______________________________________________________________________________________________________________________
 
 U.S. SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 ______________________________________________________________________________________________________________________
 
 FORM 10-KSB
 
 ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
 EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 31, 2004
 ______________________________________________________________________________________________________________________
 
 Commission File No. 000-20685
 
 AMERICAN WAGERING, INC.
 (Name of Small Business Issuer in its Charter)
   Nevada  ______________                                                                                                                                       _________ 88-0344658________
 (State or other jurisdiction of                                                                                                                                                                                  (I.R.S. Employer
 incorporation or organization)                                                                                                                                                                               Identification No.)
 
 
 675 Grier Drive, Las Vegas, Nevada 89119
 (Address of principal executive offices) (Zip Code)
 
 (702) 735-0101
 (Issuers telephone number)
 
 
 Securities registered under Section 12(b) of the Exchange Act: None
 
 Securities registered under Section 12(g) of the Exchange Act:
 
 Common Stock, $.01 par value
 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 of 1934 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 there is no 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. ÿ
 
 The issuers revenues for the fiscal year ended January 31, 2004, were $10,891,946
 
 The aggregate market value of the voting and non-voting stock (which consists solely of shares of Common Stock) held by non-affiliates as of April 14, 2004 computed by reference to the average bid and asked price for the registrants Common Stock as quoted on the NASD Over-The-Counter Bulletin Board on such date, was approximately $3,134,738.
 
 The number of shares of the issuers Common Stock outstanding as of April 14, 2004, was 7,836,846.
   1 
 
 TABLE OF CONTENTS
 
 Page
 PART I
 ITEM 1: DESCRIPTION OF BUSINESS  3
 ITEM 2: DESCRIPTION OF PROPERTY 14
 ITEM 3: LEGAL PROCEEDINGS 14
 ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS  15
 
 PART II
 ITEM 5: MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS
 AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES 16
 ITEM 6: MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 17
 ITEM 7: FINANCIAL STATEMENTS 22
 ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
 FINANCIAL DISCLOSURES 22
 ITEM 8A: CONTROLS AND PROCEDURES  22
 
 PART III  ITEM 9: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 23  ITEM 10: EXECUTIVE COMPENSATION 25
 ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 AND RELATED STOCKHOLDER MATTERS 26
 ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 27
 ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K 28
 ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES 29
 
 2 
 
 PART I
 
 
 Item 1.  Description of Business
 
 Primary business formation and operating activities . In August 1995, American Wagering, Inc., a Nevada Corporation (the "Company"), was formed as the holding Company for Leroys Horse and Sports Place ("Leroys"). 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 statewide network of sports and race wagering facilities in 49 casinos. Leroys offers a "turn-key" sports and race wagering operation that allows casinos to satisfy their patrons desire for sports and race wagering without 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. In October 1996, the Company acquired from Autotote Corporation, 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 a stock transfer agreement between the Company and Autotote Corporation. CBS designs, sells, installs and maintains sports and race book equipment, software and computer systems for the sports betting industry. The Company paid $3 million in cash to Autotote Corporation and guaranteed CBS obligation under its mortgage (in the principal amount of approximately $2 million as of such date). The mortgage is on the real estate and building located at 675 Grier Drive, Las Vegas, Nevada, where the Company currently maintains its corporate offices.
 
 Chapter 11 Filing
 
 On July 25, 2003 (the "Petition Date"), the Registrant, American Wagering, Inc. ("AWI") and its wholly-owned subsidiary Leroys Horse and Sports Place ("Leroys") filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code (the "Chapter 11 Cases") in the United States Bankruptcy Court for the District of Nevada, Northern Division in Reno, Nevada (the "Bankruptcy Court"). The consolidated financial statements for the year ended January 31, 2004, have been prepared assuming the Company will continue as a going concern and do not include any adjustments that might result if AWI and Leroys are unable to successfully emerge from Chapter 11 and continue as a going concern. The Company continues to cut costs, increase revenues and accumulate cash liquidity by increasing profitable and closing unprofitable Leroys locations and continuous system sales and related maintenance revenues to enable the Company to resume as a going concern upon emergence from Chapter 11.
 
 The following is a general overview of the provisions of the Amended Plan of Reorganization (the "Amended Plan") as filed with the Bankruptcy Court on April 14, 2004. This overview is qualified in its entirety by reference to the provisions of the Amended Plan. For a more detailed description of the terms and provisions of the Amended Plan (including definitions of capitalized terms), please refer to the Amended Plan. Pursuant to Section 1123(a)(1) of the Bankruptcy Code, Administrative Claims, Preserved Ordinary Course Administrative Claims and Allowed Priority Tax Claims are not designated as Classes. The holders of such unclassified Claims shall be paid in full under the Amended Plan consistent with the requirements of Section 1129(a)(9)(A) of the Bankruptcy Code and are not entitled to vote on the Amended Plan. The distributions under the Amended Plan to each Class are summarized in the following table:
 
 CLASS
DESCRIPTION
TREATMENT
EST. AMOUNT OF CLAIMClass 1:
Priority Wage Claims
Unimpaired. Paid in accordance with existing terms.
$376,707.00Class 2:
Priority Benefit Plan Contribution Claims
Unimpaired. Paid in full in Cash on the Payment Date.
$0.00Class 3:
Priority Customer Deposit Claims
Unimpaired. Paid in full in Cash on the Payment Date.
$0.00Class 4:
Secured Tax Claims
Unimpaired. Paid in full in Cash on the Payment Date.
$0.00Class 5:
Miscellaneous Secured Claims
Unimpaired. Cured or paid in full in Cash on the Payment Date.
$0.00    3
    Class 6:
Racusin Claim
Unimpaired. Unless subordinated and treated in Class 13, paid
100% of Claim when Allowed.
$1,328,764.17
Plus interest from June 20, 2003 to July 25, 2003.Class 7:
LVGI Unsecured Claim
Impaired. Paid pursuant to Settlement Agreement commencing
on Payment Date.
$1,200,486.40Class 8:
General Unsecured Claims of AWI
Unimpaired. Paid 100% of Allowed General Unsecured Claim on
the Payment Date.
$99,650.00Class 9:
General Unsecured Claims of Leroys
Unimpaired. Paid 100% of Allowed General Unsecured Claim on
the Payment Date.
$58,193.00Class 10:
Intercompany Claims
Unimpaired. Paid in accordance with existing terms.
$4,633,959.00Class 11:
Old Leroys Common Stock
Unimpaired.
N/AClass 12:
Old AWI Preferred Stock
Impaired. Paid according to existing terms only after Allowed
Claims in Classes 6, 7, 8 and 9 are paid.
$1,092,400.00
Total claim.Class 13:
Old AWI Common Stock
Impaired. Retain Old AWI Common Stock subject to dilution by
any Subordinated Claims.
N/A
   All Priority Wage Claims, Priority Benefit Plan Contribution Claims, Priority Customer Deposit Claims, Secured Tax Claims, Miscellaneous Secured Claims and the Racusin Claim, are unimpaired pursuant to the Amended Plan and shall be paid in full in cash. Specifically, Priority Wage Claims shall be paid in the ordinary course of business in accordance with existing terms. Priority Benefit Plan Contribution Claims shall be paid in full upon the latest of: (i) the Payment Date; (ii) such date as may be fixed by the Bankruptcy Court; (iii) the tenth (10 th ) Business Day after such Claim is allowed, or as soon thereafter as practicable; and (iv) such other date as the holder of such Claim and the Debtors, and after the Effective Date, the applicable Reorganized Debtor shall agree. Priority Customer Deposit Claims shall be paid in full upon the latest of: (i) the Payment Date; (ii) such date as may be fixed by the Bankruptcy Court; (iii) the tenth (10 th ) Business Day after such Claim is allowed, or as soon thereafter as practicable; (iv) such other date as the holder of such Claim and the Debtors, and after the Effective Date, the applicable Reorganized Debtor shall agree; and (v) a date when such Priority Customer Deposit Claim becomes due and owing. Secured Tax Claims shall be paid upon the latest of: (i) the Payment Date; (ii) such date as may be fixed by the Bankruptcy Court; (iii) the tenth (10 th ) Business Day after such Claim is allowed, or as soon thereafter as practicable; (iv) the date on which such Secured Tax Claim is scheduled to be paid under applicable law or regulation; and (v) such other date as the holder of such Claim and the Debtors, and after the Effective Date, the applicable Reorganized Debtor shall agree. Finally, Miscellaneous Secured Claims shall either receive on account of such Claim, Plan Distribution Cash equal to Allowed Secured Claim or such lesser amount to which the holder of such Allowed Secured Claim shall agree, in full satisfaction and release of such Allowed Secured Claim; or Debtors or the applicable Reorganized Debtor, as the case may be, shall abandon the collateral securing such Claim to the holder thereof in full satisfaction and release of such Claim.
 
 The Racusin Claim is provided for in Class 6. The holder of the Racusin Claim shall receive Plan Distribution Cash equivalent to 100% of the Allowed Racusin Claim in the amount of the Racusin Judgment on the latest of: (i) the Payment Date; (ii) such date as may be fixed by the Bankruptcy Court; and (iii) if it is a Disputed Claim, the tenth (10 th ) Business Day after such Claim is allowed. If after the Effective Date the Racusin Judgment is increased as a result of the Racusin Appeal, the holder of the increased Allowed Racusin Claim shall receive Plan Distribution Cash equivalent to 100% of such additional amount on the latest of: (i) the Payment Date; (ii) such date as may be fixed by the Bankruptcy Court; (iii) the tenth (10 th ) Business Day after such Claim is allowed; and (iv) such date as the holder of such Claim and the Reorganized Debtors shall agree. If Debtors prevail on the Subordination Appeal, the Racusin Claim shall be a Subordinated Claim and treated in Class 13.
   4
  General Unsecured Claims of AWI are provided for in Class 8. Holders of Class 8 Claims are unimpaired. Each holder of an Allowed General Unsecured Claim of AWI shall receive with interest Plan Distribution Cash equivalent to 100% of its Allowed General Unsecured Claim or other treatment agreed to between AWI and such holder upon the latest of: (i) the Payment Date; (ii) the tenth (10 th ) Business Day after such Claim is allowed, or as soon thereafter as practicable; and (iii) such other date as the holder of such Claim and the Debtors, and after the Effective Date, the applicable Reorganized Debtor shall agree.
 
