada Gaming Authorities at any time. If any securities are
held in trust by an agent or by a nominee, the record holder may be required to
disclose the identity of the beneficial owner to the Nevada Gaming Authorities.
A failure to make such a disclosure may be grounds for finding the record holder
unsuitable. The Company is also required to render maximum assistance in
determining the identity of the beneficial owner. The Commission has the power
to require the Company’s stock certificates to bear a legend indicating that the
securities are subject to the Nevada Act. However, to date, the Commission has
not imposed such a requirement on the Company.
 
 Changes
in control of the Company through merger, consolidation, stock or asset
acquisitions, management or consulting agreements, or any act or conduct by a
person whereby he or she obtains control, may not occur without the prior
approval of the Commission. Entities seeking to acquire control of a registered
corporation must satisfy the Board and the Commission in a variety of stringent
standards prior to assuming control of such registered corporation. The
Commission may also require controlling stockholders, officers, directors and
other persons having a material relationship or involvement with the entity
proposed to acquire control, to be investigated and licensed as part of the
approval process related to the transaction.
 
 The
Nevada legislature has declared that some corporate acquisitions opposed by
management, repurchases of voting securities and corporate defense tactics
affecting Nevada gaming licenses and registered corporations that are affiliated
with those operations, may be injurious to stable and productive corporate
gaming. The Commission has established a regulatory scheme to ameliorate the
potentially adverse effects of these business practices upon Nevada’s gaming
industry and to further Nevada’s policy to: (i) assure the financial stability
of corporate gaming operators and their affiliates; (ii) preserve the beneficial
aspects of conducting business in the corporate form; and (iii) promote a
neutral environment for the orderly governance of corporate affairs. Approvals
are, in certain circumstances, required from the Commission before the Company
can make exceptional repurchases of voting securities above the current market
price thereof and before a corporate acquisition opposed by management can be
consummated. The Nevada Act also requires prior approval of a plan of
recapitalization proposed by a Company’s board of directors in response to a
tender offer made directly to the registered Company’s stockholders for the
purposes of acquiring control of the registered corporation.
 
 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 the Nevada licensees respective operations are conducted.
Depending upon the particular fee or tax involved, these fees indicate taxes are
payable either monthly, quarterly, semi-annually or annually and are based upon
either: (i) a percentage of gross revenues received; (ii) the number of gaming
devices operated; or (iii) the number of games operated. Nevada licensees that
hold a license as an operator of a slot route, or a manufacturers or
distributors license, also pay certain fees and taxes to the State of
Nevada.
 
 Any
person who is licensed, required to be licensed, registered, or required to be
registered, or is under common control with such person (hereinafter
collectively referred to as “licensees”) and who propose to become involved in a
gaming venture outside the State of Nevada is required to deposit with the
Board, and thereafter maintain, a revolving fund to pay the expenses of
investigation by the Board of his or her participation in such foreign gaming.
The Company has filed the appropriate foreign gaming reports and has established
the required revolving fund. The revolving fund is subject to increase or
decrease in the discretion of the Commission. Thereafter, such licensees are
required to comply with certain reporting requirements imposed by the Nevada
Act. Licensees are also subject to disciplinary action by the Commission if they
knowingly violate any laws of the foreign jurisdiction pertaining to the foreign
gaming operation, fail to conduct the foreign gaming operation in accordance
with the standards of honesty and integrity required of Nevada gaming
operations, engage in activities that are harmful to the State of Nevada or its
ability to collect gaming taxes and fees, or employ a person in the foreign
operation who has been denied a license or finding of suitability in Nevada on
the basis of personal unsuitability. Recent changes in the Nevada Gaming Control
Act would allow the Company to seek a determination of suitability of any
associate or activity associated with the foreign gaming opportunity prior to
engaging in that activity.
 
 13
 ***Table of
Contents***
 
 Pursuant
to the Professional and Amateur Sports Protection Act (hereinafter referred to
as the “Sports Protection Act”), which became effective January 1, 1993, the
proliferation of legalized sports books and wagering was significantly
curtailed. Although the Sports Protection Act generally prohibits sports
wagering in every jurisdiction, including those jurisdictions subject to the
Indian Gaming Regulatory Act, the Sports Protection Act does permit sports
wagering in those jurisdictions that authorized sports wagering prior to the
effective date of the Sports Protection Act. Thus, sports books and wagering are
permitted to continue to operate in Nevada provided the wager originates in
Nevada and is received by a licensed Sports Book in Nevada. Moreover, the
Interstate Wire Act (hereinafter referred to as the “Wire Act”) also prohibits
those in the business of betting and wagering from utilizing a wire
communication facility for the transmission in interstate or foreign commerce
any bets, wagers or information assisting in the placing of such bets and wagers
on any sporting event or contest unless such betting or wagering activity is
specifically authorized in each jurisdiction involved.
 
 Leroy’s
may not accept bets received by use of wire communications facilities, including
telephones and computers, unless such bets originated in jurisdictions wherein
such betting or wagering is legal. Nevada has amended the Nevada Gaming Control
Act to allow licensed race and sports books in Nevada to accept interstate
pari-mutuel wagers from other jurisdictions in which pari-mutuel wagering is
legal. However, the regulations of the Nevada Gaming Commission currently
prohibit any licensed race and sports book in the State of Nevada from accepting
any telephone wagers from interstate locations. In order for Leroy’s to take
advantage of the business opportunities provided by this amendment to the law,
the Nevada Gaming Commission must amend its regulatory restrictions “ab initio”
or Leroy’s can petition the Commission to remove such regulatory restrictions in
whole or in part. There can be no assurance that any regulatory amendment will
be authorized, that any such amendment would be favorable to Leroy’s, or that
any such amendment would not be burdensome to Leroy’s.
 
 The U.S.
Congress has proposed several bills that would prohibit any person from engaging
in the business of betting or wagering via electronic communication facilities,
including the Internet, if the transmission is not legal in the state or foreign
country in which the transmission either originates or is received. If any such
bill were to become law, the Company’s ability to take advantage of interstate
pari-mutuel wagering opportunities would be adversely impacted.
 
 **Employees.** The
Company and its subsidiaries had approximately 210 full and part-time domestic
employees at January 31, 2005 with 155 employed by Leroy’s, 42 employed by CBS
and 13 employed by the Company. No employees of the Company and its subsidiaries
are currently represented by a labor union. The Company and its subsidiaries do
not currently know whether or to what extent, if any, its employees will, in the
future, be governed by collective bargaining agreements.
 
 The
continuing proliferation of legalized gaming in the United States and the
resulting increase in the number of casinos have created a competitive
environment for qualified casino management personnel and other experienced
casino employees on a national basis. Management believes that this
industry-wide factor will make it more difficult for the Company to attract and
retain a trained labor force, which may adversely affect the business of the
Company. If the Company is unable to attract and retain qualified management
personnel, the growth and profitability of the Company may be adversely
affected.
 
 **Cautionary
Statement Regarding Future Results, Forward-Looking Information/Statements and
Certain Important Factors**
 
 From time
to time, the Company makes written and oral statements regarding our business
and prospects, such as projections of future performance, statements of
management’s plans and objectives, forecasts of market trends, and other matters
that are “forward-looking statements” within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Statements containing words or phrases such as “will likely result,” “are
expected to,” “will continue,” “is anticipated,” “estimates,” “projects,”
“believes,” “expects,” “anticipates,” “intends,” “target,” “goal,” “plans,”
“objective,” “should,” or similar expressions, identify forward-looking
statements, which may appear in documents, reports, filings with the Securities
and Exchange Commission (the “SEC”), news releases, written or oral
presentations made by officers, directors or other representatives, made by the
Company to analysts, stockholders, investors, new organizations, and others, and
discussions with management and other representatives. For such statements, the
Company claim the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995.
 
 14
 ***Table of
Contents***
 
 The
Company’s future results, including results related to forward-looking
statements, involve a number of risks and uncertainties. No assurance can be
given that the results reflected in any forward-looking statements will be
achieved. Any forward-looking statement made by or on behalf of the Company
speaks only as of the date on which such statement is made. The Company’s
forward-looking statements are based upon assumptions that are sometimes based
upon estimates, data, communications and other information from suppliers,
government agencies, and other sources, that may be subject to revision. Except
as required by law, the Company does not undertake any obligation to update or
to keep current either: (i) any forward-looking statement to reflect events or
circumstances arising after the date of such statement, or (ii) the important
factors that could cause the future results to differ materially from historical
results or trends, results anticipated or planned, or which are reflected from
time to time in any forward-looking statement which may be made by or on behalf
of the Company.
 
 In
addition to other matters identified or described by us from time to time in
filings with the SEC, there are several important factors that could cause our
future results to differ materially from historical results or trends, results
anticipated or planned, or results that are reflected from time to time in any
forward-looking statement that may be made by or on behalf of the Company. Some
of these important factors, but not necessarily all important factors, include
the following:
 
 THE
COMPANY IS SUBJECT TO STRICT REGULATION BY GAMING AUTHORITIES. ** The
ownership and operation of gaming licensees in Nevada are subject to strict
regulation under various state, county and municipal laws. The Company and its
required officers and certain shareholders have received the necessary licenses,
permits and authorizations required to own and operate one or more gaming
licensees. Failure of the Company or any if its key personnel to obtain or
maintain the requisite licenses, permits and authorizations would have a
materially adverse effect on the Company. Expansion of the Company’s activities
could be hindered by delays in obtaining requisite state licenses or the
inability to obtain such licenses. No assurance can be given as to the term for
which the Company’s licenses will be renewed in a particular jurisdiction or as
to what license conditions, if any, may be imposed by such jurisdiction in
connection with any future renewals. The Company cannot predict the effects that
adoption of and changes in gaming laws, rules and regulations might have on its
future operations.
 
 THE
GAMING INDUSTRY IS SUBJECT TO COMPETITION. There is intense competition among
companies in the gaming industry, most of which have significantly greater
financial, marketing, technical and other resources than the Company.
Additionally, CBS faces competition from other larger casinos as well as keeping
up with the rapidly growing field of technology. There is also the possibility
of another systems provider moving to Nevada, particularly Virtgame Corp. which
currently has approx. 10% of the Nevada market. Significant competition
encountered by the Company may have a materially adverse effect on the Company.
There can be no assurance that the Company will be able to compete successfully
against current and future competitors.
 
 DEMAND
FOR THE COMPANY’S PRODUCTS AND SERVICES IS SUBJECT TO CONSUMER
DEMAND. ** The
Company believes its ability to increase revenues, cash flow and profitability
will depend, in part, upon continued market acceptance of the Company’s products
and services. There can be no assurance that the market acceptance of the
Company’s products and services will continue. Changes in market conditions in
the gaming industry and financial condition of host locations or customers could
limit or diminish market acceptance of these products and services. Any
interruption in professional or college football and/or professional or college
basketball games would adversely affect the Company.
 
 THE
GAMING INDUSTRY IS SUBJECT TO FEDERAL LEGISLATION. The U.S. Congress has
proposed several bills that would prohibit any person from engaging in the
business of betting or wagering via electronic communication facilities if the
transmission is not legal in the state in which the transmission either
originates or is received. In addition, the U.S. Congress has proposed several
bills that would prohibit any person from accepting wagers on amateur sporting
events including high school, college and Olympic events. There is no guarantee
that Congress will not pass a bill which would adversely effect the operations
of the Company.
 
 THE
COMPANY HAS A DEPENDENCE ON CURRENT MANAGEMENT. The Company’s success is largely
dependent on the efforts of Victor Salerno, its Chief Executive Officer.
Although the Company maintains a “key person” life insurance policy and has an
employment agreement with Mr. Salerno, the loss of Mr. Salerno’s services could
have materially adverse effect on the Company’s business.
 
 15
 ***Table of
Contents***
 
 THE
COMPANY IS SUBJECT TO POTENTIAL FLUCTUATIONS IN RESULTS. ** The
Company’s quarterly results have historically fluctuated primarily due to
outside factors such as professional and college sports seasons and timing of
sales and installation for CBS equipment sales. Thus the results of any quarter
are not necessarily indicative of the results that may be expected for any other
interim period. In addition, the Company takes risk by accepting wagers on the
outcome of various sporting events. While the Company has instituted measures to
lessen the risk, there is no assurance that the Company will be able to win more
of the wagers than it loses.
 
 OVER THE
PAST SEVERAL YEARS, THE COMPANY HAS HAD A HISTORY OF LOSSES AND MAY INCURE
ADDITIONAL LOSSES IN THE FUTURE. Over the past several years, the Company has
had a history of losses. In addition, from the Company’s inception of revenue
producing operations through the current fiscal year, the Company has incurred
an accumulated deficit. While the Company has implemented strategies to improve
future operations including, but not limited to, discontinuing unprofitable
business segments such as keno, pari-mutuel sports, international operations,
etc., investing in additional research and development aimed at new markets, and
settling various litigation matters, there is no assurance that such strategies
will be successful. In order for the Company to return to profitable operations,
the Company will need to generate and sustain addition revenues while
maintaining reasonable cost and expense levels.
 
 THE
COMPANY WILL REQUIRE ADDITIONAL CAPITAL TO ACHIEVE ITS GOALS, BUT DOES NOT HAVE
ANY COMMITMENTS TO OBTAIN SUCH CAPITAL AND CAN NOT GIVE ASSURANCE THAT IT WILL
BE ABLE TO OBTAIN CAPITAL AS AND WHEN REQUIRED. The Company believes that it has
sufficient working capital as of the date of this report to satisfy estimated
working capital requirements for the foreseeable future in regards to current
operations. In order for the Company to achieve its goals and grow the revenue
stream, however, it will require additional capital to fund the operations of
AWIM and CSS. At the present time, the Company does not have any commitments to
obtain additional capital and there can be no guarantees that such funds will be
available on commercially reasonable terms, if at all.
 
 AN
ADVERSE CHANGE AFFECTING THE GAMING INDUSTRY, SUCH AS A CHANGE IN GAMING
REGULATIONS OR A DECREASE IN THE RATE OF GROWTH AND POPULARITY OF CASINO GAMING,
WILL NEGATIVELY IMPACT OUR PROFITABILITY AND OUR POTENTIAL FOR GROWTH. The
Company’s ability to grow and operate profitably is substantially dependent upon
the expansion of the Nevada gaming industry and other factors that are beyond
the Company’s control. These factors include, among others, the pace of
development, changes in gaming regulations, the continued popularity of casino
gaming, particularly race and sports wagering, as a leisure activity, etc. An
adverse change in any of these political, legal or other factors may negatively
impact the Company’s results of operations.
 
 FAILURE
TO OBTAIN OR RETAIN REQUIRED GAMING LICENSES COULD PREVENT EXPANSION OF OUR
MARKET AND/OR PROHIBIT THE GENERATION OF REVENUE. The operation of a race and
sports related business is subject to numerous federal, state, and local
regulations. In particular, the Leroy’s and AWIM subsidiaries are licensed by
the Nevada Gaming Commission and are subject to extensive regulation. Together
with key personnel, the Company undergoes extensive investigation before each
new gaming license is issued and the products of CBS and AWIM are subjected to
testing and evaluation prior to approval and use. Generally, gaming authorities
have broad discretion when granting, renewing or revoking these approvals and
licenses. The Company’s failure to obtain or retain a required license or
approval would decrease our share in the marketplace and put us at a
disadvantage with our competitors. Consequently, the market price of the
Company’s common stock may suffer.
 
 FUTURE
REVENUE GROWTH DEPENDS ON OUR ABILITY TO IMPROVE THE EFFECTIVENESS AND BREADTH
OF OUR SALES ORGANIZATION. In order to achieve the Company’s goals for growth,
particularly with the AWIM and CSS subsidiaries, the Company will need to
improve the effectiveness and breadth of its sales operations nationally and
internationally in order to increase market awareness and sales. The Company’s
gaming products require sophisticated sales efforts targeted at selected people
within the gaming industry. Competition for qualified sales personnel is
intense, and the Company may not be able to hire the kind and number of sales
personnel required. In addition, the Company will need to effectively train and
educate the sales force if they are to be successful in selling into the
market.
 
 SPORTS
WAGERING IS ILLEGAL THROUGHOUT MOST OF THE UNITED STATES. Although legal in
Nevada, wagering on sporting events is illegal throughout most of the United
States due to the provisions of the
 
 16
 ***Table of
Contents***
 
 Federal
Wire Act and is not likely to become legal due to the provisions of the Sports
Protection Act. Consequently, the potential for growth of the Leroy’s, CBS, and
AWIM subsidiaries in the United States is limited.
 
 THE
COMPANY MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY RIGHTS AND MAY INCUR
SIGNIFICANT COSTS ATTEMPTING TO DO SO. The Company’s success and ability to
compete are dependent to a significant degree on our proprietary technology. The
Company relies on a combination of copyright, trade secret and trademark laws,
as well as confidentiality and licensing agreements to protect these proprietary
rights. However, it may be possible for a third party to copy or otherwise
obtain and use the software or other proprietary information without
authorization or to develop similar software independently. In addition,
litigation may be necessary in the future to enforce the intellectual property
rights, to protect trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. Such litigation, whether successful or not, could result in
substantial costs and diversions of resources, either of which could have a
material adverse affect on the financial condition and operating
results.
 
 THE
MARKET FOR THE COMPANY’S COMMON STOCK IS LIMITED. The Company’s common stock is
“thinly-traded” and any last reported sales price may not be a true market-based
valuation of the common stock. There can be no assurance that an active market
for the common stock will develop. In addition, the stock market in general has
experienced extreme price and volume fluctuations that have often been unrelated
or disproportionate to operating performance.
 
 THE
COMPANY’S COMMON STOCK IS CONSIDERED A “PENNY STOCK” AND, AS SUCH, THE MARKET
FOR THE COMMON STOCK MAY BE FURTHER LIMITED BY CERTAIN SEC RULES APPLICABLE TO
PENNY STOCKS. As long as the price of the Company’s common stock remains below
$5.00 per share, the common shares are likely to be subject to certain “penny
stock” rules promulgated by the SEC. Those rules impose certain sales practice
requirements on brokers who sell penny stock to persons other than established
customers and accredited investors (generally institutions with assets in excess
of $5,000,000 or individuals with net worth in excess of $1,000,000). For
transactions covered by the penny stock rules, the broker must make a special
suitability determination for the purchaser and receive the purchaser’s written
consent to the transaction prior to the sale. Furthermore, the penny stock rules
generally require, among other things, that brokers engaged in secondary trading
of penny stocks provide customers with written disclosure documents, monthly
statements of the market value of penny stocks, disclosure of the bid and ask
prices, disclosure of the compensation to the brokerage firm, and disclosure of
the sales person working for the brokerage firm. These rules and regulations
adversely affect the ability of brokers to sell the Company’s common stock and
limit the liquidity of the Company’s securities.
 
