**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-KSB**

**x****        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIES EXCHANGE ACT OF 1934**

**For the fiscal year endedJanuary 31, 2007**

**o****        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

**Commission filenumber:  000-20685**

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**AmericanWagering, Inc.**

(Name of small businessissuer as specified in its charter)

| **Nevada**                                    |   | **88-0344658**                           |
|-----------------------------------------------|--------|------------------------------------------|
| (State of  incorporation)                     |   | (I.R.S. employer  identification number) |
|                                          |   |                                     |
| **675  Grier Drive, Las Vegas, Nevada 89119** |   | **(702)  735 - 0101**                    |
| (Address of  principal executive offices)     |   | (Issuer’s  telephone number)        |

 

Securities registered underSection 12(b) of the Exchange Act:  **None**

Securities registered underSection 12(g) of the Exchange Act:  **Common Stock, par value, $0.01 per share**

Check whether the issuer isnot required to file reports pursuant to Section 13 or 15(d) of the ExchangeAct.  o

Checkwhether the issuer (1) filed all reports required to be filed by Section 13 or15(d) of the Exchange Act during the past 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes  x  No  o

Checkif there is no disclosure of delinquent filers in response to Item 405 ofRegulation S-B contained in this form, and no disclosure will be contained, tothe best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-KSB or anyamendment to this Form 10-KSB  o

Indicatewhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes  o  No  x

Stateissuer’s revenues for its most recent fiscal year.  $19,370,393

Statethe aggregate market value of the voting and non-voting common equity held bynon-affiliates computed by reference to the price at which the common equitywas sold, or the average bid and asked price of such common equity, as of aspecified date within the past 60 days.  $6,050,599 as of April 27, 2007.

**(ISSUERS INVOLVED IN BANKRUPTCYPROCEEDINGS DURING THE PAST FIVE YEARS)**

Checkwhether the issuer has filed all documents and reports required to be filed bySection 12, 13 or 15(d) of the Exchange Act after the distribution ofsecurities under a plan confirmed by a court. Yes  x  No  o

State the number of shares outstanding of each of theissuer’s classes of common equity, as of the latest practicable date.8,129,880 **Common Shares as of May 10, 2007**

**DOCUMENTS INCORPORATED BYREFERENCE:**  None.

Transitional Small Business Disclosure Format (checkone) Yes o   No x

 

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**AMERICANWAGERING, INC.TABLE OF CONTENTS TO FORM 10-KSBFOR THE YEAR ENDED JANUARY 31, 2007**
|            | ** ** | **PART I**                                                                                                                                 | ** ** | ** ** | ** ** |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| ** ** | ** ** | ** **                                                                                                                                 | ** ** | ** ** | ** ** |
| **ITEM**   | ** ** | ** **                                                                                                                                 | ** ** | **PAGE**   | ** ** |
|       |       |                                                                                                                                       |       |       |       |
| 1          |       | Description of  Business                                                                                                                   |       | 3          |       |
| 2          |       | Description of  Property                                                                                                                   |       | 15         |       |
| 3          |       | Legal Proceedings                                                                                                                          |       | 16         |       |
| 4          |       | Submission of  Matters to a Vote of Security Holders                                                                                       |       | 17         |       |
|       |       |                                                                                                                                       |       |       |       |
|       | ** ** | **PART II**                                                                                                                                |       |       |       |
|       |       |                                                                                                                                       |       |       |       |
| 5          |       | Market For  Common Equity, Related Stockholder Matters and Small Business Issuer  Purchases of Equity Securities                           |       | 18         |       |
| 6          |       | Management’s  Discussion and Analysis or Plan of Operation                                                                            |       | 19         |       |
| 7          |       | Financial Statements                                                                                                                       |       | 27         |       |
| 8          |       | Changes In and  Disagreements With Accountants on Accounting and Financial Disclosure                                                      |       | 48         |       |
| 8A         |       | Controls and  Procedures                                                                                                                   |       | 48         |       |
| 8B         |       | Other Information                                                                                                                          |       | 48         |       |
|       |       |                                                                                                                                       |       |       |       |
|       | ** ** | **PART  III**                                                                                                                              |       |       |       |
|       |       |                                                                                                                                       |       |       |       |
| 9          |       | Directors,  Executive Officers, Promoters and Control Persons and Corporate Governance;  Compliance With Section 16(a) of the Exchange Act |       | 49         |       |
| 10         |       | Executive  Compensation                                                                                                                    |       | 50         |       |
| 11         |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                                           |       | 54         |       |
| 12         |       | Certain  Relationships and Related Transactions                                                                                            |       | 55         |       |
| 13         |       | Exhibits                                                                                                                                   |       | 57         |       |
| 14         |       | Principal  Accountant Fees and Services                                                                                                    |       | 58         |       |

 

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**PART I**

**Item 1.    Description of Business**

### **Company History**

UnderNevada gaming regulations, a publicly traded company is not eligible to hold aNevada gaming license. Thus, American Wagering, Inc. (“AWI”), a Nevadacorporation, was formed to be the publicly traded holding company for Leroy’sHorse & Sports Place, Inc. (“Leroy’s”). Other operations have subsequentlybeen added through internal development and acquisition.

**Raceand Sports Wagering Revenue Segment**

***Leroy’s.***Leroy’s ownsand operates 59 satellite race and sports books in nonrestricted gamingestablishments throughout the State of Nevada. Every wager placed at any Leroy’s race and sports book is processedthrough equipment and software of our subsidiary, Computerized BookmakingSystems, Inc. (“CBS”). We refer to that equipment and software collectively asthe “CBS System.” By leveraging the technology of the CBS System to processevery wager taken at 59 race and sports books, Leroy’s enables a nonrestrictedgaming operator to offer the race and sports book amenity to its patronswithout the traditional and typical fixed costs and risk of financial lossassociated with operating a race and sports book. This structure also enablesLeroy’s to allocate its financial risk of loss more efficiently and to reduceand manage its fixed costs more effectively.