 General Unsecured Claims of Leroys are provided for in Class 9. Holders of Class 9 Claims are unimpaired. Each holder of an Allowed General Unsecured Claim of Leroys shall receive with interest Plan Distribution Cash equivalent to 100% of its Allowed General Unsecured Claim or other treatment agreed to between Leroys and such holder upon the latest of: (i) the Payment Date; (ii) the tenth (10 th ) Business Day after such Claim is allowed, or as soon thereafter as practicable; and (iii) such other date as the holder of such Claim and Leroys or Reorganized Leroys has agreed or shall agree.
 
 The LVGI Unsecured Claim is impaired under the Amended Plan and the Holder of the Allowed Claim in Class 7 is entitled to vote on the Amended Plan. In accordance with the LVGI Settlement Agreement, LVGI shall receive in full payment and satisfaction of the Imagineering Judgment a total principal sum of $1,000,000.00 payable as follows:
 
 
 (a)   Initial Payment. On the Payment Date, LVGI will receive Plan Distribution Cash of $320,000.00 (leaving a remaining balance of $680,000.00).
 (b)  Payment Upon Refinancing. Upon completion of a refinancing of the real property owned by CBS, AWI will cause CBS to pay LVGI the greater of fifty percent (50%) of the
 net proceeds realized from the refinancing or $200,000.00 (leaving a remaining balance of $480,000.00 assuming the minimum $200,000.00 payment).
 Monthly Payments. The balance of the Claim plus interest at the rate of six percent (6%) per annum shall be paid in 24 monthly installments as set forth in the amortization
 schedule attached to the LVGI Settlement Agreement.
 
 Old AWI Preferred Stock and Old AWI Common Stock are impaired under the Amended Plan and the Holders of the Allowed Claims in Classes 12 and 13 are entitled to vote on the Amended Plan. Holders of Old AWI Preferred Stock shall be paid in accordance with the terms of the Old AWI Preferred Stock and the Certificate of Designation only after Allowed Claims in Classes 6, 8 and 9 are paid in full and payments to Class 7 are current pursuant to the Amended Plan. Finally, holders of Old AWI Common Stock shall retain their Old AWI Common Stock; however, in the event that the Debtors are successful on the Subordination Appeal, Old AWI Common Stock shall be diluted by any Subordinated Claim which shall receive Old AWI Common Stock on the Effective Date.
 
 For more information regarding the bankruptcy proceedings, please see the discussion contained in Part II, Item 6, of this report.
 
 Recent material litigation and related business activities. The Company is currently involved in litigation in the Racusin and Imagineering cases. The outcome of these cases will have a material adverse effect on the Company. A more complete discussion of these cases is found in the "Legal Proceedings" section of this 10-KSB found in Item 3.
 
 The Company also owned and operated Mega$ports (ACT) Pty. Ltd. ("Mega$ports (ACT)") located in Canberra, Australia, an international wagering hub licensed to accept both fixed odds and pari-mutuel interactive wagers on the telephone and Internet. On July 27, 2000, the Company settled a complaint filed by the State Gaming Control Board, without admitting or denying the allegations, by agreeing to pay a fine of $10,000 and to divest itself of any and all interests and rights pertaining to Mega$ports (ACT). On June 18, 2002 the Company entered into a Share Sale agreement with Euraust Limited ("Euraust"), in which the Company agreed to sell the Mega$ports (ACT) subsidiary to Euraust. The Chairmen of the State Gaming Control Board and Nevada Gaming Commission concluded that a complete divestiture cannot occur so long as there is a continuing obligation from the buyer to pay the Company on its note receivable (valued at $624,600) based on a percentage of handle. The Company was unsuccessful in its attempts to negotiate a modification or discount for a lump-sum payment with the buyer. The Company wrote-off as uncollectible the existing note to gain on disposal of discontinued operations in the prior fiscal year ended January 31, 2003.
   5
   Other business activities and historical background . The Company owns AWI Manufacturing , Inc. ("AWIM") which was originally named AWI Keno, Inc ("AWIK"). AWIK designed, installed, operated and maintained computerized keno systems. In July 2002, the Company discontinued its keno operations. In preparation of the release of the self-service race and sports wagering terminals, AWIK changed its name to AWI Manufacturing, Inc. ("AWIM"). AWIM began operations in the first quarter of fiscal 2004 and currently has 9 kiosks in operation.
 
 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 and settled certain litigation between them. 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 designs, installs, and operates a telephone call identification system for its customers. The system determines the origin of a telephone call and accepts or rejects the call based on its origination. The system is used in conjunction with telephone account wagering within the State of Nevada. On January 24, 2004 the Company dissolved STOP.
 
 Las Vegas Area Market
 
 The Companys primary market (based upon wagering activity) for sports and race book operations is the Las Vegas Valley and surrounding areas (hereinafter, "Las Vegas Area"). At December 31, 2003, the Las Vegas Area included 100 sports books and 78 race books. Leroys currently operates 21 of its 50 sports books in the Las Vegas Area. The Las Vegas Area attracts both local residents and Las Vegas visitors. The Las Vegas population was approximately 1.5 million in 2003. 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 2003 was approximately 35.5 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 2003 that were attended by more than 5.6 million people who, it is estimated, spent $6.59 billion, excluding gaming activity.
 
 From 1989 to 2002, gaming revenues for Clark County (which consists principally of the Las Vegas Area) have increased 129.4%, from approximately $3.4 billion in 1989 to approximately $7.8 billion in 2002. 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
 
 The Reno gaming market and surrounding areas (the "Reno Area") is home to 8 Leroys sports and race books. Reno is the second largest city in Nevada with a population of approximately 373,000 for 2003. 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.
 
 Sports Wagering
 
 Sports wagering is legal in the State of Nevada and in numerous foreign countries, including Canada, Mexico and Australia. Sports wagering at Nevadas race and sports books increased from approximately $290 million in 1980 to $2.4 billion in 2003. During that same period, the number of sports books in Nevada increased from 24 to 155 .
    6
   With the advent of cable and satellite television, both commercially and privately, viewing access to sporting events has 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 in Las Vegas 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 50 sports books in major metropolitan areas in Nevada (21 are in the Las Vegas Area, 8 in the Reno/Sparks Area, 22 throughout the State of Nevada, including Laughlin, Jean, Crystal Bay,
 
 
 7
 
 Mesquite, Elko, Gardnerville, Hawthorne, Spring Creek, Verdi, Wendover, Winnemucca, Pahrump, Jackpot, Ely and Fernley). The locations include the Riviera Hotel/Casino, Tropicana Resort/Casino, and Four Queens Hotel/ Casino in the Las Vegas Area and Carson Nugget Casino, and Rail City Casino in the Reno Area. Under Nevada gaming law, Leroys is permitted to own and operate sports books located on the premises of other non-restricted gaming licensees. The remaining 100 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 38% of the amount bet at the Leroys locations with professional and college basketball games comprising about 29%. Professional baseball is next at about 26%. 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 2003 to January 2004 season consisted primarily of football with approximately 64%, basketball with approximately 19% and baseball with approximately 9%. Hockey comprises the majority of the balance. 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. Leroys only offers race wagering for a few major events, such as the Triple Crown and the Breeders Cup. Leroys currently offers pari-mutuel race wagering at its locations in the Sahara Hotel and Casino and in the Silverton Hotel and Gambling Hall in Las Vegas. Leroys operates a daily race book with wagers merged into the on-track pari-mutuel pools at these locations.
 
 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 Wagering
 
 Race - In December 1997, Leroys joined the Nevada Pari-mutuel Association to allow pari-mutuel race wagering at one or more of its locations. Leroys, in association with a disseminator, offered pari-mutuel wagering on events at racetracks throughout the country including Santa Anita in California and Aqueduct in New York. The Company currently offers pari-mutuel race wagering at three of its locations.
 
 Sports - From June 1997 through March 2000, the Company test marketed pari-mutuel sports wagering at its Nevada books and at approximately 18 other books throughout the State. The Companys subsidiary, Mega$ports,
 
 
 8
 
 Inc., acquired, developed, and marketed the technology. Lack of patron acceptance resulted in the Companys decision to discontinue the betting alternative and let its Nevada gaming license expire in July 2000. In preparation of the non-gaming kiosk operations projected to begin in fiscal year 2005, Mega$ports, Inc. was renamed Contest Sports Systems, Inc. ("CSS").
 
 Systems Operations
 
 CBS is a technology-driven company that designs, installs and maintains computerized sports and race wagering systems. CBS is the leading race and sports wagering systems supplier in the State of Nevada and provides either wagering systems and/or services to the majority all of the sports and race books in Nevada that are not operated by the Companys Leroys subsidiary. Casinos and other sports wagering facilities generally purchase the computerized wagering system and enter into an agreement for repair and maintenance of the system and software support. Operating revenues mainly consist of race and sports wagering equipment sales and the related maintenance contract revenues. 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.
 
 Kiosk Operations
 
 AWIM (originally named AWIK) was formed during the second quarter of fiscal 1999. In July 2002, the Company discontinued its keno operations. In preparation of the release of the self-service race and sports wagering terminals which began in the first quarter of fiscal year 2004, AWI Keno, Inc. was renamed AWI Manufacturing, Inc. ("AWIM"). There are currently 9 kiosks in operation.
 
 Operating Strategy
 
 The Companys primary operating strategies for the foreseeable future are to focus on its core businesses, operating race and sports books in Nevada and developing, selling and maintaining related systems, becoming more efficient and cutting costs. In Nevada, the Companys strategy is to expand upon its current base of 50 books. The Company has also developed a new self-service race and sports wagering terminal introduced in the first quarter of fiscal 2004. The new terminal allows patrons to place wagers on their own without the assistance of employees. Patrons are able to wager 24 hours a day on all available events at locations amenable to a 24-hour schedule. The self-service terminal allows the Company to operate profitably in smaller casinos where labor costs are prohibitive and allows improved efficiency at larger casinos. Additionally, the Company is developing a non-gaming version of the self-service terminal which it expects to complete in fiscal year end 2005. The Company has implemented and is also initiating other cost cutting measures.
 