 **Item
2.****Description
of Property**
 
 The
Company’s corporate offices, central computer operations and systems operations
are located in a 29,250 square foot building at 675 Grier Drive, Las Vegas,
Nevada. On January 7, 2005, the Company completed a sale and leaseback of the
property; prior to the sale, the building was owned by the CBS subsidiary. After
deducting the first mortgage payoff ($1,569,076), a security deposit on the
leaseback ($180,000) and standard closing costs ($22,348), CBS realized net
proceeds of $2,204,576 from the $4,000,000 sales price. However, pursuant to the
terms of the settlement agreement between the Company and LVGI dated February
23, 2004 as amended on August 10, 2004, $340,000 of the sale proceeds were paid
to LVGI on January 11, 2005 as a reduction of the debt owed to LVGI by the
Company.
 
 The
Company realized a gain of $1,638,000 on the sale of the building. However,
pursuant to SFAS No. 28, *Accounting
for Sales with Lease-backs* , only a
portion of the gain was recognized in the current fiscal year. The remainder of
the gain ($1,599,371) has been deferred and will be amortized against the lease
payments over the initial lease term (5 years). The deferred gain will be
recognized as follows:
 
 **Fiscal
      Year Ending**
      **January
      31,**
    
    **Gain**
      **Realized**
    
    **Deferred**
      **Gain
      Balance**2005
    
    $38,629
    
    $1,599,3712006
    
    327,600
    
    1,271,7712007
    
    327,600
    
    944,1712008
    
    327,600
    
    616,5712009
    
    327,600
    
    288,9712010
    
    288,971**$1,638,000**
  17
 ***Table of
Contents***
  CBS
currently leases the building from the new owner for a rent of $30,000 per month
(triple net). The lease has an initial term of five years with options for two
additional five-year terms. CBS, in turn, sublets a portion of the building to
AWI (2,830 square feet; $5,236 per month), Leroy’s (6,769 square feet; $11,014
per month) and Las Vegas Sports Consultants, Inc. (an unrelated company; 5,449
square feet; $10,353 per month).
 
 In
addition, CBS currently leases 1,847 square feet of office/warehouse space in
Reno, Nevada for the purposes of providing maintenance for our Northern Nevada
customers. This space is located at 960 Matley Lane, Suite 21, Reno, Nevada. CBS
pays $1,405 per month pursuant to a lease that expires August 31,
2006.
 
 The
Company believes that the existing facilities in Las Vegas and Reno satisfy our
present and foreseeable needs and does not anticipate any changes.
 
 Leroy’s
operates race and/or sports books subject to lease agreements with the host
casino operator. The average book occupies approximately 300 square feet and
ranges from 80 to 1,000 square feet. Lease terms generally vary from 1 to 10
years and typically provide for automatic extensions and termination by either
party with a 90-day notice. Total rental expense under the leases was
approximately $435,223 and $444,876 for the years ended January 31, 2005 and
2004, respectively.
 
 **Item
3.****Legal
Proceedings**
 ****
 **Racusin**
 
 On
September 3, 2004, the Company entered into a settlement agreement (the “Racusin
Agreement”) with Michael Racusin dba M. Racusin & Co (“Racusin”); pursuant
to the terms of the Racusin Agreement, the debt to Racusin will be paid in
either cash or stock depending upon the outcome of two appeals in the matter. A
full and completed copy of the Agreement may be found attached to the Form 8-K
filed with the SEC on September 7, 2004.
 
 On
January 14, 2005, the 9 th Circuit
Court of Appeals (the “9 th Circuit”) reversed the district court regarding prejudgment interest; pursuant
to the 9 th Circuit
decision, Racusin is awarded an additional $1,383,036.15 in prejudgment
interest. On April 14, 2005, the Bankruptcy Appellate Panel (the “BAP”) for the
9 th Circuit
issued its decision reversing the bankruptcy court and ruling that the debt owed
to Racusin is subordinated pursuant to the provisions of Section 510(b) of the
U.S. Bankruptcy Code.
 
 As a
result of the two rulings noted above, and in accordance with the provisions of
the Racusin Agreement, the debt to Racusin will be paid in the form of 250,000
shares of the Company’s common stock rather than $2.8 million in cash. Racusin,
however, retains the right to appeal this decision to the 9 th Circuit;
in the event of an appeal, a final decision regarding this matter could be
delayed by 12 to 36 months.
 
 In
accordance with the Racusin Agreement, the Company has loaned $300,000 to
Racusin in order to bond his appeal in a matter unrelated to the Company. On
March 24, 2005, the Company was notified that Racusin was not successful in this
matter and the bond (the monies loaned by the Company) was remitted to the
opposing party. As Racusin has complied with all terms and conditions of the
Agreement, he is not required to repay this sum.
 
 In
addition, a subsidiary of the Company has entered into an employment agreement
with Racusin. Pursuant to the terms of the agreement, Racusin is paid $10,000
per month in the form of employment compensation; the employment agreement will
terminate on September 30, 2005.
 
 The
Company has previously recorded $1,972,249 (including accrued interest) as a
litigation liability in regards to this matter; the Company does not intend to
eliminate this amount until such time as the shares have been issued. However,
this amount will be reduced by $300,000 on the next balance sheet published by
the Company (on Form 10-QSB for the first quarter of fiscal year 2006) to
reflect the loan/payment noted above.
  18
 ***Table of
Contents***
 
 **Las
Vegas Gaming, Inc. (previously Imagineering Systems,
Inc.)**
 
 On
February 20, 2004, the Company entered into a settlement agreement (the “LVGI
Agreement”) with Las Vegas Gaming, Inc. (“LVGI”). A full and complete copy of
the Agreement may be found attached to the Form 8-K filed with the SEC on
February 26, 2004.
 
 Pursuant
to the terms and conditions of the LVGI Agreement, LVGI has agreed to accept a
reduced amount of $1,000,000 in full satisfaction and release of the judgment.
On January 11, 2005, the Company paid LVGI the sum of $340,000 towards the debt.
On March 11, 2005, the Company paid LVGI the sum of $320,000 towards the debt.
The remaining $340,000 will be paid in 24 monthly installments beginning April
1, 2005 pursuant to the amortization schedule attached to the LVGI
Agreement.
 
 **Jean
Development Co.,** ***et.al.***
 
 On
December 14, 2004, the Company entered into a settlement agreement (the “Jean
Agreement”) with Jean Development Company, Jean Development West and Railroad
Pass Investment Group. Pursuant to the terms and conditions of the Jean
Agreement, on March 11, 2005, the Company paid a total of $76,383.86 in full
satisfaction and release of the debt.
 
 **Cash
Payment Obligations from Litigation**
 
 The
following table indicates the cash payment obligations resulting from litigation
and the settlements thereon:
 
 **Racusin**
    **LVGI**
    **Jean
      Devel.**
    **Total**FYE
      01-31-05
    $300,000
    $340,000
    $0
    $640,000FYE
      01-31-06
    0
    475,273
    76,384
    551,657FYE
      01-31-07
    0
    177,572
    0
    177,572FYE
      01-31-08
    0
    27,802
    0
    27,802**TOTAL**
    **$300,000**
    **$1,020,647**
    **$76,384**
    **$1,397,031**
 
 NOTES
 1 - Payment amounts reflected above include both principal and
interest.
 2 - Payment of $300,000 to Racusin for FYE 01-31-05 was made
09-10-04.
 3 - Payment of $340,000 to LVGI for FYE 01-31-05 was made on
01-11-05.
 4 - Payment of $320,000 to LVGI for FYE 01-31-06 was made on
03-11-05.
 5 - Payment of $15,318 to LVGI for FYE 01-31-06 was made on
04-01-05.
 6 - Payment of $76,384 to Jean Development for FYE 01-31-06 was made on
03-11-05.
 
 **Other**
 
 The
Company or any subsidiary is not a party to any other material pending legal
proceeding nor, to the Company’s knowledge, is any other material legal
proceeding threatened against it or any of its subsidiaries. The Company
maintains insurance coverage, including property, workers compensation and
general liability insurance, which it considers adequate for the size of the
Company and the nature of its business. Except as otherwise noted, management
does not believe the outcome of the above-described proceedings will have a
material adverse effect on the Company’s financial position or results of
operations.
 
 **Item
4.****Submission
of Matters to a Vote of Security Holders**
 
 Pursuant
to the timelines established by the Bankruptcy Court, the balloting deadline to
accept or reject the Restated Amended Joint Plan of Reorganization of AWI and
Leroy’s was February 14, 2005. Pursuant to the terms and conditions of the Plan,
the AWI common shareholders will be impaired (via dilution) in the event that
Racusin is paid in AWI common stock rather than cash. As the shareholders may be
impaired under the Plan, the Company’s common shareholders were requested to
vote to accept or reject the Plan. The results of the voting was as
follows:
 
 19
 ***Table of
Contents***
 
 
 **Number
      of**
      **Shares**
    **Percentage**Votes
      FOR the Plan
    4,063,640
    49.94%Votes
      AGAINST the Plan
    50,260
    0.62%Votes
      ABSTAINED
    33,775
    0.42%Shares
      Not Voted
    3,990,090
    49.03%**TOTAL**
    **8,137,765**
    **100.00%**
 
 Based
upon the results of voting, an overwhelming percentage of the votes cast were in
favor of accepting the Plan (98.78%) and, as such, the AWI common shareholders
were deemed to be in favor of the Plan.
  20
 ***Table of
Contents***
  **PART II**
 
 **Item
5.****Market
for Common Equity and Related Stockholder Matters**
 
 **Market
information.** The
Company’s common stock began trading on NASDAQ National Market System under the
symbol “BETM” upon inception in 1996. Effective August 4, 2000, however, the
Company’s securities began trading on the OTC Bulletin Board (OTCBB). The
following table sets forth the range of high and low bid quotations for the
Company’s Common Stock for each of the periods indicated as reported by the NASD
OTCBB. These prices do not include retail markup, markdown or commission and may
not represent actual transactions.
 
 **BETMQ.OB
      - Fiscal Year Ending January 31, 2005**Quarter
      Ended
    High
      $
    Low
      $April
      30, 2004
    0.51
    0.11July
      31, 2004
    0.45
    0.33October
      31, 2004
    0.80
    0.25January
      31, 2005
    0.76
    0.33**BETMQ.OB
      - Fiscal Year Ending January 31, 2004**Quarter
      Ended
    High
      $
    Low
      $April
      30, 2003
    0.15
    0.07July
      31, 2003
    0.32
    0.05October
      31, 2003
    0.23
    0.08January
      31, 2004
    0.21
    0.12
 
 The
Company considers its common stock to be “thinly traded” and, accordingly,
reported sales prices may not be a true market-based valuation of the common
stock.
 
 **Stockholders.** As of
April 15, 2005, there were 65 record holders of the Company’s common stock and
an estimated 1,273 beneficial holders.
 
 **Dividends.** The
Company has not paid any cash dividends on its common stock since inception and
does not contemplate paying dividends in the foreseeable future. The Company
anticipates that earnings, if any, will be retained for the operation of the
business.
 
 **Securities
authorized for issuance under equity compensation plans.** Part
III, Item 11 of this Form 10-KSB includes information regarding the securities
underlying outstanding options and securities remaining available for issuance
under the Company’s equity compensation plans as of January 31,
2005.
 
 **Item
6.****Management’s
Discussion**
 
 This
Annual Report on Form 10-KSB and the information incorporated by reference may
include "forward-looking statements" within the meaning of Section 27(a) of the
Securities Act and section 21(e) of the Exchange Act. We intend the
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements. All statements regarding expected financial position
and operating results, business strategy, financing plans and the outcome of any
contingencies are forward-looking statements. The forward-looking statements are
subject to risks and uncertainties that could cause actual results to differ
materially from those set forth or implied by any forward-looking statements.
Please refer to Part I, Item 1 (“Cautionary Statement Regarding Future Results,
Forward-Looking Information/Statements and Certain Important Factors”) of this
Form 10-KSB for additional information. The following discussion should be read
in conjunction with the Company’s consolidated financial statements and the
related notes included in this Form 10-KSB.
 
 **Overview.** The
Company’s primary operating strategies for the foreseeable future are to focus
on its core businesses relating to the race and sports industry. In regards to
Leroy’s, the Company intends to continue operating its existing books, adding
new books where and when appropriate, and continuing to become more efficient in
order to reduce expenses. In regards to CBS, the Company intends to continue
developing, selling and maintaining
 
 21
 ***Table of
Contents***
 
 computerized
race and sports wagering systems for the gaming industry. In regards to AWIM,
the Company intends to continue developing the self-service wagering kiosk,
installing the kiosk in Leroy’s locations to assist in controlling escalating
personnel costs, and marketing the kiosk to non-Leroy’s locations. In regards to
CSS, the Company intends to continue developing the contest-related kiosk and
marketing the kiosk to non-Leroy’s locations.
 The
Company has implemented and is continuing to initiate other cost cutting
measures.
 
 Where
appropriate, the Company will continue to explore possible new locations for its
products, including foreign jurisdictions. We will also continue our review of
existing Leroy’s locations in order to close those locations that are not
operating efficiently. Based on our strategy, the number of race and sports
books operated by Leroy’s may increase or decrease in the future due to the
closure of unprofitable locations or host properties, closures due to other
factors beyond our control and/or the possible opening of new locations with
greater potential for profitability. There is no assurance that Leroy’s will be
able to add new locations and/or that any new locations so added will be
profitable.
 
 Management
believes that the Company will be able to satisfy its operating cash
requirements for at least the next 12 months from existing cash balances and
anticipated cash flows. The Company plans to accumulate cash liquidity during
the current year ended fiscal 2006 to fund the purchase of kiosks, seasonality
of sports betting, timing of system sales, and the possible effects of
legislation to ban wagering on amateur athletic events.
 
 **Liquidity
and capital resources.** On July
25, 2003 (the “Petition Date”), AWI and Leroy’s filed voluntary petitions for
relief under Chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the District of Nevada, Northern Division in Reno,
Nevada (the “Bankruptcy Court”). The Company’s other subsidiaries, including
CBS, AWIM, and CSS were not directly involved in the bankruptcy
proceedings.
 
 On
February 28, 2005, the Bankruptcy Court confirmed the Restated Amended Joint
Plan of Reorganization (the “Plan”) of AWI and Leroy’s.
 
 On March
11, 2005 (the “Effective Date”), AWI and Leroy’s consummated the Plan and
formally emerged from Chapter 11 proceedings after completing all required
actions and all remaining conditions.
 
 As of the
Effective Date, the Company and Leroy’s have made the following cash payments
pursuant to the terms and conditions of the Plan:
 
 **CATEGORY**
    **GROSS**
    **INTEREST**
    **TOTAL**
    **BALANCE**AWI
      General Creditors
    $90,201
    $1,664
    $91,865
    $0Leroy’s
      General Creditors
    69,815
    1,288
    71,103
    0Las
      Vegas Gaming, Inc.
    660,000
    0
    660,000
    340,000AWI
      Preferred Shareholders
    224,264
    1,977
    226,241
    0**Total
      Payments**
    **$1,044,280**
    **$4,929**
    **$1,049,209**
    **$340,000**
 
 Although
the Company and Leroy’s have formally emerged from the Chapter 11 proceedings as
of March 11, 2005, the cases have not been “closed” by the Bankruptcy Court as
the Company is disputing several claims. The bankruptcy cases will not be
officially closed until each of these disputes has been resolved by the
Bankruptcy Court. The following is a summary of the disputed claims and the
potential impact on the Company:
  **REASON**
    **AMOUNT**
    **NOTES**AWI
    Disputed
      because the claim amount has already been paid
    $23,894
    The
      Company believes these amounts have already been paidAWI
    Disputed
      because the claim amount is not owed
    $2,303
    The
      Company believes these amounts are in error and are not currently due or
      owingAWI
    Disputed
      pursuant to Section 510(b) of the Bankruptcy Code
    $39,467
    The
      Company believes this amount will be satisfied by the issuance of 2,000
      shares of AWI common stockLeroy’s
    Disputed
      because the claim amount has already been paid
    $91,063
    The
      Company believes these amounts have already been paidLeroy’s
    Disputed
      because the claim amount is not owed
    $165,981
    The
      Company believes these amounts are in error and are not currently due or
      owingLeroy’s
    Disputed
      because the claim amount is in error
    $1,020
    The
      Company believes that it owes $200.00 (plus interest) of the claim
      amount
  22
 ***Table of Contents***
 
 The
disputed claims noted above are immaterial to the overall operation of the
Company and will be immediately paid from existing cash reserves if and when
ordered by the Bankruptcy Court.
 
 From the
Petition Date to the Effective Date, preferred stock dividends were not paid. As
noted above, however, all accrued preferred stock dividends, plus interest at
the Federal Judgment Rate, were paid on the Effective Date.
 
 On
December 31, 2002, the Company was notified that its surety bonds covering the
Gaming Control Board Regulation 22.040 Reserve Requirement were cancelled
effective March 1, 2003, due to the rehabilitation (bankruptcy) of the insurance
company providing the bonds. Regulation 22.040 requires the Company have
reserves (cash, surety bonds, irrevocable standby letter of credit, etc.)
sufficient to cover any outstanding wagering liability including unpaid winning
tickets, future tickets and telephone account deposits; at January 31, 2005, the
Regulation 22.040 Reserve Requirement was $2,200,000. To meet the Regulation’s
requirements, the Company obtained two (2) Irrevocable Standby Letters of Credit
(“ILOC”) from U.S. Bank in the amount of $1,100,000 each (for a total of
$2,200,000). The first ILOC is secured by a $1,100,000 Certificate of Deposit
(“CD”) held by U.S. Bank; this CD is classified in the Company’s balance sheet
as restricted cash. The second ILOC is secured by a $1,500,000 second mortgage
on the personal residence of Victor Salerno, the Company’s President, Chief
Executive Officer and Board Chairman. In exchange for providing the collateral
for the second ILOC, Mr. Salerno has been compensated as follows:
 
 For the
period July 1, 2003 through June 30, 2004:   $38,500
 For the
period July 1, 2004 through June 30, 2005:   $52,500
 
 The
amounts paid to Mr. Salerno represent 3.5% of $1,100,000 and 3.5% of $1,500,000,
respectively. The difference in the payments is due to an inadvertent error on
the part of the Company; in the first year, the Company compensated Mr. Salerno
based upon the value of the ILOC ($1,100,000) rather than on the value of his
risk relative to the transaction ($1,500,000). The percentage paid to Mr.
Salerno (3.5%) is considered appropriate based upon the Company’s borrowing
rate, the level of risk associated with the transaction, and the Company’s prior
history in paying for surety bonds.
 