***AWI International, Inc.***AWIInternational, Inc. (“AWI Int’l”) provides a myriad of services to gamingsuppliers and gaming operators in foreign jurisdictions where wagering on raceand sporting events is licensed.  Suchservices may include (1) providing remote oddsmaking and posting of odds for anevent whose popularity may be regional or cultural based (Australian-RulesFootball, cricket, polo, etc.); (2) remote operation and management of thegaming supplier’s or operator’s race and sports book system in the foreignjurisdiction; or by (3) providing wagering content to the gaming supplier oroperator that is offered to the patron with the resulting wagers having beenprocessed by the gaming supplier’s or operator’s race and sports system.

### **Race and Sports Wagering Systems Segment**

#### ***CBS*.** CBS is the leading race and sportsequipment and software supplier in the State of Nevada. Accordingly, CBSservices the majority of race and sports books in Nevada.

#### ***AWI Manufacturing, Inc*.** AWI Manufacturing,Inc. (“AWIM”) designs and leases self-service race and sports wagering kiosksto CBS customers.  The kiosks interfaceseamlessly with our customers’ CBS Systems and they expand our customers’ raceand sports books’ size and hours of operation without increasing the laborcost.

### **Hotel/Casino Segment**

#### ***AWI Gaming, Inc*.** AWI Gaming, Inc. (“AWIG”)is the sole member of Sturgeons, LLC, which owns and operates the Sturgeon’sInn & Casino.  AWIG’s purpose is toacquire other hotel/casino properties.

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

### **Chapter 11 Filing**

OnJuly 25, 2003, AWI and Leroy’s filed voluntary petitions for relief (“Chapter11 Petitions”) under Chapter 11 of the United States Bankruptcy Code (“Chapter11”) in the United States Bankruptcy Court for the District of Nevada (the “BankruptcyCourt”) On February 28, 2005, the Bankruptcy Court confirmed the RestatedAmended Joint Plan of Reorganization (the “Plan”) of AWI and Leroy’s. On March11, 2005 (the “Effective Date”), AWI and Leroy’s consummated the Plan andformally emerged from Chapter 11 proceedings after completing all requiredactions and all remaining conditions.

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OnSeptember 26, 2005, the Bankruptcy Court issued an order closing the Chapter 11cases of AWI and Leroy’s. All required distributions have been made, exceptwith respect to the Racusin matter. Michael Racusin, d/b/a Racusin &Company (“Racusin”), appealed to the United States Court of Appeals for theNinth Circuit (the “9th Circuit”) the April 14, 2005 ruling by the UnitedStates Bankruptcy Appellate Panel of the Ninth Circuit (the “BAP”) in favor ofAWI and Leroy’s.  On October 6, 2006, the9th Circuit reversed the BAP and remanded a reinstatement of the BankruptcyCourt’s original decision in favor of Racusin. AWI and Leroy’s have requested a 9th Circuit panel rehearing orrehearing *en banc*, and Racusin has filed with the9th Circuit a response to our request. The requested panel rehearing or rehearing *en banc*remains pending.

**Recent material litigation and related businessactivities.** We have settled all previous litigation; we are not a party in anylitigation and have no knowledge of any pending legal proceedings in any courtor agency of government or governmental authority with the exception of theappeal before the 9th Circuit in the Racusin matter as noted above.  A discussion of the settlements and the Racusinmatter is in the “Legal Proceedings” section in Part I, Item 3 of this Form10-KSB.

**Sports wagering.**  Wagering on sporting events is legal in thestate of Nevada and in numerous foreign countries.  Sports wagering at Nevada’s race and sportsbooks increased from approximately $290 million in 1980 to $2.4 billion in2006.  During that same period, thenumber of licensed sports books in Nevada increased from 24 to 170.  With the advent of cable and satellitetelevision, both commercially and privately, viewing access to sporting eventshas increased significantly.  Whensporting events are televised, there is increased excitement, which, webelieve, leads to more interest in sports betting.

A sports wageringfacility, or “sports book,” is a gambling establishment that sets odds andpoint spreads and accepts bets on the outcome of sporting events such asfootball, basketball, baseball, and hockey games.  Sports books set odds and point spreadsaiming not to reflect the final result, but to maintain a “balanced book” byoffering odds or point spreads that will attract equal amounts of bets on eachside of a particular event.  As a generalmatter, a patron’s odds or point spread (the “line”) are fixed at the time heor she makes his or her bet, regardless of any subsequent movement in theline.  Under this system, a sports bookoperator attracts bets by changing or “moving” the line up or down to encouragewagering on a specific team.  To theextent that a book on a particular event is not balanced, the bookmakingoperation takes a risk on the outcome of the event.  This is the fundamental difference from otherforms of organized gambling where profits result from patron play against astatistical advantage that the gambling operator (the “House”) possesses, or inpari-mutuel wagering, used by major North American Horse Racing Tracks and Jai-Alaiestablishments, where the House receives a guaranteed percentage for operatingexpenses, profit and taxes and the remainder is distributed to the winners.

This fundamentaldifference is part of the appeal for many sports patrons, but it also createsrisk for the sports book.  A bookmakeroperates in a system that is interrelated with oddsmakers and patrons.  Bookmakers collect bets, adjust odds toaccount for the preferences of their patrons, pay the winners, and if the bookis balanced for each type of sports bet, the House then has a “theoreticaladvantage.”  For example, for a straightfootball bet involving the outcome of one game, it is common practice that thepatron wagers $11 to win $10. Accordingly, by maintaining a balanced book, the sports book would earn$1 for each $22 wagered, or 4.55% (the winner would receive $21).