 Proposed Government Regulation
 
 The Company intends to continue to present casinos with a "turn key" sports book operation that allows the casinos to satisfy their patrons desires for race and sports gaming without bearing the risk and overhead associated with operating the books 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
 
 9
 
 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 50 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.
 
 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.
   10
   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 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
 
 
 11
 
 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.
 
 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
 
 
 12
 
 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.
 
 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 160 sports books in Nevada, of which the Company owns and operates 50. 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 as well as keeping up with the rapidly growing field of technology. There also is a possibility of another systems provider moving to Nevada.
 
 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.
 
 Employees
 
 The Company and its subsidiaries had approximately 207 full and part-time domestic employees at January 31, 2004 with 152 employed by Leroys, 43 employed by CBS and 12 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.
  
 13 
 
 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, which is owned by the Companys subsidiary, CBS. CBS is a debtor under a mortgage loan on the building of which approximately $1.6 million is outstanding as of January 31, 2004. The loan, which accrues interest of 8% annually, is due in full in September 2015 and is secured by a deed of trust, assignment of leases and rents in favor of the lender. The Company has guaranteed CBS obligations under this loan.
 
 Leroys operates 50 sports books subject to lease agreements. 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 $444,000 and $453,000 for the years ended January 31, 2004 and 2003, respectively.
 
 Item 3.  Legal Proceedings
 
 Racusin
 
 On July 7, 2003, the U.S. District Court for the District of Nevada issued a "Judgment Upon a Jury Verdict" in favor of Michael Racusin ("Racusin") and against the Company in the net amount of $1,328,764 plus interest at the legal rate commencing on June 20, 2003 until paid. This amount was calculated as the gross judgment of $2,310,000 plus interest of $183,393 (through June 20, 2003) reduced by the amounts previously paid to Racusin by the Company ($756,340 plus interest of $408,289 through June 20, 2003).
 
 Racusin has appealed the interest portion of the judgment to the Ninth Circuit Court of Appeals claiming that interest is due from the date of the breach (May of 1996) rather than from the date of the trial (November of 2002). This appeal on the judgment, or other legal actions, could extend this matter for an additional one to two years and, if successful, could increase the net amount of the judgment by approx. $1,500,000 (as of June 20, 2003) for the additional interest. The Company had previously accrued $328,624 for interest, which will not be adjusted until such time as the final disposition of the judgment and interest issue has been determined.
 
 On July 25, 2003, American Wagering, Inc. and its wholly owned subsidiary Leroys Horse and Sports Place, Inc. (collectively, the "Debtors") 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 January 5, 2004, the Bankruptcy Court denied the Debtors motion seeking to subordinate the Racusin judgment pursuant to Section 510(b) of the Bankruptcy Code; the Debtors are appealing the decision.
 
 The Company recorded $1,643,625 against additional paid-in capital in the quarter ended October 31, 2002, which represents the jury verdict less amounts previously paid by the Company. The Company has been in litigation with Racusin, who introduced certain underwriters in connection with the initial public offering, since 1995. The Company disputed Racusins claim for compensation under agreements that the Company believed were unenforceable.
 
 Imagineering Systems, Inc.
 
 On June 18, 2003, an order of the Supreme Court of the State of Nevada found that there was insufficient evidence to support the $397,500 jury award for breach of contract damages against the Company and instead found that substantial evidence only supported damages for breach of contract totaling $294,600. In addition, the Court affirmed the decision of the district court to award $500,000 in damages against the Company for breach of the implied covenant of good faith and fair dealing. On August 25, 2003, the Company was notified that the Supreme Court denied its request for further review of this matter. As of October 31, 2003, the Company has recorded a liability in the amount of $794,600 plus interest of $333,461 relating to the judgment.
 
 Jean Development Co., et.al.
 
 The Company is a defendant in a claim brought by Jean Development Company, Jean Development West and Railroad Pass Investment Group alleging the nonpayment of fees associated with the operation of the keno game by
 
 
 14
 
 AWI Keno, Inc. The Company is currently involved in discussions and expects this matter to be settled without material impact on the Company. In the event a settlement cannot be reached, the Company believes the impact of the lawsuit will not have a material effect on our financial position, results of operations or cash flows. AWI Keno, Inc. was subsequently renamed AWI Manufacturing, Inc.
 
 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
 
 On July 29, 2003, the Company held an annual shareholder meeting. The meeting was called for the purpose of electing directors to the board of directors. The number of votes present in person or by proxy was sufficient to constitute a quorum. A majority of the shareholders elected Victor J. Salerno, Timothy F. Lockinger, W. Larry Swecker, Judith (Salerno) Zimbelmann, and Bruce Dewing to serve on the board of directors until the next annual meeting of the shareholders, or until removed by other action as allowed by the corporate bylaws.
 
 15
   PART II
 
 Item 5.  Market for Common Equity and Related Stockholder Matters
 
 The Companys Common Stock had been reported by the NASDAQ National Market System under the symbol "BETM" since 1996. Effective August 4, 2000 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.
 
 BETMQ.OB - Fiscal Year Ending January 31, 2004Quarter 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
0.12BETMQ.OB - Fiscal Year Ending January 31, 2003Quarter Ended
High $
Low $April 30, 2002
0.48
0.28July 31, 2002
0.75
0.29October 31, 2002
0.43
0.13January 31, 2003
0.28
0.11 
 The approximate number of record holders of shares of the Common Stock of the Company outstanding as of April 18, 2004, was 61. No cash dividends have been declared or paid on the Companys Common Stock.
 
 PENNY STOCK
 
 Until our shares qualify for inclusion in the NASDAQ system, the public trading, if any, of our common stock will be on the OTC Bulletin Board. As a result, an investor may find it more difficult to dispose of, or to obtain accurate quotations as to the price of, the common stock offered. Our common stock is subject to provisions of Section 15(g) and Rule 15g-9 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), commonly referred to as the "penny stock rule." Section 15(g) sets forth certain requirements for transactions in penny stocks, and Rule 15g-9(d) incorporates the definition of "penny stock" that is found in Rule 3a51-1 of the Exchange Act. The SEC generally defines "penny stock" to be any equity security that has a market price less than $5.00 per share, subject to certain exceptions. If our common stock is deemed to be a penny stock, trading in the shares will be subject to additional sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors. "Accredited investors" are persons with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse. For transactions covered by these rules, broker-dealers must make a special suitability determination for the purchase of such security and must have the purchasers written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to the first transaction, of a risk disclosure document, prepared by the SEC, relating to the penny stock market. A broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information for the penny stocks held in an account and information on the limited market in penny stocks. Consequently, these rules may restrict the ability of a broker-dealer to trade and/or maintain a market in our common stock and may affect the ability of our shareholders to sell their shares.
  
 16 
 
 Item 6.  Managements Discussion and Analysis or Plan of Operation
 
 Overview
 
 The Companys primary operating strategy currently and upon emergence from Chapter 11 for its continuing operations over the next twelve months is to focus on its core businesses of operating race/sports books through Leroys, developing/selling/maintaining race/sports books systems through CBS, and leasing self-service wagering kiosks through AWIM. The self-service sports wagering kiosk allows the Company to operate profitably in smaller casinos where labor costs have been prohibitive and to achieve improved efficiency at larger casinos. The Company is also developing a non-gaming version of the kiosk that it anticipates will be ready in the fiscal year ending January 31, 2005.
 
 In preparation for the kiosk operations, AWI Keno, Inc., a subsidiary of the Company, was renamed AWI Manufacturing, Inc. ("AWIM") and Mega$ports, Inc., a subsidiary of CBS, was renamed Contest Sports Systems, Inc. ("CSS"). Kiosk operations will be accounted for under either AWIM or CSS depending on whether the particular kiosk is the gaming or non-gaming version.
 
 The Company will continue to explore possible new locations for sports and race book facilities, including foreign jurisdictions. We will also continue our review of existing locations in order to close those locations that are not operating efficiently. Based on our strategy, the number of sports and race books operated by Leroys may increase or decrease in the future due to the closure of unprofitable locations, or host properties, and closures due to other factors beyond our control or the possible opening of new locations with greater potential for profitability. There is no assurance that we 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 assuming resolution of the Racusin and Imagineering Systems, Inc. litigations through the amended plan of reorganization. The Company plans to accumulate cash liquidity during the current year ended fiscal 2005 to fund the purchase of kiosks, possible effects of litigation, seasonality of sports betting, timing of system sales, and the possible effects of legislation to ban wagering on amateur athletic events. The Company has possible negative cash flow exposures due to potential litigation judgments (primarily Racusin and Imagineering Systems, Inc.; see "Legal Proceedings"). Final judgments significantly in excess of amounts accrued could have a significant negative impact on the Companys existing cash balances and anticipated cash flows. Final judgments in connection with these matters could be determined within the next twelve months and are material to the financial viability of the Company.
  Liquidity and Capital Resources
 
 On July 25, 2003 (the "Petition Date"), American Wagering, Inc. ("AWI") and its wholly-owned subsidiary Leroys Horse and Sports Place, Inc. ("Leroys") (collectively, the "Debtors") filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code (the "Chapter 11 Cases") in the United States Bankruptcy Court for the District of Nevada, Northern Division in Reno, Nevada (the "Bankruptcy Court"). Pursuant to the Bankruptcy Code, AWI and Leroys continue to manage and operate the assets and business as debtor-in-possession and are subject to the supervision and orders of the Bankruptcy Court until emergence from Bankruptcy. On February 20, 2004, the Debtors filed a Plan of Reorganization (the "Plan") and related Disclosure Statement (the "Disclosure Statement") with the Bankruptcy Court. The Bankruptcy Court must approve the applicable Disclosure Statement relating to the Plan as providing adequate information of a kind, and in sufficient detail, as far as reasonably practicable in light of the nature and history of the debtor and the condition of the Companys books and records, that would enable a hypothetical reasonable investor typical of the holder of claims or interests of the relevant class to make an informed judgment about the Plan. On April 8, 2004, the Bankruptcy Court heard the Debtors motion to approve the Disclosure Statement and Plan, and to begin soliciting acceptances of the Plan; the Bankruptcy Court approved the Debtors motion but will, however, allow a competing plan to also be filed. On April 14, 2004, the Debtors amended the Plan (the "Amended Plan") and Disclosure Statement (the "Amended Disclosure Statement") in order to mitigate the effects of any competing plan of reorganization that may be submitted in this matter.  On April 22, 2004, the Bankruptcy Court denied a motion filed by the Debtors seeking to extend the Debtors exclusivity period to file a plan of reorganization and disclosure statement through the confirmation hearing. The decision of the Bankruptcy Court will continue to allow competing plans of reorganization to be filed. In accordance with the Bankruptcy Code, the proponent of a competing plan of reorganization must file a disclosure
 
 
 17
 
 statement to accompany the competing plan of reorganization and have the disclosure statement approved by the Bankruptcy Court before the competing plan of reorganization may be submitted to impaired creditors and equity interest holders for approval. Also, on April 22, 2004, the Bankruptcy Court vacated the June 3, 2004 confirmation hearing regarding the Debtors amended plan of reorganization (the "Amended Plan") and did not set a new date. Debtors will emerge from Chapter 11 if and when the Plan receives the requisite stakeholder approval and is confirmed by the Bankruptcy Court.
 