 On
February 6, 2005, the required Regulation 22.040 reserve was $2,205,720.67 as a
result of wagering activity on the professional football championship game;
accordingly, the reserve maintained by the Company ($2,200,000) was under-funded
by $5,720.67. On February 7, 2005, however, the required Regulation 22.040
reserve had dropped to $1,484,699.77, or was over-funded by $715,300.23. Due to
the deficiency in the reserve on February 6, 2005, the Gaming Control Board may
require the Company to increase the total reserve at the next renewal period
(July 1, 2005) in order to ensure a sufficient reserve in the future. An
inability to increase the reserve as necessary would have an adverse impact upon
the Company including, but not limited to, requiring a significant reduction in
the number of race/sports locations operated by the Leroy’s Horse & Sports
Place subsidiary, an elimination or reduction of telephone wagering accounts, a
reduction in handle (total amount wagered), etc.
 
 In the
upcoming fiscal year, the Company will attempt to replace the ILOC’s with new
surety bonds in an amount sufficient to cover the Regulation 22.040 Reserve
Requirement (as may be increased by the Gaming Control Board). The issuance of
new surety bonds and/or the renewal of the ILOC’s may or may not require a
continuation of collateral. The Company does not intend to increase its cash
reserves in order to provide the collateral for the surety bonds and/or ILOC’s.
If collateral in an amount exceeding the Company’s ability to fully fund the
collateral is required, Mr. Salerno has agreed to provide the additional
collateral at a rate of 3.5%.
 
 The
Company believes it will continue to successfully meet its long-term
obligations. The following table summarizes the Company’s cash payment
obligations:
 
 23
 ***Table of
Contents***
 
 **2006**
    
    **2007
      to 2008**
    
    **2009
      to 2010**Long-term
      debt
    $35,046
    
    $56,168
    
    $37,568Operating
      leases
    298,495
    
    273,989
    
    135,400Litigation
      Payments
    551,657
    
    205,374
    
    0**Total**
    **$885,198**
    
    **$535,531**
    
    **$172,968**
 
 Long term
debt includes loans for the service automobiles utilized in the Leroy’s and CBS
operations. Included in the operating leases are rents payable at the Leroy's
operating locations, an automobile, and copy machines. Rent at the Leroy's
locations includes the base rent due per the contract terms. The rental leases
also include one location in which the rent is calculated based on a formula
relating to the activity of the location. The rent to be paid for that location
was estimated for the purpose of this schedule. The litigation payments includes
amounts payable to LVGI and Jean Development.
 
 The
Company does not have any off balance sheet financing arrangements and/or
liabilities.
 
 **Results
of operations.** The
Company reports its results of operations through two operating segments:
Wagering (Leroy’s and AWIM) and Systems (CBS and CSS). Although numerous factors
are taken into consideration, the operating income (loss) of the segment
represents a significant profitability measure used by management in allocating
resources and assessing performance of the segments.
 
 **Summary.**
 
 **Fiscal
      Year Ending January 31,****2005**
    
    **2004**
    
    **Change
      (%)**Revenue
    $11,107,533
    
    $10,891,946
    
    +1.98%Costs
      and Expenses
    11,282,933
    
    10,340,466
    
    +9.11%**Operating
      Income (Loss)**
    **(175,400)**
    
    **551,480**
    
    **-131.81%**Other
      Expense
    (952,142)
    
    (1,039,200)
    
    -8.38%**Loss
      Before Income Taxes**
    **(1,127,542)**
    
    **(487,720)**
    
    **+131.19%**Income
      Tax Expense
    0
    
    0
    
    0.00%**Net
      Loss**
    **($1,127,542)**
    
    **($487,720)**
    
    **+131.19%**
 
 Revenues
for the year ending January 31, 2005 increased $215,586 (+1.98%) from revenues
for the year ending January 31, 2004. The increase is attributed to an increase
in wagering segment revenues of $58,308 (+0.85%) and an increase in systems
segment revenues of $157,278 (+3.89%).
 
 Costs and
expenses for the year ending January 31, 2005 increased $942,467 (+9.11%) from
costs and expenses for the year ending January 31, 2004. The increase is
attributed to an increase in wagering segment costs and expenses of $695,905
(+11.54%) and an increase in systems segment costs and expenses of $246,560
(+5.72%).
 
 As a
result of costs and expenses increasing at a faster rate than revenues (+9.11%
for costs and expenses versus +1.98% for revenues), the operating income for the
year ending January 31, 2004 became an operating loss in the year ending January
31, 2005. Total operating income decreased $726,880 (-131.81%) from an operating
income of $551,480 in fiscal year 2004 to an operating loss of ($175,400) in
fiscal year 2005.
 
 Other
income (expense) for the year ending January 31, 2005 decreased $87,058 (-8.38%)
from other income (expense) for the year ending January 31, 2004. The decrease
is primarily attributed to the LVGI litigation judgment recognized in fiscal
year 2004 as offset by reorganization expenses resulting from the bankruptcy
proceedings.
 
 Please
refer to the discussions below (“Wagering Segment,” “Systems Segment,” “Other
Income and Expense,” etc.) for additional information, discussion and
analysis.
 
 **Wagering
segment.** The
wagering segment is comprised of the operating results of the Leroy’s and AWIM
subsidiaries. The following table indicates the primary components of revenue
and operating costs resulting in the segment’s operating income
(loss).
  24
 ***Table of
Contents***
   **Fiscal
      Year Ending January 31,****2005**
    
    **2004**
    
    **Change
      (%)**Leroy’s
      - Sports Handle
    $96,946,479
    
    $89,796,408
    
    +7.96%Leroy’s
      - Sports Payout
    90,666,080
    
    83,348,870
    
    +8.78%Leroy’s
      - Sports Win
    6,280,399
    
    6,447,538
    
    -2.59%Leroy’s
      - Race Win
    42,104
    
    74,949
    
    -43.82%Leroy’s
      - Pari-Mutuel Commission
    548,328
    
    317,042
    
    +72.95%AWIM
      - Kiosk Lease
    30,294
    
    2,013
    
    +1,404.92%AWIM
      - Initial License Fees
    1,275
    
    2,550
    
    -50.00%**Total
      Revenue**
    **6,902,400**
    
    **6,844,092**
    
    **+0.85%**Direct
      Costs
    5,559,905
    
    4,999,434
    
    +11.21%Selling,
      General and Admin.
    965,599
    
    862,356
    
    +11.97%Depreciation
      and Amortization
    200,044
    
    167,853
    
    +19.18%**Total
      Costs and Expenses**
    **6,725,548**
    
    **6,029,643**
    
    **+11.54%****Operating
      Income**
    **$176,852**
    
    **$814,449**
    
    **-78.29%**
 
 Revenues
from wagering in fiscal year 2005 were $58,308 (+0.85%) higher than fiscal year
2004. This increase may be attributed to the following factors:
 
 Leroy’s
Sports Win: While sports handle (the total amount wagered) experienced a healthy
increase (+7.96%) over the prior fiscal year, the payouts associated with that
handle increased at an even greater rate (8.78%). As a result, the sports hold
percentage (win divided by handle) decreased from 7.2% in fiscal year 2004 to
6.5% in fiscal year 2005 and actual win decreased by $167,139 (-2.59%). The
decrease is primarily attributed to the professional football season (in which
the Nevada gaming industry as a whole experienced poor results during the month
of November 2004); while no assurances can be given, the sports hold percentage
is expected to rebound in fiscal year 2006.
 
 Leroy’s
Race Win: Non pari-mutuel race win decreased by $32,845 (-43.82%) from the prior
fiscal year. The decrease is attributed to the wagering results on the Kentucky
Derby; in fiscal year 2004, Kentucky Derby wagering resulted in a net win of
$36,352 while wagering in fiscal year 2005 resulted in a net loss of ($215); the
remaining difference is attributed to typical year-to-year differences in the
net win for the Preakness Stakes, the Belmont Stakes and Breeder’s Cup. While
the overall amount of race win is immaterial to the Leroy’s operation, the
Company expects the non pari-mutuel race win percentage to rebound in fiscal
year 2006.
 
 Leroy’s
Pari-Mutuel Commission: Pari-mutuel race commission increased by $231,286
(+72.95%) over the prior fiscal year. This increase is primarily attributable to
the addition of the pari-mutuel race book at the Riviera Hotel & Casino
(which opened on February 26, 2004). In addition, Leroy’s added pari-mutuel race
books at the Avi Hotel/Casino, Silver Club Hotel/Casino and Silver Nugget Casino
on January 28, 2005; the addition of these three pari-mutuel books, however, had
very little impact on fiscal year 2005 but are expected to increase the fiscal
year 2006 revenues.
 
 AWIM
Kiosk Lease: Revenues from leasing gaming-related self-service kiosks increased
by $28,281 (+1,404.92%) over the prior fiscal year. The increase can be
attributed to an increase in the number of kiosks out on lease (from 9 in fiscal
year 2004 to 33 in fiscal year 2005). Subject to the Company’s ability to raise
the additional capital necessary to purchase additional units, kiosk lease
revenues are expected to increase in future fiscal years as the additional units
are placed on lease.
 
 AWIM
Initial License Fees: Revenues from initial license fees decreased by $1,275
(-50.00%) from the prior fiscal year. This decrease is attributed to a change in
the third-party software used in conjunction with the self-service kiosk; due to
the change in the software, the initial license fees are expected to decrease
even further in future fiscal years.
 
 25
 ***Table of
Contents***
 
 Total
costs and expenses in fiscal year 2005 were $695,905 (+11.54%) higher than in
fiscal year 2004. This increase may be attributed to the following
factors:
 
 Direct
Costs: Direct costs increased by $560,471 (+11.21%) over the prior fiscal year
primarily due to additional costs associated with the new wagering locations
opened during the fiscal year ending January 31, 2005. General supplies
increased $51,042 (+62%), pari-mutuel race expense increased $113,599 (+42%),
repairs and maintenance increased $20,016 (+44%), television sports packages
increased $19,206 (+24%), sports line services increased $46,153 (+64%),
wagering tax and license expense increased $107,488 (+16%), payroll expense
increased $59,588 (+2%), advertising expense increased $43,872 (+33%) and
telephone expense increased $63,431 (+16%). The remainder of the difference is
attributable to smaller expense items. A number of these expenses (such as
initial wagering license fees, advertising expenses, etc.) are expected to
decrease in the next fiscal year; other expenses, however, are expected to
stabilize and generally be higher than prior fiscal years due to the increased
number of locations operated.
 
 Selling,
General and Administrative Costs: Selling, general and administrative costs
increased by $103,243 (+11.97%) over the prior fiscal year primarily due to
increases in insurance costs of $32,602 (+42%), outside services of $18,360
(53%) and MIS expenses of $44,158 (+100%). The remainder of the difference is
attributable to smaller expense items. These expenses are expected to stabilize,
but not decrease, over the next fiscal year.
 
 Depreciation
and Amortization: Depreciation and amortization increased by $32,191 (+19.18%)
over the prior fiscal year. The increase may be attributed to additional
equipment placed in service as a result of new locations (from 47 locations at
January 31, 2004 to 58 locations at January 31, 2005). Depreciation and
amortization is expected to increase in future fiscal years as the Company
continues to add locations and to modernize the equipment at existing
locations.
 
 Note that
an increase or decrease in handle is not necessarily indicative of an increase
or decrease in revenues or profits. Elimination of unprofitable locations,
closure of host properties, changes in state and/or federal regulations, and
other factors beyond the Company’s control may result in declines in
handle.
 
 The
Company intends to continue to open new locations that management expects to
operate profitably and to continue its review of existing locations in order to
close those locations that are not operating efficiently. There is no assurance
that the number of race and sports books operated by the Company will not
decrease in the future due to elimination of unprofitable locations, closure of
host properties, and other factors beyond the Company’s control, that the
Company will be able to add new locations, and/or that any new locations so
added will be profitable.
 
 **Systems
segment.** The
systems segment is comprised of the operating results of the CBS and CSS
subsidiaries. The following table indicates the primary components of revenue
and operating costs resulting in the segment’s operating income
(loss).
 
 **Fiscal
      Year Ending January 31,****2005**
    
    **2004**
    
    **Change
      (%)**CBS
      - System Sales
    $1,796,207
    
    $1,546,553
    
    +16.14%CBS
      - Maintenance Contracts
    2,392,743
    
    2,483,151
    
    -3.64%CBS
      - Other Revenue
    16,182
    
    18,150
    
    -10.84%CSS
      - Kiosk Leases
    0
    
    0
    
    0.00%**Total
      Revenue**
    **4,205,132**
    
    **4,047,854**
    
    **+3.89%**Direct
      Costs
    2,184,230
    
    1,860,102
    
    +17.43%Research
      and Development
    951,490
    
    1,025,891
    
    -7.25%Selling,
      General and Admin.
    1,248,509
    
    1,203,812
    
    +3.71%Depreciation
      and Amortization
    173,154
    
    221,018
    
    -21.66%**Total
      Costs and Expenses**
    **4,557,383**
    
    **4,310,823**
    
    **+5.72%****Operating
      Loss**
    **($352,251)**
    
    **($262,969)**
    
    **+33.95%**
   26
 ***Table of
Contents***
  Revenues
from systems in fiscal year 2005 were $157,278 (+3.89%) higher than fiscal year
2004. This increase may be attributed to the following factors:
 
 CBS
System Sales: CBS system sales increased $249,654 (+16.14%) over the prior
fiscal year. This increase is attributable to equipment and license software
sales to those CBS customers who had not previously upgraded their system. CBS
system sales are low volume, high dollar sales based on the needs of the market,
which is limited based on the number of Nevada casinos that operate race and
sports books. System sales are not recurring, as the impetus for a sale is
outdated or expired equipment at existing casinos or the opening of a new sports
book. The Company expects the system sales to remain relatively flat over the
next several fiscal years before increasing.
 
 CBS
Maintenance Contracts: Revenues from maintenance contracts decreased by $90,408
(-3.64%) over the prior fiscal year. This decrease is attributable to those
locations that upgraded their CBS system during the fiscal year; as a result of
the system sale, the customer received a 90-day warranty on the new equipment
(i.e., no maintenance fees were charged during the warranty period) and
obsolescence fees on the old equipment (if any) were eliminated. The Company
expects maintenance fees to stabilize at current levels over the next several
fiscal years. However, the consolidation in the gaming industry (i.e., the
mergers of Boyd and Coast, Harrah’s and Caesars, Mandalay Resort Group and
MGM/Mirage) could cause maintenance fees to decrease as the number of system
servers is reduced.
 
 CBS Other
Revenue: Other CBS revenues decreased by $1,968 (-10.84%) over the prior fiscal
year. Other revenues primarily consist of party rentals and other special
events. This revenue is considered immaterial to the overall operation and is
not expected to have a significant impact on future operations.
 
 CSS Kiosk
Lease: During fiscal year 2005, CSS placed two contest kiosks on trial at the
Del Mar racetrack in San Diego; during this trial period, the Company did not
charge for the use of the kiosks. Based upon the results of the trial, the
Company intends to purchase additional contest kiosks, as capital resources
allow, to grow the revenues of CSS. However, CSS revenues are not expected to
have a significant impact until fiscal year 2008.
 
 Total
costs and expenses in fiscal year 2005 were $246,560 (+5.72%) higher than in
fiscal year 2004. This increase may be attributed to the following
factors:
 
 Direct
Costs: Direct costs increased by $324,128 (+17.43%) over the prior fiscal year
primarily due to inventory purchases used to generate the increase in system
sales. Direct costs are expected to fluctuate in future fiscal periods in
proportion to increases/decreases in system sales.
 
 Research
and Development: Research and development costs decreased by $74,401 (-7.25%)
from the prior fiscal year primarily due to a decrease in payroll costs of
$64,054 (-6.53%). The remainder of the difference is attributable to smaller
expense items. These expenses are expected to stabilize, but not decrease, in
future fiscal periods.
 
 Selling,
General and Administrative Costs: Selling, general and administrative costs
increased by $44,697 (+3.71%) over the prior fiscal year due primarily to
increases in bad debt expense of $14,452 (+3%), rent expense of $24,000 (+12%)
and insurance costs of $24,688 (+42%). The remainder of the difference is
attributable to smaller expense items. Due to the sale and leaseback of the real
property, rent expense is expected to increase to approximately $360,000 (to be
offset by: (1) a decrease in interest expense as described below; and (2)
recognition of the deferred gain on the sale of the building as described in
Part I, Item 2 of this Form 10-KSB) in the next fiscal year. Other expenses are
expected to stabilize, but not decrease, in future fiscal years.
 
 Depreciation
and Amortization: Depreciation and amortization decreased by $47,864 (-21.66%)
from the prior fiscal year.
 
 **Other
income and expenses.** The
other income and expenses categories are primarily administrative in nature and,
as such, are not directly attributable to either operating segment. Accordingly,
these items are generally not taken
 
 27
 ***Table of
Contents***
 
 into
consideration by management when allocating resources to the segments and/or
assessing the performance of the segments.
 
 **Fiscal
      Year Ending January 31,****2005**
    
    **2004**
    
    **Change
      (%)**Interest
      Income
    $17,493
    
    $21,622
    
    -19.10%Interest
      Expense
    (167,078)
    
    (146,968)
    
    +13.68%Reorganization
      Expense
    (795,191)
    
    (214,935)
    
    +269.97%Litigation
      Judgment
    0
    
    (800,465)
    
    -100.00%Other,
      net
    (7,366)
    
    101,546
    
    -107.25%**Total
      Other Income (Expense)**
    **($952,142)**
    
    **$(1,039,200)**
    
    **-8.38%**
 
 Interest
Income: The majority of interest income (approx. 70%) is attributable to
interest earned on restricted cash deposits required by the Nevada Gaming
Control Board for the NGC Regulation 22.040 Reserve Requirement. (Refer to the
discussion regarding this matter located at “Liquidity and Capital Resources”
above.) The remainder of the interest income (approx. 30%) is attributable to
interest earned on interest bearing checking accounts. The decrease of $4,129
(-19.10%) is attributed to lower interest rates on the various cash deposits.
This amount is expected to remain relatively stable over the next several fiscal
years.
 
 Interest
Expense: The vast majority of interest expense paid (approx. 90%) is
attributable to the 8% mortgage note payable collateralized by the real property
located at 675 Grier Drive, Las Vegas, Nevada; this real property was sold, and
the first mortgage repaid, on January 7,2005. The remaining interest expense
(approx. 10%) is attributable to 11% and 12% notes payable collateralized by
service automobiles. The increase of $20,110 (+13.68%) is attributed to
additional service vehicles purchased during the fiscal year. This amount is
expected to decrease substantially in fiscal year 2006 due to the sale of the
real property (rent expense, as noted above, however, is expected to
increase).
 