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

A sports book alsoattempts to limit the potential risk by setting game limits and linemovement.  For example, the opening linefor a football game ideally would split the bets from the time it was posteduntil kick-off.  However, the openingline generally is unbalanced.  Because asports book does not want to take the risk of accepting unlimited bets on oneside of a game, it creates a game limit, the maximum amount of money that willbe accepted at the posted line.  When thegame limit is reached, the line is changed, or “moved,” to attract action onthe “other” side.

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

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

When Leroy’s beganoperations in 1978, it was one of only seven sports and race books in LasVegas. Currently, virtually every major casino in Nevada offers its patrons asports and race book.  The typical sportsbook location leased by Leroy’s encompasses approximately 300 square feet,contains a board displaying the odds, television monitors showing sportingevents, betting stations, ticket sellers and cashiers.  Most leases are at fixed rates, arecancelable by either party on 30 to 90 days notice, and some have incentive (orparticipation) clauses.  As a bet isplaced, the wagering data is entered into a computer terminal which isconnected via a communications device to Leroy’s centralized computer systemwhich confirms the line, determines that the bet is within the limits set forthe particular event, records the information on a central database and issuesa ticket evidencing the bet.  The ticketis then distributed to the patron with Leroy’s simultaneously recording thewager.  Personnel at Leroy’s main officemonitor all bets and adjust the odds as necessary to reflect the various betsthroughout all of Leroy’s locations.

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

Professional and collegefootball games currently are the most popular sports wagered on,  followed by professional and collegebasketball games, and finally professional baseball games; comprising themajority of the total amount wagered at all of our Leroy’s locations.  Historically, our Leroy’s business has beenseasonal in nature, with more than half of its handle occurring between themonths of September and February.

Leroy’s does not offerhorse race wagering at all its locations. It offers limited horse race wagering at most locations, and a fullpari-mutuel race book at several of its locations.

Leroy’s race booksutilize the same personnel and facilities as its sports books, but Leroy’s doesnot set its own odds for race wagering. Leroy’s accepts wagers for races by offering race patrons the same oddsas the racetracks at which the races occur. At those locations with limited race, Leroy’s pays full track odds up tothe predetermined limit; at those locations with full pari-mutuel race, Leroy’soperates a daily race book with wagers merged into the on-track pari-mutuelpools.

With the popularity andaccessibility of personal computers, bettors now have an additional medium fromwhich to wager on sporting events.  Whileonline sports betting has existed for approximately 20 years, few people hadaccess to a computer or the Internet.  Webelieve that the dynamic growth in home computers combined with the convenienceof betting online will enhance the continued growth of the sports bettingindustry in general but may have an adverse impact upon our live wageringfacilities in Nevada.  At this time, wecannot predict what impact, if any, the growth of online wagering may have on ouroverall handle (total amount wagered).

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**Pari-mutuel race wagering.**  In December of 1997, Leroy’s joined theNevada Pari-mutuel Association to allow pari-mutuel race wagering at one ormore of its licensed locations.  Leroy’s,in association with a disseminator, offers pari-mutuel wagering on numerousevents at racetracks throughout the country. As of January 31, 2007, Leroy’s offers pari-mutuel race wagering atseven of its licensed locations.

**Competition.**  There is intense competition among companiesin the gaming industry, most of which have significantly greater financial,marketing, technical and other resources than we do.

Leroy’s facescompetition from all other sports and race wagering operations throughoutNevada.  There are currently 170 sportsbooks in Nevada, of which we owned and operated 59 as of January 31, 2007.Virtually all of the major casinos in Nevada have sports and race books, someof which are larger and offer more amenities than our locations and somecasinos operate sports books at other casinos.

AWI Int’l competes withinternational race and sports service providers.

CBS faces competitionfrom the larger casinos that may develop their own race and sports wageringsystems, as well as the challenge of keeping up with the rapid evolution intechnology.  In addition, the CBS Systemcompetes directly with an over-the-counter system offered by another companywith approximately 10% of the market.

AWIM competes with othermanufacturers of self-service wagering kiosks.

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

**Intellectual property.**  We regard our technology as proprietary andattempt to protect it by relying on patents, trademarks, service marks,copyrights and trade secret laws and restrictions on disclosure andtransferring title and other methods.  Wegenerally enter into confidentiality and/or license agreements with ouremployees and consultants, and generally control access to and distribution ofour documentation and other proprietary information.  Despite these precautions, it may be possiblefor a third party to copy or otherwise obtain and use our proprietaryinformation without authorization or to develop similar technologyindependently.

**Research and development.**  We spent $1,131,265 in research anddevelopment in the fiscal year ending January 31, 2007, as compared to$1,020,051 in the fiscal year ending January 31, 2006, all of which wasexpensed as incurred.  We intend toconduct continuing development and innovation of our products in accordancewith changing consumer preferences, demographics, and the evolution of newtechnologies.  Our development strategyis to leverage our proprietary technology and regulatory approvals to integratethird party developed solutions such as age verification, biometrics,identification and security in order to provide fully-integrated applicationsthat are competitive and innovative in the regulated gaming industry.

**Proposed government regulation.**  In the past, the U.S. Congress has submittedbills that, if passed, would prohibit wagering on some, if not all, typessporting events.  Passage of any suchlegislation would have a significant negative impact on our operations.

**Regulation and licensing.**  The ownership and operation of gamingfacilities in Nevada are subject to extensive state and local regulation.  Our gaming operations are subject to theNevada Gaming Control Act and its regulations (hereinafter collectivelyreferred to as the “Nevada Act”) and various local regulations.  Our gaming operations are also subject to thelicensing and regulatory control of the Nevada Gaming Commission (the “Commission”),the State Gaming Control Board (the “Board”), various county commissions(gaming, liquor, health, etc.), and other local jurisdictions.  These regulatory agencies are hereinaftercollectively referred to as the “Nevada Gaming Authorities.”