 The Companys other subsidiaries, including CBS and AWIM, are not directly involved in the bankruptcy proceedings; however, the outcome of the Chapter 11 Cases could have a material adverse effect on these subsidiaries.
 
 Since the Petition Date, preferred stock dividends have not been paid and the preferred stock is subject to treatment and possible compromise under the Plan. The consolidated financial statements for the year ended January 31, 2004, have been prepared assuming the Company will continue as a going concern and do not include any adjustments that might result if the Debtors are unable to successfully emerge from bankruptcy.
 
 The Company has minimum cash flow from operations and exposures due to the litigation judgments against the Company in two lawsuits referred herein as the Racusin case and the Imagineering case and the aforementioned Chapter 11 Cases.
 
 The ultimate disposition and payment of the judgment in the Racusin and Imagineering matters will be determined by the United States Bankruptcy Court. A more complete discussion of these cases can be found in the "Legal Proceedings" section of this 10-KSB found under Item 3. Unless the litigation matters are resolved satisfactorily, or the Company is able to finance them adequately, management believes that the Company may not be able to satisfy its operating cash requirements for at least the next twelve months from existing cash balances and anticipated cash flows. The Company plans to accumulate cash liquidity by increasing profitable and closing unprofitable Leroys locations and leasing self service kiosks, to fund possible effects of litigation, seasonality of sports betting, timing of system sales, and the possible effects of legislation to ban wagering on amateur athletic events. Payment of final judgments at accrued amounts and final judgments significantly in excess of amounts accrued could have a significant negative impact on the Companys existing cash balances, anticipated cash flows and ability to continue as a going concern. For these reasons, our independent auditors, Piercy Bowler Taylor and Kern, have indicated in their report dated April 15, 2004, included in this 10-KSB for the fiscal year ended January 31, 2004, that they had substantial doubt as to the Companys ability to continue as a going concern.
 
 On December 31, 2002, the Company was notified that its 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. The Regulation requires the Company have cash reserves of $2,150,000 to cover any outstanding wagering liability such as unpaid winning tickets, future tickets and telephone account deposits. To meet the Regulations requirements, the Company set aside $1,050,000 in certificates of deposit which are classified in its balance sheet as restricted cash. The Companys President and Chief Executive Officer, Victor Salerno, has personally secured an additional $1,100,000 irrevocable standby letter of credit to meet the Gaming Control Boards total reserve requirement of $2,150,000. Mr. Salerno was paid $38,500 (3.5% of the $1,100,000) for his personal guarantee. 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 locations operated by the Leroys Horse & Sports Place subsidiary and/or requiring a significant reduction in the handle (total amount wagered).
 
 Assuming successful resolution of short-term issues, including satisfactorily emerging from bankruptcy, management believes the Company could successfully meet its long term obligations.
  
 18 
 
 The following summarizes the Companys cash payment obligations.
  
 2005

2006 to 2007

2008 to 2009Long-term debt
$ 316,490

$ 511,968

$ 429,236Operating leases
293,152

450,623

233,050Total
609,642

962,591

662,286 
 Long term debt includes the mortgage on the building and loans for automobiles. 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.
 
 Results of Operations
 
 The Companys "Consolidated Statements of Operations for the years ended January 31, 2004 and 2003" (see attached financial statements) indicates Net Loss in the amount of $487,719 for the year ended January 31, 2004 as compared to Net Income of $423,564 for the year ended January 31, 2003. The decline resulted primarily from an $800,465 charge due to a litigation judgment in the Imagineering case and a $214,935 charge associated with bankruptcy legal fees which were not charged in 2003.
 
 Revenues for the year ended January 31, 2004 decreased $670,139 (5.8%) from revenues for the year ended January 31, 2003. The decrease is primarily due to a $546,053 (33.7%) decrease in nonrecurring equipment sales in the systems segment (which tend to vary significantly from year-to-year based upon the needs of the industry). The operating income for the year ended January 31, 2004 was $244,933 less than the prior year due to the decrease in sales offset by the companys effort to reduce expenses and reduced cost of goods sold associated with lower equipment sales.
 
 Wagering Operations
 
 Revenues from wagering were $128,065 (1.9%) higher than 2003. Handle remained relatively the same as 2003 with an increase of $655,735 (0.7%). The Companys net win percentage was also relatively stable at 7.3% for the year ended January 31, 2004 compared to 7.4% in the prior year.
 
 Although the wagering handle between years remained relatively flat, there was not a professional football championship game in fiscal year ended 2004 and there were two professional football championship games (which generally provide for increased betting activity) in 2003. The fact the handle remained flat with the absence of football championships is credited to the locations added in 2003 becoming fully viable in 2004. An increase or decrease in handle, however, 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 number of sports and race book locations owned and operated by Leroys remained at 47 as of January 31, 2004. As of today, Leroys has 50 locations. 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 sports and race 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.
 
 Wagering operating costs increased $182,525 (3.6%) primarily in employee related expenses. Selling, general and administrative expenses increased $28,006 (25.3%) from an increase in the use of outside services.
 
 
 19 
 
 Systems Operations
 
 Revenues from Systems decreased $798,204 (16.5%) primarily in equipment and software license sales of $617,408 (28.5%) in 2004 due to a decrease in the number of customers available to sell to which have not already upgraded to the new equipment. The Companys gross profit margin increased 6.2% to 52.5% as a result of decreased costs associated with lower costs of inventory replacements. Maintenance revenues decreased $180,796 (6.7%) in 2004 and related maintenance expenses decreased $14,701 (1.1%). CBS equipment sales are low volume, high dollar sales based on the needs of the market, which is limited based on the number of casinos that operate race and sports books. Equipment 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. Included in systems are the kiosk operations. AWIM currently has 9 leased kiosks.
 
 Direct Costs
 
 Total direct costs for wagering and systems operations for 2004 decreased $127,435 (1.8%) from 2003 as a result of the matters discussed above.
 
 Research and Development Costs
 
 Research and development costs for the fiscal year ended January 31, 2004, increased by $92,377 (9.9%) primarily due to employee related expenses such as wage increases and increases in employee insurance costs.
 
 Selling, General and Administrative Costs
 
 Selling, general and administrative costs decreased $366,129 (15.3%) from 2003 to $2.031,774 primarily as a result of a one-time vacation expense adjustment in 2003 of approximately $250,000 to reinstate previously earned vacation benefits of certain officers that had been capped and reduced legal fees in 2004 related to litigation.
 
 Depreciation and Amortization
 
 Depreciation and amortization decreased by $24,019 primarily due the reduction in amortization of goodwill necessitated by Financial Accounting Standard No. 142.
 
 Interest Expense
 
 Interest expense of $146,968 for fiscal year ended 2003 decreased $9,397 (6.0%). The decrease is principally due to the reduced interest paid on the principal balance of the building mortgage.
 
 Discontinued Operations
 
 There were no material discontinued operations reported for fiscal 2004. The discontinued operations loss, net of income taxes, of $207,998 for the fiscal year ended 2003 is attributable to the sale of the Mega$ports (ACT) operation and the closure of the keno operation.
 
 Critical Accounting Estimates and Policies
 
 The Company does not utilize any critical accounting estimates that are likely to change or to have a material effect on its financial statements if changed.
 
 Forward-Looking Statement
 
 Certain information included in this report and other materials filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or written statements made or to be made by the Company) contains statements that are forward looking within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934. Such statements include information relating to current expansion projects, plans for future expansion projects and other business development activities as well as other capital spending, financing sources and the effects of regulations (including
 
 
 20
 
 gaming and tax regulations) and competition. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. These risks and uncertainties include, but are not limited to, those relating to the Company taking financial risks on the outcome of sports events as a principal betting against its patrons, domestic or global economic conditions, changes in federal or state tax laws or the administration of such laws, changes in gaming laws or regulations (including the legalization of gaming in certain jurisdictions) and applications for licenses and approvals under applicable laws and regulations (including gaming laws and regulations).
 
 Cautionary Statements
 
 As provided for under the Private Securities Litigation Reform Act of 1995, the Company wishes to caution investors that the following important risk factors, among others, in some cases have affected and in the future could affect the Companys actual results of operations and cause such results to differ materially form those anticipated in the forward-looking statements made in this document and elsewhere by or on behalf of the Company.
 
 Strict Regulation by Gaming Authorities. The ownership and operation of race and sports books 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, distribute and operate race and sports book equipment. 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.
 
 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. 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. 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.
 
 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.
 
 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.
 
 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
 
 
 21
 
 any other interim period. See "Managements Discussion and Analysis of Financial Condition and Results of Operations."
 