 Reorganization
Expense: Reorganization expense includes all fees and charges paid (or accrued)
by the Company in regards to the Chapter 11 filings of AWI and Leroy’s; these
fees and charges typically include fees to the U.S. Trustees Office, attorney
fees for the Company’s legal counsel, attorney fees for the creditors/equity
holders legal counsel, financial advisors to the Company, etc. A breakdown of
the reorganization expenses paid (or accrued) by category can be found in Note 1
(“Reorganization Expenses”) to the Consolidated Financial Statements. The
increase of $580,256 (+269.97%) in reorganization expenses can be attributed to
additional legal fees required to defend the Company from two hostile takeover
attempts (one by Vince Schettler and one by Youbet.com, Inc.). Additional
information regarding the hostile takeover attempts may be found in the Form 8-K
filings incorporated by reference to this Form 10-KSB. This expense is expected
to decrease dramatically in fiscal year 2006 as AWI and Leroy’s successfully
emerged from Chapter 11 protection on March 11, 2005.
 
 Litigation
Judgment: The litigation judgment amount for the Fiscal Year Ending January 31,
2004 is attributable to the final judgment in the LVGI (Imagineering) matter.
Additional information regarding the LVGI matter can be found in Part 1, Item 3
(“Legal Proceedings”) of this Form 10-KSB as well as the Form 10-KSB for the
fiscal year ending January 31, 2004.
 
 Other,
net: The decrease in Other, Net is primarily attributed to the following
factors: a decrease in rental income of $40,580 (-32.27%), an increase in fraud
of $8,689 (+74.86%), and the litigation settlement payment to Gold Strike, *et.al* . in the
amount of $75,000 (+100.00%). The remainder of the difference is attributed to
numerous smaller factors. In future periods, this amount is expected to return
back to the level realized in the fiscal year ended January 31,
2004.
 
 **Critical
accounting estimates and policies.** Although
the Company’s financial statements necessarily make use of certain accounting
estimates by management, the Company believes that no matters that are the
subject of such estimates are so highly uncertain, subjective, complex, or
susceptible to change so as to present a significant risk of a material impact
on the Company’s financial condition or operating performance. The following,
however, summarizes the Company’s policies and use of estimates.
 
 28
 ***Table of
Contents***
 
 Wagering:
The Company records wagering revenues in compliance with the Nevada Revised
Statutes and the Regulations of the Nevada Gaming Commission and State Gaming
Control Board. For sports and non pari-mutuel race, the Company uses an accrual
method wherein the handle (total amount wagered) is recognized on the day the
event occurs (rather than the day the wager is accepted) decreased by the total
amount owed to patrons with winning wagers. This gross calculation (handle less
payouts) is then adjusted upward to account for any winning wagers that were not
redeemed (cashed) within the specified time period. For pari-mutuel race,
commission and breakage revenues are recorded when the wagers are settled,
typically the same day as the wager. Other sources of revenue are relatively
insignificant.
 
 System -
Software: The Company recognizes software revenue in accordance with the
provisions of Statement of Position (“SOP”) 97-2, *Software
Revenue Recognition* , as
amended by SOP 98-9, *Software
Revenue Recognition, With Respect to Certain Transactions* .
Software license fees represent revenues related to licenses for race/sports
software delivered to customers for in-house use. Revenues from software license
agreements (including any related training revenue) are recognized upon
installation of the software.
 
 System -
Hardware: The Company recognizes hardware revenue (including any related
installation revenue) upon installation of the hardware.
 
 System -
Maintenance: The Company negotiates maintenance agreements with each of its
customers to provide for the long-term care of the software and hardware.
Pursuant to the terms of the various maintenance agreements, a fixed sum is due
at the beginning of each month regardless of whether the customer requires
service during that month. The Company recognizes maintenance revenue on the
first day of each month for which the maintenance agreement is in place; the
Company maintains an allowance for doubtful accounts in the event that any such
revenue recorded is not realized.
 
 System -
Other: Other sources of revenue are relatively insignificant and are typically
recognized as performed.
 
 Selling,
General and Administrative Costs are charged to expense as
incurred.
 
 Accounting
for long-lived assets: Owned property and equipment are recorded at cost and
depreciated to residual values over the estimated useful lives using the
straight-line method. Leasehold improvements on operating leases are amortized
over the life of the lease or the life of the asset, whichever is shorter. The
estimated useful life of our equipment generally ranges from 3 to 10 years. The
Company tests for impairment losses on long-lived assets used in operations when
events and circumstances indicate that the assets might be impaired as defined
by SFAS No. 144, *Accounting
for the Impairment or Disposal of Long-Lived Assets* . An
impairment loss is recognized if the carrying amount of the asset is not
recoverable from its undiscounted cash flows and is measured as the difference
between the carrying amount and fair value of the asset.
 
 Accounting
for income taxes: In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized in accordance with SFAS No. 109, *Accounting
for Income Taxes* . The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. Management considers the amount and timing of scheduled
reversals of deferred tax liabilities and forecasted future taxable income over
the periods for which the deferred tax assets are deductible. An impairment loss
is recognized if management determines that all or a portion of the deferred tax
asset will not be realized.
 
 Use of
estimates: The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
 
 **Recently
issued accounting pronouncements.** In
November 2004, the FASB issued Revised Statement No. 123, *Accounting
for Share-Based Payment* (“SFAS
No. 123R”). This statement requires the Company to recognize the grant-date fair
value of stock options in the Statement of Operations. In addition, the Company
will be required to calculate this compensation using the fair-value based
method, versus the intrinsic value method previously allowed
 
 29
 ***Table of
Contents***
 
 under
SFAS No. 123. This revision is effective for periods beginning after December
15, 2005. Accordingly, the Company will adopt this revised SFAS effective the
first quarter of fiscal year 2007 (beginning February 1, 2006). The Company is
currently evaluating how it will adopt SFAS No. 123R and has not determined the
method it will use to value granted stock options. The adoption of SFAS No. 123R
is not expected to have a material effect on the Company’s results of
operations.
 
 In
December 2004, the FASB issued SFAS No. 153, *Exchanges
of Nonmonetary Assets, an Amendment of APB Opinion No. 29, Accounting for
Nonmonetary Transactions* . The
amendments made by SFAS 153 are based on the principle that exchanges of
nonmonetary assets should be measured based on the fair value of the assets
exchanged. Further, the amendments eliminate the narrow exception for
nonmonetary exchanges of similar productive assets and replace it with a broader
exception for exchanges of nonmonetary assets that do not have commercial
substance. The Statement is effective for nonmonetary asset exchanges occurring
in fiscal periods beginning after June 15, 2005. The Company does not expect to
enter into any material transactions that would be affected by adopting SFAS
153.
 
 **Item
7.****Financial
Statements**
 
 Audited
Financial Statements for Year Ended January 31, 2005 and 2004,
including:
 a.
    Report
      of Independent Auditors
 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
  30
 ***Table of
Contents***
  **REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 
 
 To The
Board of Directors and Stockholders of American Wagering, Inc.:
 
 We have
audited the accompanying consolidated balance sheets of American Wagering, Inc.
(Debtor-in-Possession) and Subsidiaries (the “Company”) as of January 31, 2005
and 2004, and the related consolidated statements of operations, stockholders’
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of American Wagering, Inc. and
subsidiaries as of January 31, 2005 and 2004, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.
  
 /s/
Piercy Bowler Taylor & Kern
 
 Las
Vegas, Nevada
 April 5,
2005
  31
 ***Table of
Contents***
  **AMERICAN
WAGERING, INC. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES**
 **CONSOLIDATED
BALANCE SHEETS**
 **FOR
THE YEARS ENDED JANUARY 31, 2005 AND 2004**
 
 **2005**
    
    **2004****ASSETS**Cash and Cash Equivalents
    $
    3,998,851
    
    $
    4,113,196Restricted Cash
    
    1,238,159
    
    
    1,060,869Accounts Receivable, net of doubtful accounts allowance of $41,900 and
      $40,296
    
    108,720
    
    
    294,538Notes Receivable
    
    620,000Inventories
    
    348,755
    
    
    957,174Deferred Tax Assets, net
    
    440,481
    
    
    440,481Prepaid Expenses and Other Current Assets
    
    419,434
    
    
    336,491**TOTAL CURRENT ASSETS**
    
    **7,174,400**
    
    
    **7,202,749**Property and Equipment, net
    
    1,685,932
    
    
    3,255,629Goodwill
    
    103,725
    
    
    103,725Other Assets
    
    322,209
    
    
    337,816**TOTAL ASSETS**
    **$**
    **9,286,266**
    
    **$**
    **10,899,919****LIABILITIES
      AND STOCKHOLDERS’ EQUITY**Current Portion of Long-Term Debt
    $
    35,473
    
    $
    131,834Accounts Payable
    
    516,016
    
    
    448,331Accrued Expenses
    
    548,223
    
    
    504,306Unpaid Winning Tickets
    
    801,074
    
    
    687,073Customer Deposits and Other Current Liabilities
    
    1,036,786
    
    
    1,622,496**TOTAL CURRENT LIABILITIES**
    
    **2,937,572**
    
    
    **3,394,040**Accounts Payable
    
    160,216
    
    
    164,990Accrued Payroll
    
    4,950
    
    
    4,950Accrued Expenses
    
    482,577
    
    
    310,399Litigation Payable, including accrued interest
    
    2,760,310
    
    
    3,100,310Accrued Preferred Stock Dividends
    
    213,400
    
    
    71,392Redeemable Series A Preferred Stock (3,238 shares)
    
    323,800
    
    
    323,800**TOTAL SUBJECT TO COMPROMISE**
    
    **3,945,253**
    
    
    **3,975,841**LONG-TERM
      DEBT, less current portion
    
    93,766
    
    
    1,567,226OTHER
      LONG-TERM LIABILITIES
    
    1,643,385
    
    
    25,000**TOTAL LONG-TERM LIABILIITES**
    
    **1,737,151**
    
    
    **1,592,226****TOTAL
      LIABILITIES**
    
    **8,619,976**
    
    
    **8,962,107****STOCKHOLDERS’
      EQUITY**Series A Preferred Stock - 10% cumulative; $100.00 par value; 18,924
      shares
      authorized; 10,924 shares outstanding
    
    1,092,400
    
    
    1,092,400Common Stock - $0.01 par value; 25,000,000 share authorized;
      7,897,946 shares issued
    
    78,979
    
    
    78,979Additional Paid-In Capital
    
    12,738,889
    
    
    12,738,889Deficit
    
    (12,916,485
    )
    
    (11,644,963)Treasure Stock, at cost (61,100 shares)
    
    (327,493
    )
    
    (327,493)**TOTAL STOCKHOLDERS’ EQUITY**
    
    **666,290**
    
    
    **1,937,812****TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY**
    **$**
    **9,286,266**
    
    **$**
    **10,899,919**
 
 **See
notes to consolidated financial statements.**
  32
 ***Table of
Contents***
  **AMERICAN
WAGERING, INC. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES**
 **CONSOLIDATED
STATEMENTS OF OPERATIONS**
 **FOR
THE YEARS ENDED JANUARY 31, 2005 AND 2004**
 
 
 
 
 **2005**
    
    **2004**Wagering
    $
    6,902,400
    
    $
    6,844,092Systems
    
    4,205,133
    
    
    4,047,854**TOTAL
      REVENUES**
    
    **11,107,533**
    
    
    **10,891,946**Direct
      Costs:Wagering
    
    5,559,906
    
    
    4,999,434Systems
    
    2,184,230
    
    
    1,860,102**TOTAL
      DIRECT COSTS**
    
    **7,744,136**
    
    
    **6,859,536**Research and
      Development
    
    951,490
    
    
    1,025,891Selling,
      General and Administrative
    
    2,214,109
    
    
    2,066,168Depreciation
      and Amortization
    
    373,198
    
    
    388,871**TOTAL
      ADMINISTRATIVE COSTS AND EXPENSES**
    
    **3,538,797**
    
    
    **3,480,930****TOTAL
      OPERATING EXPENSES**
    
    **11,282,933**
    
    
    **10,340,465****OPERATING
      INCOME (LOSS)**
    
    **(175,400**
    **)**
    
    **551,481**Interest
      Income
    
    17,493
    
    
    21,622Interest
      Expense
    
    (167,078
    )
    
    (146,968)Reorganization
      Expense
    
    (795,191
    )
    
    (214,935)Litigation
      Judgment
    
    
    
    
    (800,465)Other,
      net
    
    (7,366
    )
    
    101,546**TOTAL
      OTHER INCOME (EXPENSE)**
    
    **(952,142**
    **)**
    
    **(1,039,200)****NET
      LOSS**
    **$**
    **(1,127,542**
    **)**
    **$**
    **(487,719)****LOSS
      PER SHARE**Net
      Loss
    $
    (0.16
    )
    $
    (0.06)
 **See
notes to consolidated financial statements.**
  33
 ***Table of
Contents***
  **AMERICAN
WAGERING, INC. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES**
 **CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY**
 **FOR
THE YEARS ENDED JANUARY 31, 2005 AND 2004**




**Preferred Stock**
    ****
    **Common Stock**
    ****
    **Treasury Stock**
    **Additional
      Paid-In**
    ****
    ********
    **Shares**
    ****
    **Par**
    ****
    **Shares**
    ****
    **Par**
    ****
    **Shares**
    ****
    **Cost**
    ****
    **Capital**
    ****
    **Deficit******
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ******Balances
      at February 1, 2003**
    ****
    **10,924**
    ****
    **$**
    **1,092,400**
    ****
    ****
    **7,897,946**
    ****
    **$**
    **78,979**
    ****
    ****
    **61,100**
    ****
    **$**
    **327,493**
    ****
    **$**
    **12,738,889**
    ****
    **$**
    **(11,013,657)**Preferred Stock
      Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (143,587)Net
      Income Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (487,719)**Balances
      at January 31, 2004**
    ****
    **10,924**
    ****
    **$**
    **1,092,400**
    ****
    ****
    **7,897,946**
    ****
    **$**
    **78,979**
    ****
    ****
    **61,100**
    ****
    **$**
    **327,493**
    ****
    **$**
    **12,738,889**
    ****
    **$**
    **(11,644,963)**Preferred Stock
      Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (143,980)Net
      Income Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,127,542)**Balances
      at January 31, 2005**
    ****
    **10,924**
    ****
    **$**
    **1,092,400**
    ****
    ****
    **7,897,946**
    ****
    **$**
    **78,979**
    ****
    ****
    **61,100**
    ****
    **$**
    **327,493**
    ****
    **$**
    **12,738,889**
    ****
    **$**
    **(12,916,485)**


34
 ***Table of
Contents***
 ****
 **AMERICAN
WAGERING, INC. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES**
 **CONSOLIDATED
STATEMENTS OF CASH FLOWS**
 **FOR
THE YEARS ENDED JANUARY 31, 2005 AND 2004**
  **2005**
    
    **2004****CASH
      AND CASH EQUIVALENTS****AT
      BEGINNING OF PERIOD**
    **$**
    **4,113,196**
    
    **$**
    **4,329,654****Net
      cash provided by (used in) operating activities**
    
    **(1,225,203**
    **)**
    
    **1,329,616**INVESTING
      ACTIVITIESInvestment in
      restricted cash
    
    (157,276
    )
    
    (1,006,880)Withdrawals of
      restricted cash
    
    
    
    
    122,848Sale of
      property and equipment
    
    3,957,679Purchase of
      property and equipment
    
    (1,033,155
    )
    
    (502,683)**Net
      cash provided by (used in) investing activities**
    
    **2,767,248**
    
    
    **(1,386,715)**FINANCING
      ACTIVITIESRepayment of
      borrowings
    
    (1,656,390
    )
    
    (88,156)Dividends
    
    
    
    
    (71,203)**Net
      cash used in financing activities**
    
    **(1,656,390**
    **)**
    
    **(159,359)****NET
      DECREASE IN CASH****AND
      CASH EQUIVALENTS**
    
    **(114,345**
    **)**
    
    **(216,458)****CASH
      AND CASH EQUIVALENTS****AT
      END OF PERIOD**
    **$**
    **3,998,851**
    
    **$**
    **4,113,196**
  **See
notes to consolidated financial statements.**
  35
 ***Table of
Contents***
  **AMERICAN
WAGERING, INC. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 **JANUARY
31, 2005**
 
 
 
 
 **1.
Nature of Operations and Background Information**
 
 **Organization
and business.** American
Wagering, Inc. (“AWI”) was incorporated in the state of Nevada in August of
1995. AWI does not engage in any revenue generating activities. Rather, AWI is a
publicly traded holding company that earns its revenues through the consolidated
operations of its wholly owned subsidiaries. Leroy’s Horse & Sports Place,
Inc. (“Leroy’s”) owns and operates 61 (as of April 15, 2005) race and sports
wagering locations (“books”) in leased space within nonrestricted casinos
throughout 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 gaming industry. Contest Sports Systems, Inc.
(“CSS”), a wholly owned subsidiary of CBS, develops and leases self-service
contest kiosks.
  **Basis
of presentation.** The
consolidated financial statements include the accounts of AWI and, for
applicable periods, its subsidiaries Leroy’s, CBS, AWIM and CSS (collectively
referred to hereafter as the “Company”). With the exception of CSS (which is a
wholly owned subsidiary of CBS), all subsidiaries are wholly owned by AWI. All
significant inter-company accounts and transactions have been eliminated in the
consolidation.
  **Chapter
11 filing.** On July
25, 2003, (the “Petition Date”), AWI and Leroy’s filed voluntary petitions for
relief under Chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the District of Nevada, Northern Division in Reno,
Nevada (the “Bankruptcy Court”). On February 28, 2005, the Bankruptcy Court
confirmed the Restated Amended Joint Plan of Reorganization (the “Plan”) of AWI
and Leroy’s. On March 11, 2005 (the “Effective Date”), AWI and Leroy’s
consummated the Plan and formally emerged from Chapter 11 proceedings after
completing all required actions and all remaining conditions.
 