The laws, regulationsand supervisory procedures of the Nevada Gaming Authorities have their genesisin various declarations of public policy which are concerned with, among otherthings: (i) the prevention of unsavory or 

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unsuitable persons fromhaving a direct or indirect involvement with gaming at any time or in anycapacity; (ii) the establishment and maintenance of responsible accountingpractices and procedures; (iii) the maintenance of effective controls over thefinancial practices of licensees, including the establishment of minimumprocedures for internal fiscal affairs and the safeguarding of assets andrevenues, providing reliable record keeping and requiring the filing ofperiodic reports with the Nevada Gaming Authorities; (iv) the prevention ofcheating and fraudulent practices; and (v) the creation of a source of stateand local revenues though taxation and licensing fees.  Changes in such laws, regulations andprocedures could have an adverse effect on our gaming operations.

We have been foundsuitable as the publicly traded parent of entities holding Nevada gaminglicenses.  Leroy’s is licensed by theNevada Gaming Authorities as the owner/operator of nonrestricted race and/orsports book operations; AWIM is licensed by the Nevada Gaming Authorities as aManufacturer and a Distributor; AWIG is licensed by the Nevada GamingAuthorities as the sole member of Sturgeon’s; Sturgeon’s is licensed by theNevada Gaming Authorities as the operator of nonrestricted gaming operations atSturgeon’s Inn & Casino; CBS is not required to maintain any gaming-relatedlicenses. Gaming licenses require the periodic payment of fees and taxes andperiodic reviews by the gaming authorities. Furthermore, gaming licenses are not transferable.

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

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

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

If it were determinedthat we or our subsidiaries violated the Nevada Act, the gaming licenses orregistration held by us could be limited, conditioned, suspended orrevoked.  At the discretion of theCommission, we and any person involved could be subject to substantial finesfor each separate violation of the Nevada Act. Furthermore, a supervisor could be appointed by the Commission tooperate our gaming properties and, under certain circumstances, earningsgenerated during the supervisor’s appointment (except for the reasonable rentalvalue of our gaming properties) could be forfeited to the State of Nevada.  Limitation, conditioning or suspension of anygaming license or the appointment of a supervisor could, and certainly therevocation of any gaming license would, materially adversely affect the resultsof our operations.

A beneficial holder ofour voting securities, regardless of the number of shares owned, may berequired to file an application, be investigated, and have his or hersuitability as a beneficial holder of our voting securities be determined ifthe Commission has reason to believe that such ownership would otherwise beinconsistent with the 

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declared policies of theState of Nevada.  The applicant must payall costs of the investigation incurred by the Nevada Gaming Authorities inconducting such an investigation.  Inaddition, the Clark County Liquor Gaming Licensing Board has taken the positionthat it has the authority to approve all persons owning or controlling thestock of any corporation controlling a gaming license.

The Nevada Act requiresany person who acquires more than 5% of our voting securities to report theacquisition to the Commission.  TheNevada Act requires that beneficial owners of more than 10.00% of our votingsecurities apply to the Commission for a finding of suitability within 30 daysafter the Chairman of the Board mails written notice requiring such afiling.  Under certain circumstances, an “institutionalinvestor,” as defined in the Nevada Act, which acquires more than 10.00%, butnot more than 15.00%, of our voting securities may apply to the Commission fora waiver of such a finding of suitability if such institutional investor holdsthe voting securities for investment purposes only.  An institutional investor shall not be deemedto hold the voting securities for investment purposes only unless the votingsecurities were acquired and are held in the ordinary course of business as aninstitutional investor and not for the purpose of causing, directly orindirectly, the election of a majority of the members of our board ofdirectors, any change in our corporate charter, bylaws, management, policies oroperations, or any of our gaming affiliates, or any other action which theCommission finds to be inconsistent with holding our voting securities forinvestment purposes only.  Activitieswhich are not deemed inconsistent with holding voting securities for investmentpurposes only include: (i) voting on all matters voted on by stockholders; (ii)making financial and other inquiries of management of the type normally made bysecurities analysts for informational purposes and not to cause a change in itsmanagement, policies or operations; and (iii) such other activities as theCommission may determine to be consistent with such investment intent.  If the Commission grants a waiver to an “institutionalinvestor,” the waiver does not include a waiver or exemption from the requirementfor prior approval to “acquire control” of a registered corporation.  If the beneficial holder of voting securitieswho must be found suitable is a corporation, partnership or trust, it mustsubmit detailed business and financial information, including a list of itsbeneficial owners.  The applicant isrequired to pay all costs of investigation.

Any person who fails orrefuses to apply for a finding of suitability or a license within 30 days afterbeing ordered to do so by the Commission, or the Chairman of the Board, may befound unsuitable.  The same restrictionsapply to a record owner if the record owner, after request, fails to identifythe beneficial owners.  Any stockholderfound unsuitable and who holds, directly or indirectly, any beneficial ownershipof the common stock of a registered corporation beyond such period of time asmay be prescribed by the Commission may be guilty of a criminal offense.  We would be subject to disciplinary actionif, after we receive notice that a person is unsuitable to be a stockholder orto have any other relationship with us or our subsidiaries, we (i) pay thatperson any dividend or interest on our voting securities; (ii) allow thatperson to exercise, directly or indirectly, any voting right conferred throughsecurities held by that person; (iii) pay remuneration in any form to thatperson for services rendered or otherwise; or (iv) fail to pursue all lawfulefforts to require such unsuitable person to relinquish his voting securitiesfor cash at fair market value.  Anyperson required by the Commission to be found suitable but who is foundunsuitable shall be guilty of a criminal offense if he holds, directly orindirectly, the beneficial ownership of the voting or debt securities beyondthe time prescribed by the Commission.