 Litigation. The Company is involved in two lawsuits see "Legal Proceedings" of which the outcome could have a material adverse effect on the operations of the Company and has necessitated the Company to file bankruptcy proceedings.
 
 Item 7.  Financial Statements
 
 The information requested by this item is set forth in Item 13 of this Report.
 
 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, 2004. 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.
   22 
 
 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
59
President, Chief Executive Officer, Chief Operating Officer, and DirectorTimothy F. Lockinger
43
Chief Financial Officer, Secretary, Treasurer, and DirectorW. Larry Swecker
59
DirectorJudith  (Salerno) Zimbelmann
52
DirectorBruce Dewing
53
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 and is currently the President of the Holder Hospitality Group, Inc. where he oversees 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.
 
 Family Relationships
 
 There are no family relationships between or among the directors, executive officers or persons nominated or chosen by the Company to become directors or executive officers.
  
 23 
 
 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 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; (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 for a one-year term 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 LateReports
Transactions NotTimely Reported
Known Failures to File a RequiredFormVictor Salerno
CEO and Director
None
None
NoneTimothy F. Lockinger
CFO and Director
None
None
NoneW. Larry Swecker
Director
None
None
NoneJudith (Salerno) Zimbelmann
Director
2
2
0Bruce Dewing
Director
None
None
NoneRobert Barengo
Shareholder
None
None
None 
 Code of Ethics Disclosure Compliance
 
 As of January 31, 2004, we have 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.
 
 
 24
 
 Subsequent to January 31, 2004, the Company has begun the process of designing a code of ethics which will be filed with the Security and Exchange Commission upon completion.
 
 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 whose annual salary and bonus exceeded $100,000 during the year ended January 31 (these individuals may be referred to as "named executive officers"):
  
 SUMMARY COMPENSATION TABLEName
Principal Position
Fiscal
Year
Ended
Annual Compensation
Long-Term
Compensation
AwardsSalary
Bonus ($)
Underlying OptionsVictor J. Salerno
Chief Executive Officer
2004
$240,000
$31,343
02003
$200,000
$14,380
02002
$200,000
$45,733
30,000Timothy F. Lockinger
Chief Financial Officer
2004
$120,000
$12,537
02003
$100,000
$5,752
02002
N/A
$10,147
15,000Robert D. Ciunci
Former Chief Financial Officer
2004
N/A
N/A
N/A2003
N/A
N/A
N/A2002
$150,000
0
0 
 The following table sets forth the number of exercisable and un-exercisable options as of January 31, 2004, and the value of such options for the Chief Executive Officer and the named Executive Officers.
 
 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%
$0.70
8/8/2006  
 Name
No. of Shares Acquired or Exercised
ValueRealized ($)
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. Any Committee Chairman receives an additional $500 per month for each committee chaired.
 
 During the fiscal year ended January 31, 2004, 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 $0.15 per share were granted to Mr.
 
 
 25
 
 Swecker, a Director of the Company. These options become fully exercisable on January 31, 2005 and expire on January 31, 2014. During the fiscal year ended January 31, 2003, pursuant to the same plan, options to purchase 400 shares of the Companys Common Stock at an exercise price of $0.12 per share were granted to Mr. Swecker, these options become fully exercisable on January 31, 2004 and expire on January 31, 2013.
 
 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, as of April 18, 2004, the 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, 2003, 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.
   26  
 Name
Number of Shares
PercentageVictor J. Salerno
2,434,054
31.1%1Judith (Salerno) Zimbelmann
1,001,200
12.8% 2Robert Barengo
527,400
6.7% 3Timothy F. Lockinger
61,865
0.8% 4Bruce Dewing
42,000
0.5%W. Larry Swecker
21,600
0.3% 5All directors and executive officers as a group (6 persons)
4,088,119
52.2% 
 
 1.   Includes 30,000 options that may be exercised immediately to purchase 30,000 shares of common stock at the price of $0.70 per share.
 2.   Includes 1,200 options that may be exercised immediately to purchase 1,200 shares of common stock at the price of $0.35 per share.
 3.   Includes 1,600 options that may be exercised immediately to purchase 1,600 shares of common stock. 400 of those options may be exercised at the price of $10.75 per share.
 400 of those options may be exercised at the price of $8.88 per share. 400 of those options may be exercised at the price of $6.69 per share. 400 of those options may be
 exercised at the price of $6.56 per share.
 4.   Includes 15,000 options that may be exercised immediately to purchase 15,000 shares of common stock at the price of $0.70 per share.
 5.   Includes 800 options that may be exercised immediately to purchase 800 shares of common stock. 400 of those options may be exercised at the price of $0.35 per share. 400 of
 those options may be exercised at the price of $0.12 per share.
 
 Item 12.  Certain Relationships and Related Transactions
 
 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;
 any proposed nominee for election as a director;
 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
 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 the aggregate for 18,924 shares of Series A Preferred Stock at $100 per share. The holders of the Series A Preferred Stock are entitled to receive, upon declaration by the Board of Directors, cumulative cash dividends at the annual rate per share of 10%. Such dividends were payable in equal quarterly installments on each March 31, June 30, September 30 and December 31, commencing with December 31, 1998, and have been payable monthly on the first of each month since 1999 by an amendment by the Board of Directors. The Series A Preferred Stock is not convertible but is redeemable, in whole or (on a pro rata basis) in part, at any time at the option of the Company, by resolution of the Board of Directors. A management shareholder has foregone his redemption rights for an indefinite period and the affected shares have been reclassified to redeemable preferred stocks. 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 otherwise mandated under Nevada law. Prior to July 25, 2003, dividends of
 
 
 27
 
 $143,587 were paid during fiscal year ending January 31, 2004; subsequent to July 25, 2003, dividends have accrued but have not been paid.
 
 The Gaming Control Board Regulation 22.040 Reserve Requirement requires the Company have cash reserves of $2,150,000 to cover any outstanding wagering liability such as unpaid winning tickets, future tickets and telephone account deposits. To meet the Regulations requirements, the Company set aside $1,050,000 in certificates of deposit which are classified in its balance sheet as restricted cash. The Companys President and Chief Executive Officer, Victor Salerno, has personally secured an additional $1,100,000 irrevocable standby letter of credit to meet the Gaming Control Boards total reserve requirement of $2,150,000. Mr. Salerno was paid $38,500 (3.5% of the $1,100,000) for his personal guarantee.
 
 Item 13. Exhibits and Reports on Form 8-K
 
 (a)              Financial Statements
 
 The Companys audited Consolidated Financial Statements, as described below, are attached hereto.
 
 1.     Audited Financial Statements for Year Ended January 31, 2004 and 2003, including:
 Report of Independent Auditors
 Consolidated Balance Sheets
 Consolidated Statements of Operations
 Consolidated Statements of Stockholders Equity
 Consolidated Statements of Cash Flows
 Notes to the Consolidated Financial Statements
 
 (b)  Reports on Form 8-K
 
 Subsequent to the reporting period on April 19, 2004, an 8-K was filed to disclose that the Debtors amended the Plan of Reorganization and Disclosure Statement in order to mitigate the effects of any competing plan of reorganization that may be submitted.
 
 On February 26, 2004 an 8-K was filed with respect to an Item 3 matter (submission of the Disclosure Statement and Plan of Reorganization).
 
 On January 12, 2004 an 8-K was filed with respect to an Item 3 matter (decision denying Debtors motion to subordinate Racusin judgment pursuant to Section 510(b) of the Bankruptcy Code).
 
 On April 23, 2004 an 8-K was filed with respect to an Item 3 matter (decision denying Debtors extension of exclusivity period to file a plan of reorganization and disclosure statement through the confirmation hearing.
 
 (c)  Exhibits
 
 Exhibit Number
Description2.1
Original Disclosure Statement (which includes Plan of Reorganization)12.2
Executed Settlement with LVGI231.1
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 
 
 1  Incorporation by reference from Exhibit 2.1 of the registrants Form 8-K filed February 26, 2004
 2  Incorporation by reference from Exhibit 2.2 of the registrants Form 8-K filed February 26, 2004
 
 28
  
 ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
 Audit Fees
 
 The aggregate fees billed by the Companys auditors for professional services rendered in connection with the audit of the Companys annual consolidated financial statements for the fiscal years ended January 31, 2004 and 2003 were approximately $50,000 and $56,575, respectively.
 
 Audit-Related Fees
 
 The Companys auditors did not bill any 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 billed by the Companys auditors for professional services for tax compliance, tax advice, and tax planning were $6,000 and $9,125 for the fiscal years ended January 31, 2004 and 2003.
 
 All Other Fees
 
 The aggregate fees billed by the Companys auditors for all other non-audit services, such as reviewing the 401(k) plan and the Companys 10-QSBs for the fiscal years ended January 31, 2004 and 2003 were $38,136 and $38,757 respectively.
   29 
 
 REPORT OF INDEPENDENT AUDITORS
 
 
 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 (collectively, the "Company") as of January 31, 2004 and 2003, 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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, 2004 and 2003, 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.
 