 As of the
Effective Date, AWI and Leroy’s have made the following cash payments pursuant
to the terms and conditions of the Plan:
 
 **CATEGORY**
    **GROSS**
    **INTEREST**
    **PAYMENT**
    **BALANCE**AWI
      General Creditors
    $90,201
    $1,664
    $91,866
    $0Leroy’s
      General Creditors
    69,815
    1,288
    71,103
    0Accrued
      Payroll
    4,950
    91
    5,041
    0Las
      Vegas Gaming, Inc.
    660,000
    0
    660,000
    340,000AWI
      Preferred Shareholders
    224,264
    1,977
    226,241
    0**Totals**
    **$1,049,230**
    **$5,021**
    **$1,054,251**
    **$340,000**
 
 Although
AWI and Leroy’s have formally emerged from the Chapter 11 proceedings as of
March 11, 2005, the cases have not been “closed” by the Bankruptcy Court as
several claims are in dispute. The bankruptcy cases will not be officially
closed until each of these disputes has been resolved by the Bankruptcy Court.
The following is a summary of the disputed claims and the potential impact on
AWI and/or Leroy’s:
  **REASON**
    **AMOUNT**
    **NOTES**AWI
    The
      claim amount has already been paid, the claim amount is not owed, or the
      claim should be subordinated pursuant to Section 510(b) of the Bankruptcy
      Code
    $65,664
    For
      the reason(s) noted, AWI believes that these amounts are not due and that
      the Bankruptcy Court will dismiss the claims.Leroy’s
    The
      claim amount has already been paid, the claim amount is not owed, or the
      claim amount is in error
    $258,064
    For
      the reason(s) noted, Leroy’s believes that these amounts are not due and
      that the Bankruptcy Court will dismiss the
claims.
 The
disputed claims noted above are immaterial to overall operations and will be
immediately paid from existing cash reserves if and when ordered by the
Bankruptcy Court.
 
 36
 ***Table of
Contents***
 
 On the
balance sheet date (January 31, 2005), AWI and Leroy’s were in Chapter 11
protection and, as such, the balance sheet indicates “Liabilities and Redeemable
Preferred Stock Subject to Compromise.” On the Effective Date (March 11, 2005),
AWI and Leroy’s emerged from Chapter 11 protection and, pursuant to the terms
and conditions of the Plan, satisfied these debts. The following tables
reconcile the balances on January 31, 2005, to the balances on March 11,
2005.
 
 The emergence from bankruptcy of AWI and Leroy's
resulted in reduction of liabilities of $1,049,230, subject to some disputed
items.  The following details of the bankruptcy are unaudited:
 
 Accounts
payable:
 
 **Balance
      at**
      **01-31-2005**
    **Interest**
      **Earned**
    **Paid
      on**
      **03-11-2005**
    **Current**
      **Balance**AWI
    $90,201
    $1,664
    $91,865
    $0Leroy’s
    70,015
    1,288
    71,103
    200**Total**
    **$160,216**
    **$2,952**
    **$162,968**
    **$200**
 
 Interest
was paid at the Federal Judgment Rate (1.13%) for the period July 25, 2003
through March 11, 2005.
 
 Leroy’s
has a remaining accounts payable balance subject to compromise because the
vendor submitted a proof of claim in the amount of $1,020 while Leroy’s believes
the amount due and owing is only $200. No monies can or will be paid to the
vendor until such time as the Bankruptcy Court has determined the correct amount
due to the vendor. The amount determined by the Bankruptcy Court, plus interest
at the Federal Judgment Rate, will be paid to the vendor as soon as practicable
after the decision is rendered.
 
 Accrued
payroll:
 
 **Balance
      at**
      **01-31-2005**
    **Interest**
      **Earned**
    **Paid
      on**
      **03-11-2005**
    **Current**
      **Balance**AWI
    $4,950
    $91
    $5,041
    $0Leroy’s
    0
    0
    0
    0**Total**
    **$4,950**
    **$91**
    **$5,041**
    **$0**
 
 Interest
was paid at the Federal Judgment Rate (1.13%) for the period July 25, 203
through March 11, 2005.
 
 Accrued
expenses:
 
 **Balance
      at**
      **01-31-2005**
    **Interest**
      **Earned**
    **Paid
      on**
      **03-11-2005**
    **Current**
      **Balance**AWI
    $389,407
    $0
    $0
    $389,407Leroy’s
    93,170
    0
    0
    93,170**Total**
    **$482,577**
    **$0**
    **$0**
    **$482,577**
 
 Although
balances remain regarding the accrued expenses (as noted above), these balances
are no longer considered “subject to compromise” as AWI and Leroy’s have
successfully emerged from Chapter 11 protection. On the next balance sheet
published by the Company (on Form 10-QSB for the first quarter of fiscal year
2006), these amounts will simply be reflected as liabilities.
 
 Litigation
payable, including accrued interest:
 
 **Balance
      at**
      **01-31-2005**
    **Interest**
      **Earned**
    **Paid
      on**
      **03-11-2005**
    **Amount**
      **Written-Off**
    **Current**
      **Balance**Racusin
    $1,972,249
    $0
    $0
    $0
    $1,972,249LVGI
    788,061
    0
    320,000
    128,061
    340,000**Total**
    **$2,760,310**
    **$0**
    **$320,000**
    **$128,061**
    **$2,312,249**
   37
 ***Table of
Contents***
  Although
balances remain regarding the litigation payable (as noted above), these
balances are no longer considered “subject to compromise” as AWI and Leroy’s
have successfully emerged from Chapter 11 protection. On the next balance sheet
published by the Company (on Form 10-QSB for the first quarter of fiscal year
2006), these amounts will simply be reflected as liabilities.
 
 Racusin:
Pursuant to the rulings by the 9 th Circuit
Court of Appeals and the Bankruptcy Appellate Panel, and in conjunction with the
settlement agreement with Racusin, this debt will be satisfied by the issuance
of 250,000 shares of the Company’s common stock. This amount will not be
eliminated from the balance sheet, however, until such time as a final decision
(including Racusin’s appeal of the BAP decision, if any) is rendered; this
amount will be reduced by $300,000 on the next balance sheet (for the quarter
ending April 30, 2005) to account for the loan/payment to Racusin. Refer to Part
I, Item 3 (“Legal Proceedings”) of this Form 10-KSB for additional information
regarding the status of the Racusin litigation.
 
 LVGI:
Pursuant to the terms and conditions of the settlement agreement, LVGI was paid
$340,000 on January 11, 2005; this amount was recorded on the records of the
Company as a reduction of the amount owed to LVGI (reducing the debt from
$1,128,061 to $788,061). In addition, the settlement agreement called for LVGI
to reduce the total amount of the debt from $1,128,061 to $1,000,000 as of the
Effective Date. Accordingly, $128,061 of the debt to LVGI was written-off as of
March 11, 2005 (leaving a remaining balance of $660,000); the write-off will be
reflected on the next balance sheet published by the Company (on Form 10-QSB for
the first quarter of fiscal year 2006). Also on March 11, 2005, the Company paid
LVGI the sum of $320,000, reducing the remaining debt balance to $340,000. The
remaining balance ($340,000) will be paid in twenty-four (24) equal monthly
installments beginning April 1, 2005.
 
 Accrued
preferred stock dividends payable:
 
 **Balance
      at**
      **01-31-2005**
    **Interest**
      **Earned**
    **Paid
      on**
      **03-11-2005**
    **Current**
      **Balance**AWI
    $213,400
    $1,974
    $226,241
    $0Leroy’s
    0
    0
    0
    0**Total**
    **$213,400**
    **$1,974**
    **$226,241**
    **$0**
 
 Interest
was paid at the Federal Judgment Rate (1.13%) for the period July 25, 2003
through March 11, 2005.
 
 The
payment on March 11, 2005 ($226,241) also included the preferred stock dividend
for the month of February, 2005 ($10,864) and interest at the Federal Judgment
Rate relating to the February, 2005 payment ($4).
 
 Redeemable
preferred stock:
 
 **Balance
      at**
      **01-31-2005**
    **Interest**
      **Earned**
    **Paid
      on**
      **03-11-2005**
    **Current**
      **Balance**AWI
    $323,800
    $0
    $0
    $323,800Leroy’s
    0
    0
    0
    0**Total**
    **$323,800**
    **$0**
    **$0**
    **$323,800**
 
 Although
the balance remains regarding the redeemable preferred stock (as noted above),
this balance is no longer considered “subject to compromise” as AWI and Leroy’s
have successfully emerged from Chapter 11 protection. On the next balance sheet
published by the Company (on Form 10-QSB for the first quarter of fiscal year
2006), this amount will simply be reflected as redeemable preferred stock
liability.
 
 Refer to
Note 5 (“Series A Preferred Stock”) to these financial statements for a
discussion regarding “Redeemable Preferred Stock” (a liability item) versus
“Series A Preferred Stock” (an equity item).
 
 38
 ***Table of
Contents***
 
 The
supplemental unaudited condensed financial statements of debtors AWI and Leroy’s
follow:
 
 **Balance
      Sheets as of January 31, 2005**
    **AWI**
    
    **Leroy’s****Assets**Cash
    $               
      100,691
    
    $            
      2,343,689Restricted
      cash and investments
    
    
    
    
    1,235,149Deferred
      tax asset
    
    440,481Prepaid
      expenses and other current assets
    
    109,456
    
    
    205,360**Total
      Current Assets**
    
    **650,628**
    
    
    **3,784,198**Property
      and equipment, net
    
    15,747
    
    
    391,056Investment
      in and advances to subsidiaries and affiliates*
    
    5,212,663
    
    
    3,202,574Other
      assets
    
    436,000
    
    
    1,200**Total
      Assets**
    **$**
    **6,315,038**
    
    **$**
    **7,379,028****Liabilities
      and Equity**Accounts
      payable
    $
    246,010
    
    $
    176,921Accrued
      expenses
    
    73,232
    
    
    123,665Unpaid
      winning tickets
    
    
    
    
    801,074Customer
      deposits and other current liabilities
    
    
    
    
    1,059,953**Total
      Current Liabilities**
    
    **319,242**
    
    
    **2,161,613**Due
      to affiliates, subject to compromise*
    
    3,541,189
    
    
    1,422,661Other
      liabilities subject to compromise
    
    3,933,210
    
    
    164,443**Total
      Liabilities**
    
    **7,793,641**
    
    
    **3,748,717**Equity
      (deficiency)
    
    (1,478,603
    )
    
    3,630,311**Total
      Liabilities and Equity**
    **$**
    **6,315,038**
    
    **$**
    **7,379,028**
 
 
 **Statement
      of Operations**
      **for
      the year ended January 31, 2005**
    
    **AWI**
    
    
    **Leroy’s**Revenues
    $
    2,570,489
    
    $
    6,870,831Operating costs
      and expenses
    
    2,604,169
    
    
    7,305,996Operating
      loss
    
    (33,680
    )
    
    (435,165)Other
    
    
    
    
    (7,496)**Net
      Loss**
    **$**
    **(33,680**
    **)**
    **$**
    **(442,661)**
 ____________
 *Eliminated
in consolidation
 
 **Concentrations.** Because
the Company operates primarily in the larger metropolitan areas of Nevada in the
highly regulated gaming industry, realization of its receivables and its future
operations could be affected by adverse economic conditions in Nevada and its
key feeder markets in the Western United States, and by possible future
anti-wagering legislation and regulatory limitations on the scope of
wagering. **** 99% of
the Company’s wagering revenue comes from its Nevada books and more than
one-fourth of that is derived from professional football events. If the
professional football season were to be interrupted, this could have significant
adverse impact on future operations. Management also estimates that
approximately 29% of the Company’s Nevada wagering relates to college sports
and, therefore, the passage of amateur sports anti-wagering legislation could
have a material adverse impact upon future operations. In addition, because the
Company generates substantial revenue from system sales to a relatively small
population of potential customers, a decline in the size or number of these
contracts could also adversely affect future operations. ****
 
 39
 ***Table of
Contents***
 
 The
Company manages its concentrations of credit risk by evaluating the credit
worthiness of systems customers before extending credit and by perfecting and
using, when necessary, security interests in the hardware and software. In
establishing an allowance for doubtful collection, if any, the Company considers
the customer, the relative strength of the Company’s legal position, the related
cost of any proceedings, and general economic conditions. The maximum losses
that the Company would incur if a customer failed to pay would be limited to the
amount due after any allowances provided.
 
 **Use
of estimates.** Timely
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates that affect reported
amounts, some of which may require revision in future periods. Setting and
adjusting betting lines on sporting events that have not yet taken place as of
the most recent balance sheet date might change materially before the event and
within one year.
 
 **Cash
equivalents.** Cash
equivalents include highly liquid investments with initial maturities of three
months or less. Excluded from cash and cash equivalents are restricted amounts
required to be maintained in order to meet certain Nevada regulatory
requirements. The amounts excluded from cash and cash equivalents
are:
 
 **Year
      Ended****Restricted
      Cash**
    **01-31-2005**
    
    **01-31-2004**Tax
      Liabilities Fund
    
    
    
    $
    6,636Worker’s
      Compensation Fund
    $
    9,281
    
    
    8,481NGC
      Regulation 22.040 Reserve
    
    1,228,878
    
    
    1,045,752**TOTAL**
    **$**
    **1,238,159**
    
    **$**
    **1,060,869**
 
 The
Company maintains its cash accounts at financial institutions located in the
state of Nevada. Cash accounts held by Nevada financial institutions are insured
by the Federal Deposit Insurance Corporation (“FDIC”) up to a maximum of
$100,000. The Company has not experienced any losses in such accounts and
Company management believes it places its cash on deposit with financial
institutions that are financially stable.
 
 **Inventories.** Inventories consisting primarily of systems components and replacement parts are
stated at the lower of cost (based on the first-in, first-out method) or
market.
 
 **Property
and equipment.** Property
and equipment (Note 3) is stated at cost, net of accumulated depreciation, which
is computed using the straight-line method over the estimated useful lives of
the assets (generally 3 to 10 years for equipment, furniture and fixtures, and
40 years for building improvements).
 
 **Goodwill.** As of
the most recent balance sheet date, goodwill primarily consists of the excess of
the purchase price over fair value of net assets acquired in connection with the
acquisition of CBS, the subsidiary that designs, sells, installs, and maintains
the Company’s primary computerized race and sports book systems product.
Goodwill is evaluated periodically for impairment as events or circumstances
warrant. Such evaluations include, among other analysis, cash flow and
profitability projections, including the impact on other operations of the
Company. There were no impairment provisions taken for the fiscal year ended
January 31, 2005.
 
 **Revenue
recognition.** In
December of 1999, the SEC staff issued Staff Accounting Bulletin (“SAB”) Number
101, *Revenue
Recognition* , that
summarized the SEC staff’s views regarding the recognition and reporting of
revenues in certain transactions. The implementation of SAB No. 101 does not
require the Company to change the method by which it recognizes revenue.
Revenues are principally recognized as services are provided to customers; the
Company does not bill in advance and the financial statements do not reflect any
deferred or unearned income.
 
 Wagering:
The Company records wagering revenues in compliance with the Nevada Revised
Statutes and the Regulations of the Nevada Gaming Commission and State Gaming
Control Board. For sports and non pari-mutuel race, the Company uses an accrual
method wherein the handle (total amount wagered) is recognized on the day the
event occurs (rather than the day the wager is accepted) decreased by the total
amount owed to patrons with winning wagers. This gross calculation (handle less
payouts) is then adjusted upward to account for any winning wagers that were not
redeemed (cashed) within the specified time period. For pari-mutuel race,
commission and breakage revenues are recorded when the wagers are settled,
typically the same day as the wager. Other sources of revenue are relatively
insignificant.
 
 40
 ***Table of
Contents***
 
 System -
Software: The Company recognizes software revenue in accordance with the
provisions of Statement of Position (“SOP”) 97-2, *Software
Revenue Recognition* , as
amended by SOP 98-9, *Software
Revenue Recognition, With Respect to Certain Transactions* .
Software license fees represent revenues related to licenses for race/sports
software delivered to customers for in-house use. Revenues from software license
agreements (including any related training revenue) are recognized upon
installation of the software.
 
 System -
Hardware: The Company recognizes hardware revenue (including any related
installation revenue) upon installation of the hardware.
 
 System -
Maintenance: The Company negotiates maintenance agreements with each of its
customers to provide for the long-term care of the software and hardware.
Pursuant to the terms of the various maintenance agreements, a fixed sum is due
at the beginning of each month regardless of whether the customer requires
service during that month. The Company recognizes maintenance revenue on the
first day of each month for which the maintenance agreement is in place; the
Company maintains an allowance for doubtful accounts in the event that any such
revenue recorded is not realized.
 
 System -
Other: Other sources of revenue are relatively insignificant and are typically
recognized as performed.
 
 **Advertising.** The
Company expenses all advertising costs as incurred. Advertising expense was
$132,885 and $89,013 for the fiscal years ended January 31, 2005 and 2004,
respectively.
 
 **Stock-based
compensation.** The
Company accounts for stock-based employee compensation (Note 6) using the
intrinsic value method in Accounting Principles Board (APB) Opinion No.
25 *,
Accounting for Stock Issued to Employees* .
Intrinsic value represents the excess, if any, of the market price of the stock
at the grant date over the exercise price of the options.
 
 **Reorganization
expenses.** Reorganization expenses are charged to expense as incurred. Refer to Note 12 for
additional information.
 
 **Net
income (loss) per share.** Basic
net income (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding during the year. Except in
loss years when to do so would be anti-dilutive, diluted earnings per share
considers potentially dilutive securities (options) as outstanding and net
income is adjusted for preferred stock dividends. For the operating periods
presented, the tables below reconciles net income (loss) and weighted average
shares outstanding used to calculate basic and diluted income (loss) per share.
 
 **2005**
    
    **2004**Net
      loss
    $
    (1,127,542
    )
    $
    (487,720)Preferred
      stock dividends
    
    (143,980
    )
    
    (143,587)**Net
      loss, as adjusted**
    **$**
    **(1,271,522**
    **)**
    **$**
    **(631,307)**Basic
      weighted average shares outstanding
    
    7,836,846
    
    
    7,836,846Diluted
      weighted average shares outstanding
    
    7,836,846
    
    
    7,836,846
 
 The
following factors were considered in determining the diluted weighted average
shares outstanding:
 
 FYE 2005:
On January 31, 2005, the Company had 255,642 stock options outstanding (253,242
from the 2001 Stock Option Plan and 2,400 from the Director’s Stock Option
Plan), of which 254,842 were exercisable. Exercise prices of these options
ranged from a low of $0.12 to a high of $0.70; during the fiscal year, the
average market price of the Company’s common stock was $0.52. Due to the net
loss (as adjusted for preferred stock dividends) as noted above, all 254,842
exercisable options were excluded from the diluted earnings per share
calculations as their effect is anti-dilutive.
 