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

Changes in control ofAWI through merger, consolidation, stock or asset acquisitions, management orconsulting agreements, or any act or conduct by a person whereby he or sheobtains control, may not occur without the prior approval of the Commission.  Entities seeking to acquire control of aregistered corporation must satisfy the Board and the Commission under avariety of stringent standards prior to assuming control of such registeredcorporation.  The Commission may alsorequire controlling stockholders, officers, directors and other persons havinga material relationship or involvement with the entity that proposes to acquirecontrol, to be investigated and licensed as part of the approval processrelated to the transaction.

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The Nevada legislaturehas declared that some corporate acquisitions opposed by management,repurchases of voting securities and corporate defensive tactics affectingNevada gaming licenses and registered corporations that are affiliated withthose operations, may be injurious to stable and productive corporategaming.  The Commission has established aregulatory scheme to ameliorate the potentially adverse effects of thesebusiness practices upon Nevada’s gaming industry and to further Nevada’s policyto: (i) assure the financial stability of corporate gaming operators and theiraffiliates; (ii) preserve the beneficial aspects of conducting business in thecorporate form; and (iii) promote a neutral environment for the orderlygovernance of corporate affairs. Approvals are, in certain circumstances, required from the Commissionbefore we can make exceptional repurchases of voting securities above thecurrent market price thereof and before a corporate acquisition opposed by ourmanagement can be consummated.  The NevadaAct also requires prior approval of a plan of recapitalization proposed by aregistered company’s board of directors in response to a tender offer madedirectly to the registered company’s stockholders for the purposes of acquiringcontrol of the registered company.

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

Any person who islicensed, required to be licensed, registered, or required to be registered, oris under common control with such person (hereinafter collectively referred toas “licensees”) and who proposes to become involved in a gaming venture outsidethe State of Nevada is required to deposit with the Board, and thereaftermaintain, a revolving fund to pay the expenses of investigation by the Board ofhis or her participation in such foreign gaming.  We have filed the appropriate foreign gamingreports and have established the required revolving fund.  The revolving fund is subject to increase ordecrease in the discretion of the Commission. Thereafter, such licensees arerequired to comply with certain reporting requirements imposed by the NevadaAct.  Licensees are also subject todisciplinary action by the Commission if they knowingly violate any laws of theforeign jurisdiction pertaining to the foreign gaming operation, fail toconduct the foreign gaming operation in accordance with the standards ofhonesty and integrity required of Nevada gaming operations, engage inactivities that are harmful to the State of Nevada or its ability to collectgaming taxes and fees, or employ a person in the foreign operation who has beendenied a license or finding of suitability in Nevada on the basis of personalunsuitability.  Recent changes in theNevada Gaming Control Act would allow us to seek a determination of suitabilityof any associate or activity associated with the foreign gaming opportunityprior to engaging in that activity.

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

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

The U.S. Congress hasproposed several bills that would prohibit any person from engaging in thebusiness of betting or wagering via electronic communication facilities,including the Internet, if the transmission is not legal in the state orforeign country in which the transmission either originates or is received.  If any such bill were to 

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become law, our abilityto take advantage of interstate pari-mutuel wagering opportunities would beadversely impacted.

**Employees.**  We had approximately 224 employees at January31, 2007, of which 190 were full time.  None of our employees are represented by a labor union.  We do not know whether or to what extent, ifany, our employees will, in the future, be governed by collective bargainingagreements. At this time, we believe our employee relations are good.

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

Throughout this reportwe make statements regarding our business, expectations and prospects, such asprojections of future performance, statements of our plans and objectives, forecastsof market trends, and other matters that are “forward-looking statements” asdefined in Section 27A of the Securities Act of 1933, as amended, and Section21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Statements containing words or phrases suchas “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimates,”“projects,” “believes,” “expects,” “anticipates,” “intends,” “target,” “goal,” “plans,”“objective,” “might,” “may,” “could,” “will,” “should,” or similar expressions,or the negative thereof, constitute forward-looking statements.  Although we believe that our plans,objectives and expectations reflected in, or suggested by, such forward-lookingstatements are reasonable at the present time, we might not achieve them or wemay modify them from time to time.  Youshould read this report thoroughly and with the understanding that actualfuture results may be materially different from what we expect.  We do not plan to update forward-lookingstatements even though our situation or plans may change in the future, unlessapplicable law requires us to do so.

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

**WE ARESUBJECT TO INTENSE COMPETITION.**  There is intense competition among companiesin the gaming industry, along with dynamic customer demand and rapidtechnological advances; and most of our competitors have significantly greaterfinancial, marketing, technical and other resources than we do.  Significant competition that we encounter mayhave a materially adverse effect on us. There can be no assurance that we will be able to compete successfullyagainst current and future competitors.

**WE ARESUBJECT TO STRICT REGULATION BY GAMING AUTHORITIES.*** *The ownership andoperation of gaming licensees in Nevada are subject to strict regulation undervarious state, county and municipal laws. We and our required officers and certain shareholders have received thenecessary licenses, permits and authorizations required to own and operate oneor more gaming licensees.  Failure by usor any of our key personnel to obtain or maintain the requisite licenses,permits and authorizations would have a materially adverse effect on us.  Expansion of our activities could be hinderedby delays in obtaining requisite state licenses or the inability to obtain suchlicenses.  No assurance can be given asto the term for which our licenses will be renewed in a particular jurisdictionor as to what license conditions, if any, may be imposed by such jurisdictionin connection with any future renewals. We cannot predict the effects that adoption of and changes in gaminglaws, rules and regulations might have on our future operations.

**BECAUSEOF OUR SEC FILING DELINQUENCIES, OUR STOCK COULD BE REMOVED FROM QUOTATION ONTHE OTC BULLETIN BOARD (“OTCBB”).**  We were late in thefiling of our last Form 10-QSB and this Form 10-KSB.  Consequently,the OTCBB has notified us that if we are late with the filing of anotherExchange Act report between now and the due date for our October 31, 2008 Form10-QSB, our common stock will be removed from quotation on the OTCBB for atleast one year.  Such removal could have a materially adverse effect onthe marketability and trading price of our stock, as well as on our ability toraise additional equity capital, (if we seek to do so).