 The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 7, the Company is in proceedings under Chapter 11 of the United States Bankruptcy code and is involved in various litigation matters that could result in losses sufficient to threaten the financial viability of the Company. These matters raise substantial doubt as to the Companys ability to continue as a going concern. Managements plans regarding these matters are also discussed in Note 7. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
 
 PIERCY BOWLER TAYLOR & KERN
 Certified Public Accountants & Business Advisors
 A Professional Corporation
 
 
 /s/ Piercy Bowler Taylor & Kern
 
 Las Vegas, Nevada
 April 9, 2004
 
 
 
 30
 AMERICAN WAGERING, INC. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS
 FOR THE YEARS ENDED JANUARY 31, 2004 AND 2003
   ASSETS

2004


2003CURRENT ASSETSCash and equivalents
$
4,113,196

$
4,329,654Restricted cash

1,060,869


176,837Accounts receivable, net of allowance for doubtful accounts
of $40,296 and $32,750

294,538


542,493Inventories

957,174


424,482Deferred tax asset, net

440,481


440,481Prepaid expenses and other current assets

336,491


177,1767,202,749


6,091,123PROPERTY AND EQUIPMENT, net

3,255,629


3,113,766GOODWILL

103,725


103,725OTHER ASSETS

337,816


303,083$
10,899,919

$
9,611,697LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESCurrent portion of long-term debt
$
131,834

$
114,669Accounts payable

448,331


248,957Accrued expenses

504,306


814,332Unpaid winning tickets

687,073


953,868Customer deposits and other current liabilities

1,621,956


593,549Litigation payable




2,295,8573,393,500


5,021,232LIABILITIES AND REDEEMABLE PREFERRED STOCK SUBJECT TO COMPROMISEAccounts payable

169,940Accrued expenses

382,331Litigation payable, including accrued interest

3,100,310Redeemable Series A preferred stock - 3,238 shares

323,8003,976,381LONG-TERM DEBT, less current portion

1,567,226


1,672,547OTHER LONG-TERM LIABILITIES

25,000


25,000REDEEMABLE SERIES A PREFERRED STOCK - 3,238 shares




323,8001,592,226


2,021,3478,962,107


7,042,579STOCKHOLDERS EQUITYSeries A preferred stock - 10% cumulative; $.01 par value;
authorized: 25,000,000 shares; issued and outstanding:
10,924 shares

1,092,400


1,092,400Common stock - $.01 par value; authorized: 25,000,000 shares;
issued: 7,897,946 shares

78,979


78,979Additional paid-in capital

12,738,889


12,738,889Deficit

(11,644,963
)

(11,013,657)Less 61,100 common shares in treasury, at cost

(327,493
)

(327,493)1,937,812


2,569,118$
10,899,919

$
9,611,697 
 See notes to consolidated financial statements.






31


AMERICAN WAGERING, INC. (DEBTOR-IN-POSSESSION) AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF OPERATIONS
 FOR THE YEARS ENDED JANUARY 31, 2004 AND 2003
  
 2004
2003REVENUESWagering
$
6,839,529

$
6,711,464Systems

4,052,417


4,850,62110,891,946


11,562,085OPERATING COSTS AND EXPENSESDirect costs:Wagering

4,961,816


4,769,120System s

1,932,114


2,252,2456,893,930


7,021,365Research and development

1,025,891


933,514Selling, general and administrative

2,031,774


2,397,903Depreciation and amortization

388,870


412,88910,340,465


10,765,671OPERATING INCOME

551,481


796,414OTHER INCOME (EXPENSE)Interest income

21,622


44,747Interest expense

(146,968
)

(156,365)Reorganization expense

(214,935
)Litigation judgment

(800,465
)

(273,145)Other, net

101,546


51,430(1,039,200
)

(333,333)INCOME (LOSS) BEFORE TAX BENEFIT AND DISCONTINUED OPERATIONS

(487,719
)

463,081INCOME TAX BENEFIT




(168,481)INCOME (LOSS) FROM CONTINUING OPERATIONS

(487,719
)

631,562DISCONTINUED OPERATIONSGain on disposal of discontinued segment




5,957Loss from operations of discontinued segments




(213,955)(207,998)NET INCOME (LOSS)
$
(487,719
)
$
423,564BASIC AND DILUTED INCOME (LOSS) PER SHAREIncome (loss) from continuing operations
$
(0.08
)
$
0.06Loss from discontinued operations



$
(0.03)Net income (loss)
$
(0.08
)
$
0.04  See notes to consolidated financial statements
   32 
 
 AMERICAN WAGERING, INC .
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 FOR THE YEARS ENDED JANUARY 31, 2004 AND 2003
  
 Preferred Stock                 Common Stock           Treasury Stock          AdditionalPaid inShares      Par Value     Shares       Par Value       Shares        Cost              Capital             DeficitBalances, February 1, 2002
11,924
$1,192,400
7,897,946
$78,979
(61,100)
$( 327,493)
$14,382,514
$(11,291,830)Preferred stock dividends
--
--
--
--
--
--
--
(145,391)Preferred stock redemption
(500)
(50,000)
--
--
--
--
--
--Reclassified to redeemable
preferred stock
(500)
(50,000)
--
--
--
--
--
--Racusin litigation judgment
--
--
--
--
--
--
(1,643,625)
--Net Income
--
--
--
--
--
--
--
423,564Balances, January 31,2003
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 Loss
--
--
--
--
--
--
--
(487,719)Balances, January 31,2004
10,924
$1,092,400
7,897,946
$78,979
(61,100)
$( 327,493)
$12,738,889
$(11,644,963) 
 
 See notes to consolidated financial statements
   33 
 
 AMERICAN WAGERING, INC .
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR THE YEARS ENDED JANUARY 31, 2004 AND 2003
 
 
 2004


2003OPERATING ACTIVITIESNet cash provided by operating activities
$
1,329,616

$
1,201,017INVESTING ACTIVITIESInvestment in restricted cash

(1,006,880
)

(8,637)Withdrawals of restricted cash

122,848


138,064Purchase of property and equipment

(502,683
)

(424,736)Net cash used in investing activities

(1,386,715
)

(295,309)FINANCING ACTIVITIESRepayment of borrowings

(88,156
)

(99,204)Proceeds from borrowings




100,493Preferred stock redeemed




(50,000Dividends

(71,203
)

(145,392)Net cash used in financing activities

(159,359
)

(194,103)NET INCREASE (DECREASE) IN CASH

(216,458
)

711,605CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD

4,329,654


3,618,049END OF PERIOD

$ 4,113,196


$ 4,329,654  
 34 
 
 AMERICAN WAGERING, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JANUARY 31, 2004
 
 1.  Nature of Operations and Background Information
 
 Business Activities
 
 American Wagering, Inc. and subsidiaries, (collectively, the Company), owns and operates 50 race and sports wagering locations (books) in leased space within casinos throughout the state of Nevada. In addition, the Company designs, sells, installs, and maintains computerized race and sports book systems, including wagering by telephone systems, in Nevada. The Company has developed a self-service wagering terminal that was introduced into operations in the first quarter of fiscal year 2004.
 
 Chapter 11 Filing
 
 On July 25, 2003 (the "Petition Date"), American Wagering, Inc. ("AWI") and its wholly-owned subsidiary Leroys Horse and Sports Place, Inc. ("Leroys") (collectively, the "Debtors") filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code (the "Chapter 11 Cases") in the United States Bankruptcy Court for the District of Nevada, Northern Division in Reno, Nevada (the "Bankruptcy Court"). Pursuant to the Bankruptcy Code, AWI and Leroys continue to manage and operate the assets and business as debtor-in-possession and are subject to the supervision and orders of the Bankruptcy Court until emergence from Bankruptcy. On February 20, 2004, the Debtors filed a Plan of Reorganization (the "Plan") and related Disclosure Statement (the "Disclosure Statement") with the Bankruptcy Court. The Bankruptcy Court must approve the applicable Disclosure Statement relating to the Plan as providing adequate information of a kind, and in sufficient detail, as far as reasonably practicable in light of the nature and history of the debtor and the condition of the Companys books and records, that would enable a hypothetical reasonable investor typical of the holder of claims or interests of the relevant class to make an informed judgment about the Plan. On April 8, 2004, the Bankruptcy Court heard the Debtors motion to approve the Disclosure Statement and Plan, and to begin soliciting acceptances of the Plan; the Bankruptcy Court approved the Debtors motion but will, however, allow a competing plan to also be filed. On April 14, 2004, the Debtors amended the Plan (the "Amended Plan") and Disclosure Statement (the "Amended Disclosure Statement") in order to mitigate the effects of any competing plan of reorganization that may be submitted in this matter.  On April 22, 2004, the Bankruptcy Court denied a motion filed by the Debtors seeking to extend the Debtors exclusivity period to file a plan of reorganization and disclosure statement through the confirmation hearing. The decision of the Bankruptcy Court will continue to allow competing plans of reorganization to be filed. In accordance with the Bankruptcy Code, the proponent of a competing plan of reorganization must file a disclosure statement to accompany the competing plan of reorganization and have the disclosure statement approved by the Bankruptcy Court before the competing plan of reorganization may be submitted to impaired creditors and equity interest holders for approval. Also, on April 22, 2004, the Bankruptcy Court vacated the June 3, 2004 confirmation hearing regarding the Debtors amended plan of reorganization (the "Amended Plan") and did not set a new date. Debtors will emerge from Chapter 11 if and when the Plan receives the requisite stakeholder approval and is confirmed by the Bankruptcy Court.
 
 The Companys other subsidiaries, including CBS and AWIM, are not directly involved in the bankruptcy proceedings; however, the outcome of the Chapter 11 Cases could have a material adverse effect on these subsidiaries.
 
 Since the Petition Date, preferred stock dividends have not been paid, and the preferred stock is subject to treatment and possible compromise under the Plan. The consolidated financial statements for the year ended January 31, 2004, have been prepared assuming the Company will continue as a going concern and do not include any adjustments that might result if the Debtors are unable to successfully emerge from bankruptcy.
 
 Liabilities and Redeemable Preferred Stock subject to compromise as of January 31, 2004 is as follows:
  Description

AWI


Leroys


TotalAccounts payable
$
111,845

$
58,095

$
169,940Accrued expenses

314,584


67,747


382,331
  
 35
 
 Judgment payable - Racusin

1,972,249





1,972,249Judgment payable - Imagineering

1,128,061





1,128,061Redeemable Series A Preferred Stock

323,800





323,800$
3,850,539

$
125,842

$
3,976,381
 
 Intercompany accounts which are eliminated in consolidation subjected to compromise were $4,632,130.
 