 FYE 2004:
On January 31, 2004, the Company had 279,269 stock options outstanding (277,669
from the 2001 Stock Option Plan and 1,600 from the Director’s Stock Option
Plan), of which 276,469 were exercisable. Exercise prices of these options
ranged from a low of $0.12 to a high of $0.70; during the
 
 41
 ***Table of
Contents***
 
 fiscal
year, the average market price of the Company’s common stock was $0.16. Due to
the net loss (as adjusted for preferred stock dividends) as noted above, all
276,469 exercisable options were excluded from the diluted earnings per share
calculations as their effect is anti-dilutive.
 
 **Financial
instruments.** The
Company’s financial instruments consist of cash (including restricted cash) and
cash equivalents, accounts and notes receivable, accounts payable, accrued
expenses, unpaid winning tickets, advance deposits, and long-term debt. The
Company’s cash and cash equivalents are diversified among security types and
issuers, and approximate fair value. The fair values of other financial
instruments that are short-term and/or that have little or no risk are
considered to have a fair value equal to book value. Assets and liabilities that
are included in this category are accounts receivable, accounts payable, accrued
expenses, unpaid winning tickets and advance deposits. The Company believes the
fair values of notes receivable and long-term debt are also not materially
different from their carrying values due to the instruments’ interest rates
approximating market rates for similar borrowings at January 31, 2005 and
2004.
 
 **Other
long-term liabilities.** Other
long-term liabilities includes deferred gain on the sale of the real property
located at 675 Grier Drive, Las Vegas, Nevada, in the amount of $1,599,371.
Refer to Note 3 for additional information.
 
 **Reclassifications.** Certain
amounts in the 2004 consolidated financial statements have been reclassified to
conform to the 2005 presentation.
 
 **2.
Notes Receivable**
 
 Notes
receivable in the amount of $620,000 at January 31, 2005 consist of a $320,000
loan to Las Vegas Gaming, Inc. (“LVGI”) and a $300,000 loan to Michael Racusin
dba M. Racusin & Co. (“Racusin”) pursuant to the terms and conditions of the
settlement agreements with the parties. Neither loan accrues
interest.
 
 On March
15, 2005, LVGI repaid the $320,000 loan.
 
 The
monies advanced to Racusin were used to bond his legal appeal in a matter
unrelated to the Company. On March 24, 2005, the Company was notified that
Racusin was not successful in this matter and the bond (the monies advanced by
the Company) was remitted to the opposing party. As Racusin has complied with
all terms and conditions of the settlement agreement, he is not required to
repay this sum. Accordingly, this sum will be applied towards the litigation
judgment payable to Racusin (reducing the payable from $1,972,249 as reflected
in Note 1 above to $1,672,249).
 
 As of the
date of this Form 10-KSB, notes receivable are $0 (zero); the next balance sheet
published by the Company (on Form 10-QSB for the first quarter of fiscal year
2006) will reflect the payment and adjustment.
 
 **3.
Property and Equipment**
 
 On
January 7, 2005, the Company completed a sale and leaseback of the real property
located at 675 Grier Drive, Las Vegas, Nevada, 89119. Prior to the sale, the
building was owned by the CBS subsidiary. After deducting the first mortgage
payoff ($1,569,076), a security deposit on the leaseback ($180,000) and standard
closing costs ($22,348), CBS realized net proceeds of $2,204,576 from the
$4,000,000 sales price. Pursuant to the terms of the settlement agreement
between the Company and LVGI dated February 23, 2004 as amended on August 10,
2004, $340,000 of the sale proceeds were paid to LVGI on January 11, 2005 as a
reduction of the debt owed to LVGI by the Company.
 
 The
Company realized a gain of $1,638,000 on the sale of the building. However,
pursuant to SFAS No. 28, *Accounting
for Sales with Lease-backs* , only a
portion of the gain was recognized in the current fiscal year. The remainder of
the gain ($1,599,371) has been deferred and will be amortized against the lease
payments over the initial lease term (5 years). The deferred gain will be
recognized as follows:
 
 42
 ***Table of
Contents***
 
 **Fiscal
      Year Ending**
      **January
      31,**
    **Gain**
      **Realized**
    **Deferred**
      **Gain
      Balance**2005
    $38,629
    $1,599,3712006
    327,600
    1,271,7712007
    327,600
    944,1712008
    327,600
    616,5712009
    327,600
    288,9712010
    288,971**$1,638,000**
 
 Property
and equipment consists of the following as of January 31, 2005 and
2004:
 
 **2005**
    
    **2004**Land
    
    
    
    $
    575,000Building/improvements
    
    
    
    
    2,147,671Equipment,
      furniture and fixtures
    $
    3,894,415
    
    
    2,875,553Other
    
    6,200
    
    
    6,2003,900,615
    
    
    5,604,424Less
      accumulated depreciation
    
    2,214,683
    
    
    2,348,795**$**
    **1,685,932**
    
    **$**
    **3,255,629**
 
 **4.
Long-term Debt**
 
 Long-term
debt consists of 11.5% to 12% notes payable collateralized by automobiles. As of
January 31, 2005, annual maturities of total long-term debt, excluding interest,
for the next five years range up to $32,680 per year.
 
 **5.
Series A Preferred Stock**
 
 The
Series A Preferred Stock is held by two (2) persons. One shareholder is an
officer and director of the Company (the “Officer/Director Shareholder”); this
related party owns a total of 8,900 shares of preferred stock (5,662 regular
shares and 3,238 redeemable shares). The other shareholder is a director of the
Company (the “Director Shareholder”); this related party owns a total of 5,262
shares (all regular shares).
 
 Holders
of the Series A Preferred Stock are entitled to receive, upon declaration by the
Board of Directors, cumulative cash dividends monthly at the annual rate of 10%
per share; note that each holder of the Series A Preferred Stock is also a
member of the Board of Directors. The Series A Preferred Stock is not
convertible but is callable, in whole or (on a pro rata basis) in part, at any
time at the option of the Company. There were no shares called during the fiscal
years ending January 31, 2005 or 2004. The holders of Series A Preferred Stock
are not entitled to vote (on a cumulative basis or otherwise) as a class or with
the Common Stock upon any matters submitted to shareholders for a vote, except
as mandated under Nevada law.
 
 Over the
years, the Officer/Director Shareholder has indefinitely forgone his right to
have shares redeemed in accordance with the pro-rata provision applicable when
shares are called, and the affected shares have been reclassified as “Redeemable
Series A Preferred Stock” (in the liabilities section) and may be put to the
Company for redemption at any time. As of January 31, 2005, the amount of Series
A Preferred Stock that may be called for immediate redemption (without prior
approval by the Board of Directors) is $323,800 (3,238 shares). Upon filing for
Chapter 11 protection, this “Redeemable Series A Preferred Stock” became subject
to compromise pursuant to applicable bankruptcy code. (Also pursuant to
applicable bankruptcy code, the ordinary Series A Preferred Stock classified in
the equity section was not designated as subject to compromise.) Pursuant to the
terms and conditions of the Plan consummated by AWI and Leroy’s on March 11,
2005, the “Redeemable Series A Preferred Stock” is no longer considered subject
to compromise and will be paid in the ordinary course of business pursuant to
the preferred stock agreement.
 
 During
the months of August, September, October, November and December of 2004, 200
shares (40 shares each month) of Series A Preferred Stock was sold by the
Director Shareholder to the Officer/Director Shareholder. Prior to this
sale/transfer, each holder of the Series A Preferred Stock had an equivalent
number of regular shares.
 
 43
 ***Table of
Contents***
 
 During
the Chapter 11 process, no dividends were paid to the holders of the Series A
Preferred Stock. Upon emergence from bankruptcy on March 11, 2005, and pursuant
to the terms and conditions of the Plan, all accrued dividends, including
interest at the Federal Judgment Rate (1.13%), were paid as
follows:
 
 **Accrued**
    
    **Interest**
    
    **Total
      Paid**August
      2003 to January 2004
    $
    71,392
    
    $
    1,065
    
    $
    72,457February
      2004 to January 2005
    
    142,008
    
    
    909
    
    
    142,917February
      2005
    
    10,864
    
    
    4
    
    
    10,868**Total**
    **$**
    **224,264**
    
    **$**
    **1,978**
    
    **$**
    **226,242**
 
 **6.
Capital Stock and Stock Options**
 
 **Stock
repurchase.** The
Company’s Board of Directors approved a program to repurchase up to 250,000
shares of the Company’s publicly held common stock from time to time in the open
market. As of January 31, 2005, 61,100 shares had been repurchased and are held
in the treasury. The timing and amount of future share repurchases, if any, will
depend on various factors, including market conditions, available alternative
investments and the Company’s financial position.
 
 **Stock-Based
Compensation.** In
November 2004, the Financial Accounting Standards Board issued Revised Statement
No. 123, *Accounting
for Share-Based Payment* (“SFAS
123R”). This statement requires the Company to recognize the grant-date fair
value of stock options in the Statement of Operations. In addition, the Company
will be required to calculate this compensation using the fair-value based
method, versus the intrinsic value method previously allowed. This revision is
effective for periods beginning after December 15, 2005. Accordingly, the
Company will adopt SFAS 123R effective the first quarter of fiscal year 2007
(beginning February 1, 2006). The Company is currently evaluating how it will
adopt SFAS 123R. The adoption of SFAS 123R is not expected to have a material
effect on the Company’s results of operations.
 
 **1995
stock option plan.** Effective August 9, 2001, the 1995 Stock Option Plan was cancelled in its
entirety; in addition, any and all options issued pursuant to the plan were also
cancelled.
 
 **2001
stock option plan.** On
August 9, 2001, the Company adopted the “2001 Stock Option Plan” (the “2001
Plan”) to replace the “1995 Stock Option Plan.” All options currently awarded
pursuant to the 2001 Plan are considered employee grants and, as such, are
currently reported pursuant to the “intrinsic value” method of accounting
prescribed by APB 25; the impact of the adoption of the “fair value” method is
disclosed in this note on a pro forma basis.
 
 Summary
of the 2001 Plan. The 2001 Plan was authorized on August 9, 2001, and will
terminate on August 8, 2011, unless extended by the Board of Directors; the 2001
Plan was approved by a vote of the shareholders during the 2002 annual meeting.
In general, management may, upon approval from the Board of Directors, award
options to any employee at any time excepting that no employee may receive in
excess of 250,000 options per year and the 2001 Plan may not grant more than
1,150,000 options in total. The 2001 Plan does not require any specific vesting
schedule and/or term; as such, vesting and term is left to the discretion of
management, as approved by the Board of Directors. Pursuant to the terms of the
2001 Plan, the exercise price of options must be equal to or greater than the
market value of the Company’s common stock on the date of the grant. The
following tables summarize the current status of the 2001 Plan:
  44
 ***Table of
Contents***
  
 **FYE
      01-31-2005**
    
    **FYE
      01-31-2004****NUMBER
      OF**
      **SHARES**
    
    **WEIGHTED
      AVERAGE EXERCISE**
      **PRICE**
    
    **NUMBER
      OF**
      **SHARES**
    
    **WEIGHTED
      AVERAGE EXERCISE**
      **PRICE****Outstanding
      at Beginning****of
      Fiscal Year**
    
    **277,669**
    
    **$**
    **0.61**
    
    
    **290,317**
    
    **$**
    **0.60**Granted:Price =
      Market
    
    0
    
    
    0.00
    
    
    0
    
    
    0.00Price
      > Market
    
    0
    
    
    0.00
    
    
    0
    
    
    0.00Price
      < Market
    
    0
    
    
    0.00
    
    
    0
    
    
    0.00Exercised
    
    0
    
    
    0.00
    
    
    0
    
    
    0.00Cancelled
    
    (24,427)
    
    
    0.56
    
    
    (12,648)
    
    
    0.55**Outstanding
      at End of****Fiscal
      Year**
    
    **253,242**
    
    **$**
    **0.61**
    
    
    **277,669**
    
    **$**
    **0.61****Exercisable
      at End of****Fiscal
      Year**
    
    ****
      **253,242**
    
    
    
    
    
    **275,669**
 
 
 **Outstanding
and Exercisable by Price Range as of January 31, 2005**
 
 **OPTIONS
      OUTSTANDING**
    **OPTIONS
      EXERCISABLE****PRICE
      RANGE**
    **NUMBER**
      **OUTSTANDING**
    **REMAINING**
      **LIFE**
    **WEIGHTED**
      **AVERAGE**
      **EXERCISE**
      **PRICE**
    **NUMBER**
      **EXERCISABLE**
    **WEIGHTED**
      **AVERAGE**
      **EXERCISE**
      **PRICE**$0.40
    6,000
    1.75
      years
    $0.40
    6,000
    $0.40$0.50
    45,708
    1.52
      years
    0.50
    45,708
    0.50$0.60
    114,534
    1.52
      years
    0.60
    114,534
    0.60$0.70
    87,000
    1.52
      years
    0.70
    87,000
    0.70**01-31-2005**
    **253,242**
    **1.53
      years**
    **$0.61**
    **253,242**
    **$0.61****Available**
      **For
      Grant**
    **896,758**
 
 **Directors
stock option plan.** On May
16, 1997, the Company adopted the “Directors Stock Option Plan” (the “Directors
Plan”). All options currently awarded pursuant to the Directors Plan are
considered employee grants and, as such, are currently reported pursuant to the
“intrinsic value” method of accounting prescribed by APB 25; the impact of the
adoption of the “fair value” method is disclosed in this note on a pro forma
basis.
 
 Summary
of the Directors Plan. The Directors Plan was authorized on May 16, 1997, and
will terminate on May 15, 2007, unless extended by the Board of Directors; the
Directors Plan was approved by a vote of the shareholders during the 1997 annual
meeting. In general, each “outside” director of the Company is awarded 400
options on the last day of each fiscal year; these grants do not require any
additional approval from the Board of Directors. No more than 20,000 options may
be granted pursuant to the Directors Plan. The Directors Plan provides that
options will vest 100% after one year of service and will expire 10 years from
the grant date. Pursuant to the terms of the Directors Plan, the exercise price
of options must be equal to the market value of the Company’s common stock on
the date of the grant. The following tables summarize the current status of the
Directors Plan:
  45
 ***Table of
Contents***
  
 **FYE
      01-31-2005**
    
    **FYE
      01-31-2004****NUMBER
      OF**
      **SHARES**
    
    **WEIGHTED
      AVERAGE EXERCISE**
      **PRICE**
    
    **NUMBER
      OF**
      **SHARES**
    
    **WEIGHTED
      AVERAGE EXERCISE**
      **PRICE****Outstanding
      at Beginning****of
      Fiscal Year**
    
    **1,600**
    
    **$**
    **0.19**
    
    
    **800**
    
    **$**
    **0.24**Granted:Price =
      Market
    
    800
    
    
    0.55
    
    
    800
    
    
    0.15Price
      > Market
    
    0
    
    
    0.00
    
    
    0
    
    
    0.00Price
      < Market
    
    0
    
    
    0.00
    
    
    0
    
    
    0.00Exercised
    
    0
    
    
    0.00
    
    
    0
    
    
    0.00Cancelled
    
    0
    
    
    0.00
    
    
    0
    
    
    0.00**Outstanding
      at End of****Fiscal
      Year**
    
    **2,400**
    
    **$**
    **0.31**
    
    
    **1,600**
    
    **$**
    **0.19****Exercisable
      at End of****Fiscal
      Year**
    
    ****
      **1,600**
    
    
    
    
    
    **800**
 
 
 **Outstanding
and Exercisable by Price Range as of January 31, 2005**
 
 **OPTIONS
      OUTSTANDING**
    **OPTIONS
      EXERCISABLE****PRICE
      RANGE**
    **NUMBER**
      **OUTSTANDING**
    **REMAINING**
      **LIFE**
    **WEIGHTED**
      **AVERAGE**
      **EXERCISE**
      **PRICE**
    **NUMBER**
      **EXERCISABLE**
    **WEIGHTED**
      **AVERAGE**
      **EXERCISE**
      **PRICE**$0.12
    400
    8.00
      years
    $0.12
    400
    $0.12$0.15
    800
    9.00
      years
    0.15
    800
    0.15$0.35
    400
    7.00
      years
    0.35
    400
    0.35$0.55
    800
    10.00
      years
    0.55
    0
    0.00**01-31-2005**
    **2,400**
    **8.83
      years**
    **$0.31**
    **1,600**
    **$0.19****Available**
      **For
      Grant**
    **17,600**
  **Fair
value method.** The
following table represents the Company’s proforma net income (loss), in total
and on a per share basis, using the alternative “fair value” approach described
in SFAS 123 and 123R.
 
 **2005**
    
    **2004**Net
      Loss as Reported
    $
    (1,127,542
    )
    $
    (487,720)Less:
      Total Stock Based Employee
      Compensation
      Expense Determined
      Under
      Fair-Value Based Method
    
    (114
    )
    
    (183)Proforma
      Net Loss
    $
    (1,127,656
    )
    $
    (487,903)Net
      Loss Per Share:As
      reported
    $
    (0.16
    )
    $
    (0.06)Proforma
    $
    (0.16
    )
    $
    (0.06)
 
 
 46
 ***Table of
Contents***
 
 The
following table presents the “Total Stock Based Employee Compensation Expense
Determined Under Fair-Value Based Method” (Black-Scholes Multiple Option) for
each stock option plan.
 
 **2001
      Plan**
    **Directors
      Plan**
    **Total**FYE
      2005
    $58
    $56
    $114FYE
      2004
    $160
    $23
    $183
 
 **Assumptions.** The
following table presents the assumptions used in estimating the fair value of
each option grant using the Black-Scholes Multiple Option pricing model for each
stock option plan.
 
 **2005**
    **2004**Expected
      Stock Price Volatility
    60.00%
    49.56%Risk-Free
      Interest Rate
    3.72%
    3.02%Dividend
      Yield
    0%
    0%Expected
      Option Lives
    1.5
      years
    2.5
      years
 
 **7.
Commitments and Contingencies**
 
 In
accordance with an interpretation of SFAS No. 5, *Accounting
for Contingencies* , the
Company has recorded allowances for probable losses equal to the lower end of
the estimated probable loss range for the following matters and periodically
revises these estimates as known facts and circumstances change.
 
 **Litigation
judgments and settlements.** The
Company has entered into settlement agreements with LVGI, Racusin, and Jean
Development, et.al. As a result, the Company has settled all previous
litigation; currently, the Company is not a party in any litigation and has no
knowledge of any pending legal proceedings in any court or agency of government
or governmental authority.
 
 **Racusin.** On
September 3, 2004, the Company entered into a settlement agreement with Racusin.
Pursuant to the terms and conditions of the agreement, as well as events to
date, the debt to Racusin will be paid via the issuance of 250,000 shares of the
Company’s common stock. Racusin, however, has the option of appealing the recent
BAP decision to the 9 th Circuit
Court of Appeals in order to seek cash rather than stock; if appealed, a final
decision regarding this matter may not be known for 12 to 36
months.
 