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**DEMANDFOR OUR PRODUCTS AND SERVICES IS SUBJECT TO CONSUMER DEMAND.*** *We believe ourability to increase revenues, cash flow, and profitability will depend, inpart, upon continued market acceptance of our products and services.  There can be no assurance that the marketacceptance of our products and services will continue.  Changes in market conditions in the gamingindustry, the general and gaming industry economic conditions, and thefinancial condition of host locations or patrons could limit or diminish marketacceptance of these products and services. Any interruption in professional or college football or professional orcollege basketball games would adversely affect us.

**THEGAMING INDUSTRY MAY BE ADVERSELY AFFECTED BY FEDERAL LEGISLATION.**  The U.S. Congress has proposed several billsthat would prohibit any person from engaging in the business of betting orwagering via electronic communication facilities if the transmission is notlegal in the state in which the transmission either originates or isreceived.  In addition, the U.S. Congresshas proposed several bills that would prohibit any person from accepting wagerson amateur sporting events including high school, college and Olympicevents.  There is no guarantee thatCongress will not pass a bill which would adversely affect our operations.Additionally, federal and state tax legislation and matters, including changesto current law, or new assessments by taxing authorities could also negativelyimpact our results of operations or financial position.

**WE ARELARGELY DEPENDENT ON CURRENT MANAGEMENT.**  Our success is largely dependent on theefforts of Victor Salerno, our Chief Executive Officer (“CEO”) and ChiefOperating Officer (“COO”) who is currently also serving as our InterimPrincipal Financial Officer. Although we maintain a “key person” life insurancepolicy and have an employment agreement with Mr. Salerno, the loss of Mr.Salerno’s services could have a materially adverse effect on our business.

**WE ARESUBJECT TO POTENTIAL FLUCTUATIONS IN RESULTS.*** *Our quarterlyresults have fluctuated primarily due to outside factors such as professionaland college sports seasons and timing of sales and installation for CBSequipment.  Thus the results of anyquarter are not necessarily indicative of the results that may be expected forany other interim period.  In addition,we take risks by accepting wagers on the outcome of various sporting events.  While we have instituted measures to lessenthe risk, there is no assurance that we will be able to win more of the wagersthan we lose.

**PRIOR TO FISCAL YEAR ENDEDJANUARY 31, 2007, WE HAD A HISTORY OF LOSSES AND WE MAY INCUR ADDITIONAL LOSSESIN THE FUTURE.** From our inception of revenue producing operations through the currentfiscal year, we have incurred an accumulated deficit.  While we have implemented strategies toimprove future operations including, but not limited to, discontinuingunprofitable business segments such as keno and pari-mutuel sports, investingin additional research and development aimed at new markets, and settlinglitigation matters, there is no assurance that such strategies will besuccessful. Higher than expected administrative, research and development,and/or distribution costs, could also negatively impact our financial results.Changes in our business systems or technologies affecting our products couldalso negatively impact our financial results. In order for us to maintainprofitability, we need to generate and sustain additional revenues whilemaintaining reasonable cost and expense levels.

**AN ADVERSE DECISION BY THE 9thCIRCUIT IN THE RACUSIN MATTER, COULD ADVERSELY AFFECT OUR LIQUIDITY ANDOPERATING PERFORMANCE.** We are involved in court proceedings with Racusin to determine the formof payment on his claim on our Chapter 11 proceedings.  In accordance with the decision of the BAP, weissued Racusin 250,000 shares of common stock in payment of his claim.  Racusin appealed the BAP decision to the 9thCircuit, requesting a cash payment of approximately $2.8 million.  On October 6, 2006, the 9th Circuit reversedthe BAP decision.  We have requested apanel rehearing or rehearing *en banc.*  Racusin has filed a response to our request.The outcome of our request for a panel rehearing or rehearing *en banc* cannot be predicted at this time.  If the 9th Circuit declines to rehear thematter or does rehear the matter and again reverses the BAP, our liquidity andfuture results could be adversely affected.

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**WE NEED ADDITIONAL CAPITAL TOACHIEVE OUR GOALS, BUT WE DO NOT HAVE ANY COMMITMENTS TO OBTAIN SUCH CAPITALAND CAN NOT GIVE ASSURANCE THAT WE WILL BE ABLE TO OBTAIN CAPITAL AS AND WHENREQUIRED.**  We believe that wehave sufficient working capital as of the date of this report to satisfyestimated working capital requirements for the foreseeable future in regards tocurrent operations.  In order for us toachieve our goals and grow the revenue stream, however, we will requireadditional capital to fund the operations of AWIG and AWIM.  At the present time, we do not have anycommitments to obtain additional capital and there can be no guarantees thatsuch funds will be available on commercially reasonable terms, if at all.

**AN ADVERSE CHANGE AFFECTING THEGAMING INDUSTRY, SUCH AS A CHANGE IN GAMING REGULATIONS OR A DECREASE IN THERATE OF GROWTH AND POPULARITY OF CASINO GAMING, WILL NEGATIVELY IMPACT OURPROFITABILITY AND OUR POTENTIAL FOR GROWTH.**  Our ability to grow and operate profitably issubstantially dependent upon the expansion of the Nevada gaming industry andother factors that are beyond our control. These factors include, among others, the pace of development, changes ingaming regulations, the continued popularity of casino gaming, particularlyrace and sports wagering, as a leisure activity, etc.  An adverse change in any of these political,legal or other factors may negatively impact our results of operations.Additionally, consolidation of existing gaming operations could negativelyimpact our pricing structure and revenue.