 The supplemental unaudited condensed financial statements of debtors follow:
  
 Balance Sheets as of January 31, 2004

AWI


LeroysAssetsCash
$
137,501

$
3,613,359Restricted cash and investments




1,051,482Deferred tax asset

440,481Prepaid expenses and other current assets

95,738


200,184673,720


4,865,025Property and equipment, net

34,381


288,419Investment in and advances to subsidiaries and affiliates*

5,260,716


3,203,360Other assets

136,101


2,100$
6,104,918

$
8,358,904Liabilities and EquityAccounts payable
$
133,660

$
259,088Accrued expenses

70,748


117,217Unpaid winning tickets




687,073Customer deposits and other current liabilities




1,646,956204,408


2,710,334Due to affiliates, subject to compromise*

3,202,374


1,429,756Other liabilities subject to compromise

3,526,739


125,842Equity (deficiency)

(828,603
)

4,092,972$
6,104,918

$
8,358,904     Statement of Operations
for the year ended January 31, 2004

AWI


LeroysRevenues
$
1,890,467

$
6,840,676Costs and expenses

1,671,832


6,294,140Income from operations

218,635


546,536Other expense

(1,006,795
)

(31,302)Loss from continuing operations

(788,160
)

515,234Loss from discontinued operations

(529,762
)

(184,057)Net Income (loss)
$
(1,317,922
)
$
331,177 
 The condensed balance sheets may not reflect, as liabilities, the total amount of the claims filed against AWI and Leroys in the Chapter 11 Cases as the date for the filing of pre-petition claims has not passed and the assertion of additional bankruptcy claims is possible.
 ____________
 *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
 
 
 36
 
 regulatory limitations on the scope of wagering.  100% 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.
 
 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.
 
 
 Basis of Presentation
 
 The consolidated financial statements include the accounts of American Wagering, Inc. (the Company) and, for applicable periods, its subsidiaries, Leroys Horse and Sports Place (Leroys), Computerized Bookmaking Systems, Inc. (CBS), AWI Manufacturing, Inc. (AWIM) (formerly AWI Keno. Inc.), AWI Sports Systems, Inc. (AWISSI) (dissolved September 2003), AWI Hotel Systems, Inc. (HSI) (dissolved June 2002), Secured Telephone Operating Platform, Inc. (STOP) (dissolved January 2004), Contest Sports Systems, Inc. (CSS) (formerly Mega$ports, Inc.), Mega$ports (ACT) Pty Ltd. (Mega$ports (ACT)) (sold June 2002), and American Wagering Management Company, Inc. (AWMCI) (dissolved February 2003). All subsidiaries are 100%-owned since June 2000, when the Company acquired the then remaining minority interest (49%) in AWISSI. All significant inter-company accounts and transactions have been eliminated in the consolidation.
 
 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 had 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 as of January 31, 2004, is $1,060,869 of cash and cash equivalents restricted to meet certain, Nevada requirements. Restricted cash at January 31, 2004 includes $6,636 for tax liabilities, $8,481 for workers compensation coverage requirements and $1,042,484 to meet certain Nevada Gaming Control Board requirements. Restricted cash of $176,837 at January 31, 2003 includes $6,558 for tax liabilities, $8,481 for workers compensation coverage requirements and $161,798 to meet certain Nevada Gaming Control Board requirements.
 
 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 property equipment and 40 years for building improvements).
   37
   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, 2004.
 
 Revenue Recognition
 
 Fixed odds race and sports wagering revenue is the net win from wagering activities, which is the difference between wagering wins and losses. Wagering revenues also includes commissions earned on pari-mutuel race wagers. Wagers accepted on future events are reflected as liabilities (included in customer deposits) until the outcome of the event becomes known. Systems sales are recognized when the software and hardware are installed at the customer's location. The Company typically does not include warranties or maintenance service contracts with the products sold. Revenue from warranties and service contracts sold separately are recognized over the life of the contract. Maintenance fee revenue is recognized evenly over the term of the maintenance contracts. Kiosk lease revenue is recognized in equal monthly amounts over the term of the lease.
 
 Advertising
 
 The Company expenses all advertising costs as incurred. Advertising expense was $89,013 and $69,564 for 2004 and 2003, respectively.
 
 Stock-based Compensation
 
 The Company accounts for stock-based employee compensation 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.
 
 Discontinued Operations
 
 In fiscal 2003, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets and has reported disposal activities indicated in fiscal 2003 in accordance therewith.
 
 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.
 
 
 2004


2003Net income (loss)
$
(487,719
)
$
423,564Preferred stock dividends

(143,587
)

(145,391)Net income (loss), as adjusted
$
(631,306
)
$
278,173 
 
 
 38
 
 
 Basic weighted average shares outstanding

7,836,846


7,836,846Diluted weighted average shares outstanding

8,123,629


8,151,304
 
 
 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 and the carrying value 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, 2004 and 2003.
 
 Reclassifications
 
 Certain amounts in the 2003 consolidated financial statements have been reclassified to conform with the 2004 presentation.
 
 3.  Property and Equipment
 
 Property and equipment consists of the following as of January 31, 2004 and 2003:
 
 2004


2003Land
$
575,000

$
575,000Building/Improvements

2,147,671


2,142,099Equipment, furniture and fixtures

2,875,553


2,432,376Other

6,200


6,2005,604,424


5,155,675Accumulated depreciation

(2,348,795
)

(2,041,909)$
3,255,629

$
3,113,766 
 4.  Long-term Debt
 
 Long-term debt consists of an 8% mortgage note payable in equal monthly installments of principal and interest through 2015, collateralized by real property and of 11.5% to 12% notes payable collateralized by automobiles. As of January 31, 2004, annual maturities of total long-term debt excluding interest for the next five years range from approximately $101,000 to $119,000 per year.
 
 5.  Series A Preferred Stock
 
 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 per share of 10%. 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 in 2004 and 500 shares ($50,000) were called for cash in 2003. 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. A preferred shareholder has forgone his right to have shares redeemed in accordance with the pro-rata provision applicable when other shares are called for an indefinite period, and the affected shares have been reclassified to redeemable preferred stock and may be put to the Company for redemption at any time.
 
 6.  Capital Stock and Stock Options
 
 The Companys Board of Directors has 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, 2004, 61,100 shares had been
 
 
 39
 
 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.
 
 At both January 31, 2004 and 2003, the Company had in effect stock option plans (employee and director plans) under which options may be granted to employees and directors of the Company. Under these plans the Company has authorized 1,211,500 and 20,000 shares, respectively. At August 9, 2001, the Company adopted its "2001 Stock Option Plan" which replaced the Companys "1995 Stock Option Plan" for employees. Options granted have an exercise price equal to or greater than the market price of the Companys common stock on the date of grant and a term of five to ten years and generally become exercisable on a single date from one to five years from the date of grant.
 
 Management replaced all outstanding employee options of the 1995 plan with the options provided for in the 2001 Stock Option Plan.
 
 Summarized information regarding the options by recipient category follows:
  
 Employees Plan
Directors Plan2004                                  2003
2004                                  2003Wtd. Avg                          Wtd. Avg
Wtd. AvgWtd AvgExerciseExercise
ExerciseExerciseNumber             Price           Number           Price
Number           PriceNumber            PriceOutstanding, at the beginning of the year  ("1995 Stock Option Plan")
--
$0.60
--
$0.59
5,600
$6.30
5,200
$6.30Outstanding, at the beginning of the year
--("2001 Stock Option Plan")
290,310

347,850Granted
--
--
--
--
800
$0.12
400
$0.12Forfeited
(14,362)
$0.50
(57,532)
$0.50
--
--
--
--Outstanding, end of the year
275,956
$0.60
290,318
$0.60
6,400
$5.86
5,600
$5.86Exercisable, at the end of the year
275,956
$0.60
290,318
$0.60
5,600
$6.30
5,200
$6.30Weighted average fair value of options
granted on grant date

--

--

$5.86

$5.86Options available for grant at the end of the year
935,544

921,182

14,000

14,400 
  
 EmployeesEmployees
Options Outstanding
At January 31, 2004
Exercise Price
Average Contractual
Life Remaining (Years)
Options Exercisable10,524
$0.50
2.5
10,52418 ,408
$0.50
2.5
18 ,40824,004
$0.50
2.5
24,00428,740
$0.60
2.5
28,740101,280
$0.60
2.5
101,28087,000
$0.70
2.5
87,0006,000
$0.40
2.8
6,000275,956


275,956 
 
 
 DirectorsDirectors
Options Outstanding
At January 1, 2004
Exercise Price
Average Contractual
Life Remaining (Years)
Options
Exercisable700
$10.75
3.0
700700
$ 6.69
4.0
7002000
$ 5.89
5.0
2000700
$ 6.56
5.4
700700
$ 5.75
6.0
700400
$ 0.35
7.0
400400
$ 0.12
9.0
400800
$0.15
10.0
--6,400


5,600
 
 
 The following table presents the Companys proforma net income (loss) and net income (loss) per share using the alternative "fair value-based approach" described in SFAS No. 123, Stock Based Compensation . The table also presents the weighted-average assumptions used in estimating the fair value of each option grant on the date of grant using the "Black-Scholes" option-pricing model.
 
 The proforma adjustment relates to stock options granted under the "2001 Plan" for which a fair value on the date of grant was determined using a Black-Scholes option pricing model. There is no effect on proforma net income for fiscal year end 2003 because options granted had no value.
   40
  
 2004


2003Net income
As reported

$(487,719
)

$423,564Proforma

(487,719
)

423,564Basic and diluted net income per shareAs reported

($0.08
)
$
0.04Proforma

($0.08
)
$
0.03Weighted-average assumptionsExpected stock price volatility

49.56
%

49.56Risk-free interest rate

3.02
%

3.02Expected option lives

5 years


5 years 
 7.  Commitments and Contingencies (other than Chapter 11)
 
 Litigation Judgments and Settlements
 
 On July 25, 2003, American Wagering, Inc. and its wholly owned subsidiary Leroys Horse and Sports Place, Inc. 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. Included in the Chapter 11 Cases and plans of reorganization which may be confirmed therein is the treatment and payment of the judgment in the Racusin and Imagineering matters described more fully in Part I, Item 3.
 
 In accordance with an interpretation of Statement of Financial Accounting Standard 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 and will be adjusted ultimately in accordance with any plans of reorganization confirmed in the Chapter 11 Cases. Also in accordance with Statement of Financial Accounting Standard No. 5, the Company has recorded the Racusin and Imagineering litigation liabilities (discussed in Part I, Item 3) as probable losses to the extent of the lower end of the estimated probable loss range and has revised these estimates as known facts and circumstances change. The litigation amount is subject to compromise and could materially increase or decrease depending on the outcome of the Chapter 11 Cases.
 