 In
addition, a subsidiary of the Company has entered into an employment agreement
with Racusin. Pursuant to the terms of the agreement, Racusin is paid $10,000
per month in the form of employment compensation; the employment agreement will
terminate on September 30, 2005.
 
 The
Company has recorded $1,972,249 (including accrued interest) as a litigation
liability in regards to this matter; this amount will be reduced by $300,000
(see Note 2 above regarding the loan to Racusin) on the next balance sheet
published by the Company on Form 10-QSB for the first quarter of fiscal year
2006. With the exception of the reduction resulting from the loan, this amount
will not be adjusted until such time as the shares of common stock have been
issued.
 
 **LVGI.** On
February 23, 2004, the Company entered into a settlement agreement with LVGI.
Pursuant to the terms and conditions of the agreement, LVGI agreed to reduce the
total amount of the debt to $1,000,000; this amount will be paid as
follows:
 
 $340,000
was paid on January 11, 2005 (reducing the total debt to $660,000).
 
 $320,000
was paid on March 11, 2005 (reducing the total debt to $340,000).
 
 $340,000
will be paid in 24 equal monthly installments (including interest at 6% per
annum) with the first monthly installment beginning on April 1,
2005.
 
 47
 ***Table of
Contents***
 ****
 **Jean
Development Co.,** ***et.al.*** On
December 14, 2004, the Company entered into a settlement agreement with Jean
Development Co., et.al. Pursuant to the terms and conditions of the agreement,
Jean Development Co. agreed to accept $75,000 to resolve this matter. On March
11, 2005, the Company paid Jean Development Co. $76,384 (which included interest
at the Federal Judgment Rate in the amount of $1,384) in full satisfaction and
release of the debt.
 
 **Operating
leases.** The
Company has operating lease commitments for the majority of its race and sports
book locations and for leased office equipment. Future minimum lease payments
under non-cancelable operating leases total $298,495 for 2006 and $188,651 for
2007. Rent expense for all operating leases was approximately $474,452 and
$479,971 during the operating periods presented; a portion of the rent expense
($69,336 in 2005 and $69,276 in 2004) was paid to a company whose board of
directors includes a shareholder of the Company.
 
 **Gaming
reserve requirement.** Pursuant
to Regulation 22.040 of the Nevada Gaming Commission, Leroy’s is required to
maintain a reserve in the amount of $2,200,000 (as of January 31, 2005) to cover
any outstanding wagering liability such as unpaid winning tickets, future
tickets and telephone account deposits. The Company has met the requirement by
the purchase of two Irrevocable Letters of Credit (in the amount of $1,100,000
each) from U.S. Bank. An inability to maintain or increase the reserve as
necessary would have an adverse impact upon the Company including, but not
limited to, requiring a significant reduction in the number of locations
operated by Leroy’s and/or requiring a significant reduction in the handle
(total amount wagered).
 
 **8.
Related Party Transactions**
 
 The
Company has engaged in the following related-party transaction during the years
ended January 31, 2005 and 2004:
 
 In
conjunction with personally guaranteeing certain ILOC’s obtained by the Company
to secure the Gaming Control Board’s Regulation 22.040 Reserve Requirement, an
officer and director of the Company was paid $52,500 on June 30, 2004 and
$38,500 on June 30, 2003.
 
 In
addition, the Series A Preferred Stock is held by persons who are officers
and/or directors of the Company. Refer to Note 5 for additional
information.
 
 **9.
Income Taxes**
 
 The tax
effect of significant temporary differences representing deferred tax assets and
liabilities for the Company is as follows:
 
 
 **2005**
    
    **2004**Deferred
      tax assets (liabilities):Net
      operating loss carryforward
    $
    854,990
    
    $
    1,036,580Depreciation
      and amortization
    
    245,651
    
    
    111,747Allowances for
      accounts receivable
    
    9,530
    
    
    10,673Unrealized loss
      on investment in subsidiary
    
    1,102,203
    
    
    1,102,203Accrued
      liabilities
    
    1,300,429
    
    
    680,291Other
    
    7,185
    
    
    10,185**3,519,988**
    
    
    **2,951,679**Valuation
      allowance
    
    (2,474,629
    )
    
    (2,449,220)**1,045,359**
    
    
    **502,459**Advance
      payments
    
    (61,978
    )
    
    (61,978)Gain/loss
      on sale of asset
    
    (542,900
    )**$**
    **440,481**
    
    **$**
    **440,481**
 
 The
difference between the normal federal statutory tax rate of 34% applied to
income from continuing operations before income taxes and the Company’s
effective tax rate is:
 
 48
 ***Table of
Contents***
 
 
 **2005**
    
    **2004**Income
      taxes (benefit) at federal statutory rate
    $
    (383,364
    )
    $
    (165,824)Non-deductible
      expenses
    
    5,260
    
    
    9,883Benefit
      of NOL carryforwards
    
    (181,590
    )
    
    (65,512)Other
      temporary differences
    
    559,694
    
    
    128,219Decrease
      in deferred tax valuation allowances
    
    
    
    
    93,234**$**
    **0**
    
    **$**
    **0**
 
 At
January 31, 2005, the Company had tax net operating loss carryforwards of
$2,514,677 of which $2,350,675 will expire in 2020.
 
 In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
amount and timing of scheduled reversals of deferred tax liabilities and
forecasted future taxable income over the periods for which the deferred tax
assets are deductible. Management believes that the Company will be profitable
as necessary to realize the recorded tax benefit. Due to AWI’s and Leroy’s
emergence from Chapter 11 protection, the discontinuance of unprofitable
business activities in prior fiscal years, and other factors, management
believes it is more likely than not that the recorded deferred tax asset will be
realized.
 
 **10.
Business Segments**
 
 The
Company conducts its continuing operations through two primary business
segments: Wagering and Systems.
 
 **Wagering.** The
wagering segment is comprised of Leroy’s and AWIM. Through Leroy’s, the Company
owns and operates race and sports books throughout the state of Nevada. Through
AWIM, the Company leases gaming-related self-service race and sports wagering
kiosks. At the present time, Leroy’s accounts for the bulk of AWIM’s
revenues.
 
 **2005**
    
    **2004**Leroy’s
      Revenue
    $
    6,870,831
    
    $
    6,839,529AWIM
      Revenue
    
    31,569
    
    
    4,563**Total
      Revenue**
    
    **6,902,400**
    
    
    **6,844,092**Direct
      Costs
    
    5,559,905
    
    
    4,999,434Selling,
      General and Administrative Costs
    
    965,599
    
    
    862,356Depreciation
      and Amortization
    
    200,044
    
    
    167,853**Total
      Costs and Expenses**
    
    **6,725,548**
    
    
    **6,029,643****Income
      Before Taxes**
    **$**
    **176,852**
    
    **$**
    **814,449**
 
 **Systems.** The
systems segment is comprised of CBS and CSS. Through CBS, the Company designs,
sells, installs and maintains computerized race and sports book systems for the
Nevada gaming industry. Through CSS, the Company leases contest-related
self-service kiosks.
 
 **2005**
    
    **2004**CBS
      Revenue
    $
    4,205,132
    
    $
    4,047,854CSS
      Revenue
    
    0
    
    
    0**Total
      Revenue**
    
    **4,205,132**
    
    
    **4,047,854**Direct
      Costs
    
    2,184,230
    
    
    1,860,102Research
      and Development
    
    951,490
    
    
    1,025,891Selling,
      General and Administrative Costs
    
    1,248,509
    
    
    1,203,812Depreciation
      and Amortization
    
    173,154
    
    
    221,018**Total
      Costs and Expenses**
    
    **4,557,383**
    
    
    **4,310,823****Loss
      Before Taxes**
    
    **($352,251**
    **)**
    
    **($262,969)**
 49
 ***Table of
Contents***
 
 **Other
information.** Other
information regarding the wagering segment, systems segment and certain
unallocated items are set forth below.
 
 **2005**
    
    **2004**Capital
      ExpendituresWagering
    $
    810,068
    
    $
    113,831Systems
    
    303,385
    
    
    381,198Unallocated
    
    6,271
    
    
    7,654**Total
      Capital Expenditures**
    **$**
    **1,119,724**
    
    **$**
    **502,683**Identifiable
      AssetsWagering
    $
    5,241,168
    
    $
    5,137,827Systems
    
    2,942,723
    
    
    4,917,888Unallocated
    
    1,102,375
    
    
    844,204**Total
      Identifiable Assets**
    **$**
    **9,286,266**
    
    **$**
    **10,899,919**
 
 **11.
Supplementary Cash Flow Information**
 
 **Reconciliation
of net loss to net cash provided by (used in) operating
activities.**
 
 **2005**
    
    **2004**Net
      loss
    $
    (1,127,542
    )
    $
    (487,720)Depreciation
      and amortization
    
    331,555
    
    
    388,870Bad
      debts
    
    
    
    
    32,124Loss
      (gain) on equipment dispositions
    
    (1,341
    )
    
    30,296Litigation
      judgments
    
    (340,000
    )
    
    804,453Decrease
      (increase) in operating assets:Accounts
      receivable
    
    185,818
    
    
    215,831Notes
      receivable
    
    (620,000
    )Inventories
    
    608,419
    
    
    (532,692)Prepaid
      expenses
    
    (82,943
    )
    
    (159,315)Other
    
    15,506
    
    
    (93,079)Increase
      (decrease) in operating liabilities:Accounts
      payable
    
    132,332
    
    
    369,314Accrued
      expenses
    
    144,163
    
    
    (79)Unpaid
      winning tickets
    
    114,001
    
    
    (266,795)Customer
      deposits and other
    
    (585,171
    )
    
    1,028,407**Net
      cash provided by (used in) operating activities**
    
    **($1,225,203**
    **)**
    **$**
    **1,329,616****Cash
      paid for interest**
    **$**
    **167,078**
    
    **$**
    **142,442**
 
 **12.
Reorganization expenses**
 
 Reorganization
expenses are charged to expense as incurred. The following table provides a
breakdown of reorganization expenses.
  50
 ***Table of
Contents***
  **Year
      Ending****Category**
    **01-31-2005**
    
    **01-31-2004**United
      States Trustee (Bankruptcy Tax)
    $32,000
    
    $20,500Legal
      Counsel for Company (Bankruptcy)
    581,378
    
    139,755Legal
      Counsel for Company (Securities)
    
    
    688Legal
      Counsel for Equity Shareholders *
    10,388Financial
      Advisor (Bankruptcy)
    75,026
    
    53,992Expenses
      of Youbet.com, Inc.
    75,000Expenses
      of Plan Solicitation
    20,709Miscellaneous
    690**TOTAL**
    **$795,191**
    
    **$214,935**
 -------------------------
 * A group
of equity shareholders engaged an attorney to represent their interests in the
bankruptcy estates; generally, their stated purpose was to oppose the unwanted
takeover attempts by Schettler and Youbet.com, Inc. The Company agreed to
reimburse the legal expenses of these shareholders in this effort; reimbursement
was paid via the CBS subsidiary. There was no formal equity
committee.
 
 For the
fiscal years ended January 31, 2005 and 2004, the Company did not recognize any
interest expense and/or interest income attributable to the reorganization
proceedings. At the present time (and subject to change), the Company is
currently estimating that interest expense relating to the reorganization
proceedings in the amount of $5,021 will be recognized in the fiscal year ended
January 31, 2006.
  51
 ***Table of
Contents***
  **Item
8.****Changes
in and disagreements with Registrant’s Certifying
Accountants**
 
 The
Company had no changes in, or disagreements with, its auditors on accounting or
financial disclosures during or in connection with the reported fiscal
year.
 
 **Item 8A: Controls and Procedures**
 
 The
Company carried out an evaluation of the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) as of January 31, 2005. This
evaluation was carried out under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer, Mr.
Victor Salerno, and the Company’s Chief Financial Officer, Mr. Timothy
Lockinger. Based upon that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective. There have been no significant changes in the
Company's internal controls or in other factors, which could significantly
affect internal controls subsequent to the date the Company carried out its
evaluation.
 
 Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed in Company reports filed or
submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer and Chief Financial Officer, to allow timely decisions
regarding required disclosure.
 
 It should
be noted that any system of controls, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of the
system are met. In addition, the design of any control system is based in part
upon certain assumptions about the likelihood of future events. Because of these
and other inherent limitations of control systems, there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions.
 
 **Item 8B: Other Information**
 
 None.
  52
 ***Table of
Contents***
  **PART III**
 
 
 **Item
9.****Directors,
Executive Officers, Promoters and Control Persons; Compliance with Section 16(a)
of the Exchange Act**
 
 The
directors and executive officers of the Company are as follows:
 
 Name
    Age
    PositionVictor
      J. Salerno
    60
    President,
      Chief Executive Officer, Chief Operating Officer, and
    DirectorTimothy
      F. Lockinger
    44
    Chief
      Financial Officer, Secretary, Treasurer, and DirectorW.
      Larry Swecker
    60
    DirectorJudith
      (Salerno) Zimbelmann
    53
    DirectorBruce
      Dewing
    54
    Director
 
 **Victor
J. Salerno** has been
President, Chief Executive Officer and a Director of the Company since its
inception. Mr. Salerno has been the President, Chief Executive Officer and a
Director of Leroy’s since September, 1979. Mr. Salerno served as an Executive
Vice-President and Director of Autotote CBS Corporation (subsequently purchased
by the Company and renamed Computerized Bookmaking Systems, Inc.). He is a past
President of the Nevada Association of Race and Sports Operators.
 
 **Timothy
F. Lockinger** was
named Chief Financial Officer, Secretary, Treasurer and Director of the Company
in January, 2001. Mr. Lockinger has served the Company in various consulting
practices since 1989 and joined the Company on a full-time basis in August, 1997
as a manager of Mega$ports and Leroy’s. Mr. Lockinger was Director of Regulatory
Compliance for Casino Data Systems, Chief Financial Officer for Si Redd at
International Technical Systems, a Senior Agent with the Nevada Gaming Control
Board’s Audit Division and has operated his own consulting/accounting firm.
 
 **W.
Larry Swecker** became a
Director of the Company 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 firm of
Keltner Milam & Company, Certified Public Accountants, from 1975 to 1979.
Mr. Swecker was employed as a revenue agent with the Internal Revenue Service
from 1972 to 1975. He has a Bachelor of Science in Business Administration from
the University of Nevada Reno. Mr. Swecker is a member of the Audit,
Compensation, and Compliance Committees of the Board of Directors.
 
 **Judith
(Salerno) Zimbelmann** became a
Director of the Company in January, 2001. Ms. Zimbelmann is the daughter of
Leroy Merillat, the founder of Leroy’s Horse & Sports Place and was formerly
married to Victor Salerno. Ms. Zimbelmann is a private investor with numerous
holdings and has been a homemaker for the past five years.
 
 **Bruce
Dewing** has been
a director of the Company since July 29, 2003. Mr. Dewing has over thirty years
of progressive experience in hotel/casino senior level management positions. Mr.
Dewing is currently a gaming consultant and was formerly the President of the
Holder Hospitality Group, Inc. where he oversaw the daily operations of five
casinos, an AM radio station, a statewide (Nevada) slot route, several event
companies and over 1,500 executives and employees. Mr. Dewing is a founding
member of the Air Service Task Force for Washoe County (Nevada) Airport
Authority, a member of the Advisory Board to Washoe Airport Authority, a Board
member of the Reno Air Race Association, and a Board member of the Nevada Hotel
and Lodging Association.
 
 **Licensing.** Pursuant
to Nevada gaming regulations/statutes and the status of Leroy’s and AWIM as
gaming licensees, all officers and directors of Leroy’s and AWIM must be
investigated and licensed by the Nevada Gaming Commission, a process that may be
both lengthy and expensive. Mr. Salerno and Mr. Lockinger have applied for, and
received, approval from the Nevada Gaming Commission to be officers and
directors of both Leroy’s and AWIM.
 
 **Involvement
in certain legal proceedings.** To the
best of the Company’s knowledge, during the past five years, none of the
following occurred with respect to a present or former director, executive
officer, or employee of the
 
 53
 ***Table of
Contents***
 
 Company:
(1) any bankruptcy petition filed by or against any business of which such
person was a general partner or executive officer either at the time of the
bankruptcy or within two years prior to that time (with the exception of the
Chapter 11 cases filed by AWI and Leroy’s as previously disclosed); (2) any
conviction in a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor offenses); (3) being
subject to any order, judgment or decree, not subsequently reversed, suspended
or vacated, of any court of any competent jurisdiction, permanently or
temporarily enjoining, barring, suspending or otherwise limiting his involvement
in any type of business, securities or banking activities; and (4) being found
by a court of competent jurisdiction (in a civil action), the SEC or the
Commodities Futures Trading Commission to have violated a federal or state
securities or commodities law, and the judgment has not been reversed, suspended
or vacated.
 
 **Term
of office.** The
Company’s Directors are appointed to hold office until the next annual general
meeting of the shareholders or until removed from office in accordance with the
bylaws. The Company’s officers are appointed by the board of directors and hold
office until removed by the board.
 
 **Section
16(a) beneficial ownership reporting compliance.** Section
16(a) of the Securities Exchange Act of 1934 requires the Company’s directors
and executive officers and persons who beneficially owns more than ten percent
of a registered class of the Company’s equity securities to file with the SEC
initial reports of ownership and reports of change in ownership of common stock
and other equity securities of the Company. Officers, directors and greater than
ten percent shareholders are required by SEC regulations to furnish the Company
with copies of all Section 16(a) forms they file. To our knowledge, the
following persons have failed to file, on a timely basis, the identified reports
required by Section 16(a) of the Exchange Act during the most recent fiscal
year:
 
 Name
      and Principal Position
    Number
      of Late
      Reports
    Transactions
      Not
      Timely
      Reported
    Known
      Failures to
      File
      a Required
      FormVictor
      Salerno
      CEO
      and Director
    None
    None
    NoneTimothy
      F. Lockinger
      CFO
      and Director
    None
    None
    NoneW.
      Larry Swecker
      Director
    None
    None
    NoneJudith
      (Salerno) Zimbelmann
      Director
    None
    None
    NoneBruce
      Dewing
      Director
    None
    None
    NoneRobert
      Barengo
      Shareholder
    None
    None
    None
 
 **Code
of ethics disclosure compliance.** As of
the date of this filing, the Company has not adopted a Code of Ethics for
Financial Executives, which include the Company’s principal executive officer,
principal financial officer, principal accounting officer or controller, or
persons performing similar functions, as required by sections 406 and 407 of the
Sarbanes-Oxley Act of 2002. The Company has begun the process of designing a
code of ethics that will be filed with the Security and Exchange Commission upon
completion. The Company has not adopted a code of ethics at the present time
because its administrative resources have been primarily allocated to overseeing
the Chapter 11 case and its operations.
 