**FAILURE TO OBTAIN OR RETAINREQUIRED GAMING LICENSES COULD PREVENT EXPANSION OF OUR MARKET AND/OR PROHIBITTHE GENERATION OF REVENUE.** The operation of a race and sports related business is subject to numerousfederal, state, and local regulations. In particular, the Leroy’s, AWIM, AWIG and Sturgeon’s subsidiaries arelicensed by the Commission and are subject to extensive regulation.  Together with key personnel, we undergoextensive investigation before each new gaming license is issued, and theproducts of CBS and AWIM are subjected to testing and evaluation prior toapproval and use.  Generally, gamingauthorities have broad discretion when granting, renewing or revoking theseapprovals and licenses.  If we fail toobtain or retain a required license or approval, it would decrease our share inthe marketplace and put us at a disadvantage with our competitors.  Consequently, the market price of our commonstock may suffer.

**FUTURE REVENUE GROWTH DEPENDS ONOUR ABILITY TO IMPROVE THE EFFECTIVENESS AND BREADTH OF OUR SALES ORGANIZATION.**  In order to achieve our goals for growth,particularly with the AWIG and AWIM subsidiaries, we need to improve theeffectiveness and breadth of our sales operations nationally andinternationally in order to increase market awareness and sales.  Our gaming products require sophisticatedsales efforts targeted at selected people within the gaming industry.  Competition for qualified sales personnel isintense, and we may not be able to hire the kind and number of sales personnelrequired.  In addition, we will need toeffectively train and educate the sales force in order to be successful inselling into the market. Reliance upon our current strategic relationships withour customers and our vendors could also subject us to increased risk if we areunable to positively and successfully maintain or create those relationships.

**SPORTS WAGERING IS ILLEGALTHROUGHOUT MOST OF THE UNITED STATES.**  Although legal in Nevada, wagering on sportingevents is illegal throughout most of the United States due to the provisions ofthe Interstate Wire Act and is not likely to become legal due to the provisionsof the Sports Protection Act. Consequently, the potential for growth of the Leroy’s, CBS, and AWIMsubsidiaries in the United States is limited.

**WE MAY NOT BE ABLE TO PROTECT OURPROPRIETARY RIGHTS AND MAY INCUR SIGNIFICANT COSTS ATTEMPTING TO DO SO.**  Our success and ability to compete aredependent to a significant degree on our proprietary technology.  We rely on a combination of patent,copyright, trade secret and trademark laws, as well as confidentiality andlicensing agreements to protect these proprietary rights.  However, it may be possible for a third partyto copy or otherwise obtain and use our software or other proprietaryinformation without authorization or to develop similar softwareindependently.  In addition, litigationmay be necessary in the future to enforce our intellectual property rights, toprotect trade secrets, to determine the validity and scope of the proprietaryrights of others, or to defend against claims of infringement orinvalidity.  Such litigation, whethersuccessful or not, could result in substantial costs and diversions ofresources, either of which could have a material adverse affect on ourfinancial condition or operating results.

**THE MARKET FOR OUR COMMON STOCKIS LIMITED.** Our common stock is thinly-traded and any recently reported sales pricemay not be a true market-based valuation of our common stock.  There can be no assurance that an activemarket for our common stock will develop. In addition, the stock market in general has 

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experienced extremeprice and volume fluctuations that have often been unrelated ordisproportionate to operating performance.

**OUR COMMON STOCK IS CONSIDERED A “PENNYSTOCK” AND, AS SUCH, THE MARKET FOR OUR COMMON STOCK MAY BE FURTHER LIMITED BYCERTAIN SEC RULES.** As long as the price of our common stock remains below $5.00 per share,the stock is likely to be subject to certain “penny stock” rules promulgated bythe SEC.  Those rules impose certainsales practice requirements on brokers who sell penny stock to persons otherthan established customers and accredited investors (generally institutionswith assets in excess of $5,000,000 or individuals with net worth in excess of$1,000,000).  For transactions covered bythe penny stock rules, the broker must make a special suitability determinationfor the purchaser and receive the purchaser’s written consent to the transactionprior to the sale.  Furthermore, thepenny stock rules generally require, among other things, that brokers engagedin secondary trading of penny stocks provide customers with written disclosuredocuments, monthly statements of the market value of penny stocks, disclosureof the bid and ask prices, disclosure of the compensation to the brokeragefirm, and disclosure of the sales person working for the brokerage firm.  These rules and regulations adversely affectthe ability of brokers to sell our common stock and limit the liquidity of oursecurities.

**THE TRADING PRICE OF OUR COMMONSTOCK IS VOLATILE AND COULD DECLINE SUBSTANTIALLY.**  The trading price of our common stock isvolatile and is likely to continue to be volatile.  Our stock price could be subject to widefluctuations in response to a variety of issues, including broad market factorsthat may have a material adverse impact on our stock price, regardless of ouractual performance.  The factors include,but are not limited to, the following:

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

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

·                  Materialannouncements by us or our competitors;

·                  Uncertaintyas to the continued quotation of our stock on the OTCBB; and

·                  Adversechanges in general market conditions or economic trends or in conditions ortrends in the market in which we operate.

**WE HAVE THE ABILITY TO ISSUE ADDITIONALEQUITY SECURITIES, WHICH WOULD LEAD TO DILUTION OF OUR ISSUED AND OUTSTANDINGCOMMON STOCK.** The issuance of additional equity securities or securities convertibleinto equity securities would result in dilution of our existing stockholders’equity interests in us.  Our Board ofDirectors has the authority to issue, without vote or action of stockholders,preferred stock in one or more series, and has the ability to fix the rights,preferences, privileges and restrictions of any such series.  Any such series of preferred stock couldcontain dividend rights, conversion rights, voting rights, terms of redemption,redemption prices, liquidation preferences or other rights superior to therights of holders of our common stock. If we issue convertible preferred stock, a subsequent conversion maydilute the current common stockholders’ interest.  In addition, as of January 31, 2007, we wereauthorized to issue, without stockholder approval, up to 16,878,120 shares ofcommon stock.  Of that amount, 368,200 sharesof our common stock were issuable upon the exercise of vested options.