 The ultimate disposition and payment of the Racusin, Imagineering, and Jean Development Company matters listed below will be determined by the United States Bankruptcy Court.
 
 Racusin
 
 The Company recorded $1,643,625 against additional paid-in capital in the quarter ended October 31, 2002, which represents the jury verdict less amounts previously paid by the Company. The Company has been in litigation with Michael Racusin ("Racusin"), who introduced certain underwriters in connection with the initial public offering, since 1995. The Company disputed Racusins claim for compensation under agreements that the Company believed were unenforceable.
 
 On July 7, 2003, the U.S. District Court for the District of Nevada issued a "Judgment Upon a Jury Verdict" in favor of Racusin and against the Company in the net amount of $1,328,764 plus interest at the legal rate commencing on June 20, 2003 until paid. This amount was calculated as the gross judgment of $2,310,000 plus interest of $183,393 (through June 20, 2003) reduced by the amounts previously paid to Racusin by the Company ($756,340 plus interest of $408,289 through June 20, 2003).
 
 Racusin has appealed the interest portion of the judgment to the Ninth Circuit Court of Appeals claiming that interest is due from the date of the breach (May of 1996) rather than from the date of the trial (November of 2002). This appeal on the judgment, or other legal actions, could extend this matter for an additional one to two years and, if successful, could increase the net amount of the judgment by approx. $1,500,000 (as of June 20, 2003) for the additional interest. The Company had previously accrued $328,624 for interest, which will not be adjusted until such time as the final disposition of the judgment and interest issue and the Chapter 11 cases have been determined.
 
 
 41
  Imagineering Systems, Inc.
 
 On June 18, 2003, an order of the Supreme Court of the State of Nevada was filed reversing in part and affirming in part the jury verdict of October 30, 2000. The Supreme Court of Nevada found that there was insufficient evidence to support the $397,500 jury award for breach of contract damages against the Company and instead found that substantial evidence only supported damages for breach of contract totaling $294,600. In addition, the Court affirmed the decision of the district court to award $500,000 in damages against the Company for breach of the implied covenant of good faith and fair dealing. On August 25, 2003, the Company was notified that the Supreme Court denied its request for further review of this matter. As of October 31, 2003, the Company has recorded a liability in the amount of $794,600 plus interest of $333,461 relating to the judgment. In addition, as of October 31, 2003, the Company has recorded a receivable for monies owed by Imagineering to the Company in the amount of $76,583 plus interest in the amount of $37,857.
 
 Jean Development Co., et.al.
 
 The Company is a defendant in a claim brought by Jean Development Company, Jean Development West and Railroad Pass Investment Group alleging the nonpayment of fees associated with the operation of the keno game by AWI Keno, Inc. AWI Keno, Inc. was subsequently renamed AWI Manufacturing, Inc. The Company is currently involved in discussions and expects this matter to be settled without material impact on the Company. Even in the event a settlement cannot be reached, the Company believes the impact of the lawsuit will not have a material effect on our financial position, results of operations or cash flows
 
 Willow International Ventures Corporation
 
 In 2001, the Company was sued for trademark infringement by Willow International Ventures Corporation ("Willow") regarding use of the trademark name, "Mega$ports". On August 28, 2002, Willow and the Company settled. As a result of the settlement, the Company wrote off the Mega$ports trademark in the amount of $252,532 in the quarter ended July 31, 2002.
 
 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 $246,497 for 2004, $124,360 for 2005 and $79,074 for 2006. Rent expense for all operating leases was approximately $453,000 and $417,000 during the operating periods presented, $120,000 in 2003 and $108,000 in 2002, to a company whose board of directors includes a shareholder of the Company.
 
 Gaming Reserve Requirement
 
 On December 31, 2002, the Company was notified that its 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. The Regulation requires the Company have cash reserves of $2,150,000 to cover any outstanding wagering liability such as unpaid winning tickets, future tickets and telephone account deposits. To meet the Regulations requirements, the Company set aside $1,050,000 in certificates of deposit which are classified in its balance sheet as restricted cash. Additionally, the Companys President and Chief Executive Officer, Victor Salerno, has personally secured a $1,100,000 irrevocable standby letter of credit to meet the Gaming Control Boards total reserve requirement of $2,150,000. Mr. Salerno was paid $38,500 (3.5% of the $1,100,000) for his personal guarantee. 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 locations operated by the Leroys Horse & Sports Place subsidiary and/or requiring a significant reduction in the handle (total amount wagered).
 
 8. Discontinued Operations
 
 In July 2000, the Nevada Gaming Commission approved a settlement of a complaint against the Company filed by the State Gaming Control Board. Without admitting or denying the allegations contained in the complaint, the
 
 
 42
 
 Company agreed to pay a fine of $10,000 and to divest itself of any and all interests and rights pertaining to the Mega$ports (ACT) Pty. Ltd. subsidiary.
 
 In July 2002, the Company completed a sale of Mega$ports (ACT) to Euraust Limited ("Euraust"). However, in March 2003, Nevada gaming authorities concluded that a complete divestiture cannot occur so long as there is a continuing obligation from the buyer to pay the Company on its note (valued at $624,600) based on a percentage of handle. The Company was unsuccessful in its attempts to negotiate a modification or discount for a lump-sum payment with the buyer. Accordingly, on January 31, 2003, the Company wrote off as uncollectible the existing note to gain on disposal of discontinued operations.
 
 In February 2002, the Company temporarily closed its keno operations. It was the Companys intent to restructure AWIK and reopen the game. Due to prohibitive costs the Company discontinued keno operations in July 2002.
 
 There were no material results from discontinued operations for the fiscal year ended January 31, 2004. Results from discontinued operations for the fiscal year ended January 31, 2003 are as follows:
 
 
 2003Net loss from operations:Mega$ports ACT
$
(163,610)Keno

(50,345)(213,955)Gain (loss) on disposal:Mega$ports ACT

165,309Keno

(159,352)5,957$
(207,998) 
 9.  Income Taxes
 
 The tax effect of significant temporary differences representing deferred tax assets and liabilities for the Company is as follows:
 
 2004


2003Deferred tax assetsNet operating loss carryforward
$
1,036,580

$
1,006,709Depreciation and amortization

111,747


263,646Allowances for accounts receivable

10,673


11,135Allowances for inventory obsolescence




9,319Unrealized loss on investment in subsidiary

1,102,203


1,106,283Accrued liabilities

680,291


345,254Other

10,185


54,1212,951,679


2,796,467Valuation allowance

(2,449,220
)

(2,355,986)502,459


440,481Deferred tax liabilitiesAdvance payments

(61,978
)$
440,481

$
440,481 
 Income tax expense (benefit) for continuing operations is comprised as follows:
 
 2004


2003Current
$
--

$
--Deferred

--


(168,481$
--

$
(168,481  
 
 43
 
 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:
  
 2004


2003Income taxes (benefit) at federal statutory rate
$
(165,824
)
$
157,447Non-deductible expenses

9,883


19,719Benefit of NOL carryforwards

(65,512
)

(75,325)Other temporary differences

128,219


(101,841)Decrease in deferred tax valuation allowances

93,234


(168,481)$
--

$
(168,481) 
 At January 31, 2004, the Company had tax net operating loss carryforwards of $2,960,910 of which $445,207 will expire in 2019 and $2,515,703 will expire in 2020.
 
 10.  Business Segments
 
 The Company conducts its continuing operations with customers through two primary business segments, Wagering Unit and Systems Unit. Its Wagering Unit (Wagering) operates 49 race and sports books throughout Nevada. Its Systems Unit (Systems) designs, markets, installs and maintains sports and race book systems for the sports betting industry and leases self service wagering terminals.
 
 Financial performance measurements for Wagering, Systems, and SG&A (certain unallocated selling, general, and administrative costs) are set forth below.
  
 2004
2003Depreciation and AmortizationWagering
$
128,248

$
166,725Systems

216,471


191,912SG&A

44,151


54,252$
388,870

$
412,889Operating income (loss)Wagering
$
1,638,756

$
1,693,216Systems

521,833


1,104,572SG&A

(1,609,108
)

(2,001,374)$
551,481

$
796,414Capital expendituresWagering
$
113,831

$
193,198Systems

381,198


228,162SG&A

7,654


3,376$
502,683

$
424,736Identifiable assetsWagering
$
5,137,827

$
3,322,507Systems

4,917,888


5,214,481SG&A

844,204


1,074,708$
10,899,919

$
9,611,697 
 11.  Supplementary Cash Flow Information
 
 2004
2003Reconciliation of net income (loss) to net cash
provided by operating activitiesNet income (loss)
$
(487,719
)
$
423,564Depreciation and amortization

388,870


453,117Bad debts

32,124


17,840 
 
  44
    
 Loss on asset dispositions

30,296


195,459Litigation judgments

804,453


273,145Decrease (increase) in operating assets:Accounts receivable

215,831


97,088Inventories

(532,692
)

26,108Prepaid expenses

(159,315
)

57,705Deferred tax assets




(168,481)Other

(93,079
)

96,120Increase (decrease) in operating liabilities:Accounts payable

369,314


(14,608)Accrued expenses

(79
)

90,278Unpaid winning tickets

(266,795
)

(155,806)Customer deposits and other

1,028,407


(190,512)Net cash provided by operating activities
$
1,329,616

$
1,201,017Cash paid for interest
$
142,442

$
144,566Cash paid for income taxes
$
--

$
--
 
 
 
 SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES
 
 In 2003, paid in capital decreased $1,643,625 as a result of a non-cash financing activity, the increase of an accrued litigation payable.
 
 
 45 
 
 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, 2004
 Victor Salerno Officer; Director
 
 
 
 /s/ Timothy Lockinger Chief Financial Officer, Secretary April 29, 2004
 Timothy Lockinger     Treasurer, and Director
 
 
 /s/ W. Larry Swecker  Director April 29, 2004
 W. Larry Swecker
 
 
 /s/ Judith Zimbelmann Director April 29, 2004
 Judith Zimbelmann
 
 
 /s/ Bruce Dewing Director April 29, 2004
 Bruce Dewing


46