 **Item 10. Executive Compensation**
 
 The
following table sets forth certain information covering the compensation paid or
accrued by the Company during the fiscal years indicated to its Chief Executive
Officer and to its most highly compensated executive officer
 
 54
 ***Table of
Contents***
 
 whose
annual salary and bonus exceeded $100,000 during the year ended January 31.
These individuals may be referred to as “named executive officers.”
 
 **ANNUAL**
      **COMPENSATION**
    **LONG-TERM**
      **COMPENSATION****Name
      and Position**
    **Year**
    **Salary**
    **Bonus**
    **Other**
    **Restricted
      Stock**
      **Awards**
    **Common**
      **Share**
      **Options**Victor
      Salerno,
      CEO,
      COO and
      President
    2005
    $240,000
    $0
    $0
    $0
    02004
    $240,000
    $31,343
    $0
    
    02003
    $200,000
    $14,380
    $0
    
    0Timothy
      F. Lockinger,
      CFO,
      Secretary and
      Treasurer
    2005
    $120,000
    $0
    $0
    $0
    02004
    $120,000
    $12,537
    $0
    
    02003
    $100,000
    $5,752
    $0
    
    0
 
 From the
Petition Date (July 25, 2003) to the Effective Date (March 11, 2005), the
Company did not pay bonuses to the named executive officers. The amounts noted
for the fiscal years ending January 31, 2005 and 2004 were accrued pursuant to
the terms and conditions of the employment agreements, but were not paid until
after the Effective Date.
 
 The
following table sets forth the number of exercisable and un-exercisable options
held by the named executive officers as of January 31, 2005, and the value of
such options.
 
 **AGGREGATED
OPTION EXERCISES IN LAST FISCAL YEAR**
 **AND
FISCAL YEAR-END OPTIONS VALUES**
 
 Name
    Number
      of Securities
      Underlying
      Options
      Granted
    %
      of Total Options
      Granted
      to Employees
      in
      Fiscal Year
    Exercise
      or base price
    Expiration
      DateVictor
      J. Salerno
    30,000
    8.4%
    $0.70
    8/8/2006Timothy
      F. Lockinger
    15,000
    4.2%
    $0.70
    8/8/2006
 
 
 Name
    No.
      of Shares Acquired orExercised
    Value
      Realized
      ($)
    No.
      of Securities Underlying Unexercised Options at Fiscal Year
      End
      Exercisable/Unexercisable
    Value
      of Unexercised In the Money Options at Fiscal
      Year
      End ($)Exercisable/UnexercisableVictor
      J. Salerno
    0
    $0
    30,000
      / 0
    $0/$0Timothy
      F. Lockinger
    0
    $0
    15,000
      / 0
    $0/$0
 
 
 **Compensation
of directors.** Directors who are not employees or consultants of the Company receive a fee of
$1,000 per month plus travel expenses. In addition, each Committee Chairman
(audit committee, compensation committee, etc.) receives an additional $500 per
month for each committee chaired.
 
 During
the fiscal year ended January 31, 2005, pursuant to the Company’s Directors
Stock Option Plan, options to purchase 400 shares of the Company’s common stock
at an exercise price of $0.60 per share were granted to Mr. Swecker and Mr.
Dewing, directors of the Company. These options become fully exercisable on
January 31, 2006 and expire on January 31, 2015. During the prior fiscal year,
options to purchase 400 shares of the Company’s
 
 55
 ***Table of
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 common
stock at an exercise price of $0.15 per share were granted to Mr. Swecker and
Mr. Dewing; these options become fully exercisable on January 31, 2005 and
expire on January 31, 2014.
 
 **Employment
agreements.** On June
28, 2002, and effective as of July 1, 2002, the Company entered into employment
agreements with Victor Salerno and Timothy Lockinger.
 
 Mr.
Salerno’s agreement has a 5-year initial term and automatically renews for
additional 5-year terms unless either party gives the other party 180-days
written notice to terminate. Mr. Lockinger’s agreement has a 3-year initial term
and automatically renews for additional 3-year terms unless either party gives
the other party 180-days written notice to terminate.
 
 Pursuant
to the terms of his employment agreement, Mr. Salerno is employed as the Chief
Executive Officer, Chief Operating Officer, President and Director of the
Company and as President and Director of each of the Company’s subsidiaries. In
addition, Mr. Salerno is entitled to receive a performance bonus each year equal
to five percent (5%) of the Company’s pre-tax earnings (as defined in the
employment agreement) for the prior fiscal year. In the event the employment
agreement is terminated by the Company in violation thereof, the Company has
agreed to pay, as termination benefits to Mr. Salerno, a continuation of his
base salary, performance bonus, and all other benefits under the employment
agreement for a period of 5 years. Mr. Salerno is entitled to participate in the
Company’s benefit plans available to the Company’s officers and employees
generally.
 
 Pursuant
to the terms of his employment agreement, Mr. Lockinger is employed as the Chief
Financial Officer, Secretary, Treasurer and Director of the Company and as
Secretary, Treasurer and Director of each of the Company’s subsidiaries. In
addition, Mr. Lockinger is entitled to receive a performance bonus each year
equal to two percent (2%) of the Company’s pre-tax earnings (as defined in the
employment agreement) for the prior fiscal year. In the event the employment
agreement is terminated by the Company in violation thereof, the Company has
agreed to pay, as termination benefits to Mr. Lockinger, a continuation of his
base salary, performance bonus, and all other benefits under the employment
agreement for a period of 3 years. Mr. Lockinger is entitled to participate in
the Company’s benefit plans available to the Company’s officers and employees
generally.
 
 **Item 11. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters.**
 
 The
following table sets forth the current number and percentage of shares of Common
Stock, which, according to information supplied to the Company, are beneficially
owned by: (i) each person who is a beneficial owner of more than 5% of the
Common Stock; (ii) each of the directors, and named executive officers of the
Company individually; and (iii) all current directors and executive officers of
the Company as a group. Under rules adopted by the Securities and Exchange
Commission, a person is deemed to be a beneficial owner of Common Stock with
respect to which he or she has or shares voting power (which includes the power
to vote or to direct the voting of the security), or investment power (which
includes the power to dispose of, or to direct the disposition of, the
security). A person is also deemed to be the beneficial owner of shares with
respect to which he or she could obtain voting or investment power within 60
days of April 30 th (such as
upon the exercise of options or warrants). Except as otherwise indicated below,
the persons named in the table have sole voting and investment power with
respect to all shares of Common Stock held by them. Unless otherwise indicated,
the principal address of each person named in the table is c/o American
Wagering, Inc., 675 Grier Drive, Las Vegas, Nevada 89119.
 
 **Name**
    **Number
      of Shares**
    **Percentage**Victor
      J. Salerno (Officer and Director)1
    2,438,054
    30.13%Judith
      Zimbelmann (Director)2
    1,001,200
    12.37%Robert
      Barengo (Shareholder)
    525,800
    6.50%Timothy
      F. Lockinger (Officer and Director)3
    61,865
    0.76%Bruce
      Dewing (Director)4
    42,400
    0.52%W.
      Larry Swecker (Director)5
    22,000
    0.27%**All
      directors and executive officers as a group (6 persons)****6**
    **4,091,319**
    **50.56%**
 
 1
    Includes
      options that may be exercised immediately to purchase 30,000 shares of
      common stock at the price of $0.70 per share.
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 ***Table of
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  2      Includes
options that may be exercised immediately to purchase 1,200 shares of common
stock at the price of $0.35 per share.
 3     
Includes
options that may be exercised immediately to purchase 15,000 shares of common
stock at the price of $0.70 per share.
 4 Includes
options that may be exercised immediately to purchase 400 shares of common stock
at the price of $0.15 per share. Not included are options that may be exercised
 after January 31, 2006 to purchase 400 shares at the price of $0.55 per
share.
 5 Includes
options that may be exercised immediately to purchase 1,200 shares of common
stock as follows: 400 at the price of $0.35 per share, 400 at the price of $0.15
per share
 and 400 at the price of $0.12 per share. Not included are options that may be
exercised after January 31, 2006 to purchase 400 shares at the price of $0.55
per share.
 6      The
percentage amounts for each reported party assume total outstanding common
shares of 8,091,688 calculated as follows: 7,897,346 shares outstanding less
61,100 treasury
 shares plus 253,242 presently exercisable options under the 2001 Stock Option
Plan plus 1,600 presently exercisable options under the Director’s Stock Option
Plan.
 ****
 **Securities
authorized for issuance under equity compensation plans.** The
following table provides information concerning compensation plans under which
equity securities of the Company are authorized for issuance.
 
 Equity
Compensation Plans Approved by Security Holders:
 
 **Name
      of Plan**
    **Number
      of Shares**
      **Authorized
      for**
      **Issuance**
    **Number
      of Options**
      **Outstanding
      at**
      **01-31-2005**
    **Weighted-Average**
      **Exercise**
      **Price**2001
      Stock Option Plan
    1,150,000
    253,242
    $0.61Director’s
      Stock Option Plan
    20,000
    2,400
    $0.311995
      Stock Option Plan
    Discontinued
    0
    0
 
 Equity
Compensation Plans Not Approved by Security Holders:  None.
 
 **Item
12.****Certain Relationships and Related Transactions**
 
 Other
than as set forth below, none of the following persons has any direct or
indirect material interest in any transaction to which the Company is a party
since the incorporation, or in any transaction to which the Company is proposed
to be a party:
 
 
 (a)
    any
      director or officer;
 (b)
    any
      proposed nominee for election as a
director;
 (c)
    any
      person who beneficially owns, directly or indirectly, shares carrying more
      than 10% of the voting rights attached to the Company’s common stock;
      or
 (d)
    any
      relative or spouse of any of the foregoing persons, or any relative of
      such spouse, who has the same house as such person or who is a director or
      officer of any parent or subsidiary
 
 The
Company’s policy regarding related transactions requires that any director or
officer who has an interest in any transaction disclose the presence and the
nature of the interest to the board of directors prior to any approval of the
transaction by the board of directors. The transaction may then be approved by a
majority of the disinterested directors, provided that an interested director
may be counted in determining the presence of a quorum at the meeting of the
board of directors to approve the transaction. The Company’s policy regarding
compensation for directors and officers is that the board of directors may,
without regard to personal interest, establish the compensation of directors for
services in any capacity.
 
 On
December 9, 1998, the Company redeemed shareholder notes of $1,892,424 in
exchange for 18,924 shares of Series A Preferred Stock at $100 per share. The
Series A Preferred Stock is held by two (2) persons. One shareholder is an
officer and director of the Company (the “Officer/Director Shareholder”); this
related party owns a
 
 57
 ***Table of
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 total of
8,900 shares of preferred stock (5,662 regular shares and 3,238 redeemable
shares). The other shareholder is a director of the Company (the “Director
Shareholder”); this related party owns a total of 5,262 shares (all regular
shares).
 
 Holders
of the Series A Preferred Stock are entitled to receive, upon declaration by the
Board of Directors, cumulative cash dividends monthly at the annual rate of 10%
per share; note that each holder of the Series A Preferred Stock is also a
member of the Board of Directors. The Series A Preferred Stock is not
convertible but is callable, in whole or (on a pro rata basis) in part, at any
time at the option of the Company. There were no shares called during the fiscal
years ending January 31, 2005 or 2004. The holders of Series A Preferred Stock
are not entitled to vote (on a cumulative basis or otherwise) as a class or with
the Common Stock upon any matters submitted to shareholders for a vote, except
as mandated under Nevada law.
 
 Over the
years, the Officer/Director Shareholder has indefinitely forgone his right to
have shares redeemed in accordance with the pro-rata provision applicable when
shares are called, and the affected shares have been reclassified as “Redeemable
Series A Preferred Stock” (in the liabilities section) and may be put to the
Company for redemption at any time. As of January 31, 2005, the amount of Series
A Preferred Stock that may be called for immediate redemption (without prior
approval by the Board of Directors) is $323,800 (3,238 shares). Upon filing for
Chapter 11 protection, this “Redeemable Series A Preferred Stock” became subject
to compromise pursuant to applicable bankruptcy code. (Also pursuant to
applicable bankruptcy code, the ordinary Series A Preferred Stock classified in
the equity section was not designated as subject to compromise.) Pursuant to the
terms and conditions of the Plan consummated by AWI and Leroy’s on March 11,
2005, the “Redeemable Series A Preferred Stock” is no longer considered subject
to compromise and will be paid in the ordinary course of business pursuant to
the preferred stock agreement.
 
 During
the months of August, September, October, November and December of 2004, 200
shares (40 shares each month) of Series A Preferred Stock was sold by the
Director Shareholder to the Officer/Director Shareholder. Prior to this
sale/transfer, each holder of the Series A Preferred Stock had an equivalent
number of regular shares.
 
 From the
Petition Date (July 25, 2003) through the Effective Date (March 11, 2005),
dividends were accrued but not paid on the Series A Preferred Stock. The
following table indicates the accruals and payments to the preferred
shareholders through the date of this filing:
 
 **PAID**
    **ACCRUED**
    **UNPAID**02/2003
      through 07/2003
    $72,195
    $0
    $008/2003
      through 01/2004
    $0
    $71,392
    $71,39202/2004
      through 01/2005
    $0
    $142,008
    $213,40002/2005
    $0
    $10,864
    $224,26403/11/2005
    $226,241
    $0
    $003/2005
    $12,028
    $0
    $0
 
 The
payment on March 11, 2005 includes $1,977 of interest at the Federal Judgment
Rate.
 
 In
conjunction with personally guaranteeing certain ILOC’s obtained by the Company
to secure the Gaming Control Board’s Regulation 22.040 Reserve Requirement,
Victor Salerno (an officer and director of the Company), was paid $52,500 on
June 30, 2004 and $38,500 on June 30, 2003. For additional information regarding
this matter, please refer to the discussion regarding “Liquidity and Capital
Resources” that may be found in Part II, Section 6 (“Management’s Discussion and
Analysis or Plan of Operation”) of this Form 10-KSB.
 
 **Item 13. Exhibits**
 
 **EXHIBIT
      NUMBER**
    **DESCRIPTION**2.1
    Press
      release dated April 18, 2005. (Incorporated by reference from Exhibit 99.1
      of the Company’s Form 8-K dated April 20, 2005.)2.2
    Press
      release dated March 14, 2005. (Incorporated by reference from Exhibit 99.1
      of the Company’s Form 8-K dated
03/15/2005.)
   58
 ***Table of
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   2.3
    Press
      release dated March 1, 2005. (Incorporated by reference from Exhibit 99.1
      of the Company’s Form 8-K dated 03/02/2005.)2.4
    Settlement
      agreement with Youbet.com, Inc. (Incorporated by reference from Exhibit
      99.1 of the Company’s Form 8-K dated 01/14/2005.)2.5
    Valuation
      report prepared by FTI Consulting, Inc. (Incorporated by reference from
      Exhibit 99.1 of the Company’s Form 8-K dated
  01/14/2005.)2.6
    Settlement
      agreement with Michael Racusin dba M. Racusin & Co. (Incorporated by
      reference from Exhibit 99.1 of the Company’s Form 8-K dated
      09/07/2004.)2.7
    AWI
      and Leroy’s Joint Disclosure Statement and Joint Plan of Reorganization.
      (Incorporated by reference from Exhibit 2.1 of the Company’s Form 8-K
      dated 02/26/2004.)2.8
    Settlement
      agreement with Las Vegas Gaming, Inc. (Incorporated by reference from
      Exhibit 2.2 of the Company’s Form 8-K dated
02/26/2004.)31.1
    Certification
      of Chief Executive Officer pursuant to Securities Exchange Act Rule
      13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
    Certification
      of Chief Financial Officer pursuant to Securities Exchange Act Rule
      13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1
    Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002
 
 **Item 14: Principal Accountant Fees and
Services**
 
 The
Company’s Board of Directors has selected the firm of Piercy Taylor Bowler &
Kern (“PBTK”) as independent accountants to audit the Company’s books, records
and accounts for the fiscal year ending January 31, 2005. In addition, PBTK
previously audited the Company’s financial statements for the years ending
January 31, 2004, 2003, 2002 and 2001. PBTK’s primary offices are located at
6100 Elton Avenue, Suite 1000, Las Vegas, Nevada, 89107.
 
 **Pre-approval
policies and procedures.** The
company has implemented pre-approval policies and procedures related to the
provision of audit and non-audit services. Under these procedures, Company
management pre-approves both the type of services to be provided by PBTK and the
estimated fees related to these services.
 
 **Total
fees.** Total
fees paid to PBTK are as follows:
 
 **Year
      Ending January 31,****Service
      Provided**
    **2005**
    **2004**Audit
      Service Fees
    $51,357
    $50,000Audit
      Related Service Fees
    0
    0Tax
      Service Fees
    12,623
    6,000Other
      Fees
    20,982
    38,136**Total**
    **$84,962**
    **$94,136**
 
 **Audit
fees.** The
aggregate fees for audit services are for the audits of the Company’s annual
financial statements.
 
 59
 ***Table of
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 ****
 **Audit-related
fees.** The
aggregate fees for audit-related services are additional fees for assurance and
related services that are reasonably related to the performance of the audit or
review of the Company’s financial statements.
 
 **Tax
Fees.** The
aggregate fees for tax services are for professional services relating to tax
compliance, tax advice, and tax planning.
 
 **All
other fees.** The
aggregate fees for other services are reviews of the Company’s 401(K) plan,
reviews of the Company’s interim financial statements on Form 10-QSB and all
other non-audit services.
  60
 ***Table of
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  **SIGNATURES**
 
 
 In
accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
 
 AMERICAN
WAGERING, INC.
 
 
 
 By:  
/s/ Victor Salerno
 Victor Salerno,
 President and Chief Executive Officer
 
 In
accordance with the requirements of the Exchange Act, this report has been
signed by the following persons in the capacities and on the dates
indicated.
 
 Signature     Title     Date
 
 /s/  Victor
Salerno  President;
Chief Executive   April 29,
2005
 Victor
Salerno Officer;
Director
 
 
 /s/ Timothy
Lockinger Chief
Financial Officer,
Secretary April 29,
2005
 Timothy
Lockinger       Treasurer,
and Director
 
 
 /s/ W. Larry
Swecker  Director April 29,
2005
 W. Larry
Swecker
 
 
 /s/ Judith
Zimbelmann  Director April 29,
2005
 Judith
Zimbelmann
 
 
 /s/
Bruce
Dewing                                                     
 Director April 29,
2005
 Bruce
Dewing
 
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