**WE DO NOT INTEND TO PAY CASHDIVIDENDS.  AS A RESULT, STOCKHOLDERSWILL BENEFIT FROM AN INVESTMENT IN OUR COMMON STOCK ONLY IF IT APPRECIATES INVALUE.**  We have never paid acash dividend on our common stock, and we do not plan to pay any cash dividendson our common stock in the foreseeable future. We currently intend to retain any future earnings to finance ouroperations and further expansion and growth of our business, includingacquisitions.  As a result, the successof an investment in our common stock will depend upon any future appreciationin its value.  We cannot guarantee thatour common stock will appreciate in value or even maintain the price at whichstockholders have purchased their shares.

**WE FACE CONSIDERABLE RISK INSUCCESSFULLY IMPLEMENTING ACQUISTIONS.** As part of our business strategy, we acquiredSurgeon’s in fiscal 2006 and we may acquire other businesses in thefuture.  Acquisitions could result inpotential dilution of the value of our common stock, cash expenditures,increased debt, increased system costs related to integration, and greaterpotential risk for contingent liabilities. We cannot be assured that we willsuccessfully complete any future acquisitions due to various constraints, suchas our need for funding, increased competition, cost constraints, legal,compliance and regulatory issues.

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Our acquisition ofSturgeon’s in March 2006, and any future acquisitions, may not produce therevenues, earnings or savings in business synergies that were anticipated forsuch reasons or constraints below:

·                  Potentialloss of key employees;

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

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

·                  valuationdeclines in US currency and/or cost increases, particularly in transportationthat affect potential tourism and gaming revenue

·                  difficultiesin our use, development or marketing of the acquired entity’s brand identityand integration of such into our Company;

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

·                  anyundisclosed or potential legal liabilities of the acquired businesses.

**RISKSINCLUDING POLITICAL, ECONOMIC AND OTHERS RELATED TO OUR INTERNATIONALSUBSIDIARY, AWI INT’L THAT COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS**.Our subsidiary, AWI Int’l, providesservices to licensed non-U.S. jurisdictions and therefore is subject to risksassociated with doing business internationally. AWI Int’l provides sportsgaming services and equipment depending on the needs of the gaming operator ora third party gaming supplier (vendor); including the following:  remote wagering management; equipment andkiosk sales or leases; setting of the odds and/or the lines; uploading games;and software installation. Our sales to customers outside the United States arecurrently to licensed jurisdictions in the Caribbean, but we could potentiallyexpand to other foreign jurisdictions that are licensed for sports gaming.Accordingly, our future results could be harmed by a variety of factors,including:

·       changesin regulatory requirements;

·       changesin a specific country’s or particular region’s political or economicconditions;

·       tariffs,other trade protection measures and import or export licensing requirements;

·       potentially negative consequences from changes in tax laws orapplication of such tax laws;

·       different foreign entities that would control the protection of ourintellectual property; and

·       restrictions on our ability to own or operate subsidiaries makeinvestments or acquire new businesses in these jurisdictions.

Our international operationsare affected by global economic and political conditions. Changes in economicor political conditions in any of the countries in which we operate couldresult in new or changed restrictions being imposed on our operations.

**WE MAYNOT BE ABLE TO COMPLETE OUR ASSESSMENT AND/OR WE MAY NOT RECEIVE AN UNQUALIFIEDOPINION FROM OUR AUDITORS WITH RESPECT TO THE ASSESSMENT OF OUR INTERNALCONTROLS OVER FINANCIAL REPORTING THAT IS REQUIRED BY SECTION 404 OF THESARBANES-OXLEY ACT OF 2002, AND WE WILL INCUR ADDITIONAL COSTS IN THAT PROCESS.**We believe that effective internal controls are necessary for us to providereasonable assurance with respect to our financial reports. We may be requiredto spend a substantial amount of management time and resources and significantexpenses in order to comply with laws, regulations and standards relating tocorporate governance and public disclosure, including the Sarbanes-Oxley Act of2002. In particular, Section 404 of the Sarbanes-Oxley Act of 2002 requires ourmanagement’s annual review and evaluation of our internal control systems,commencing with our Annual Report on Form 10-KSB for fiscal year ended January31, 2008 and attestations as to the effectiveness of these systems by ourindependent public accounting firm commencing with the annual report for thefollowing fiscal year.

Wewill incur significant increased costs in implementing and responding to theserequirements due to the complexities of Section 404 that require significantdocumentation, testing and, if necessary, remediation. Our process ofreviewing, documenting and testing our internal controls over financialreporting may cause a significant strain on our management, diverting them fromtheir daily business focus; and strain on our information systems and otherresources.  We likely will be required tohire additional personnel and to use outside legal, accounting and 

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advisoryservices and software to assist us in compliance efforts. In addition, we willincur additional fees from our auditors as they perform the added review worknecessary for them to provide their attestation. Even with those expenditures,we may not be able to complete our assessment or we may not be able to obtainan unqualified attestation report on such assessment.

Also,partly in response to Section 404, we will begin a significant redesign andupgrade of our financial reporting software, systems and procedures. Thisredesign and upgrade will be undertaken in hopes of strengthening our internalcontrol over financial reporting, improving our ability to plan and analyze ourbusiness and reducing the work burden on our finance and accounting staff. Weestimate that we will fully implement our new financial reporting software bythe end of fiscal 2007.

Further,we or our auditors may identify significant deficiencies or more materialweaknesses in our internal control over financial reporting, as we have donethis year. If we fail to maintain the adequacy of our internal controls, we maynot be able to conclude on an ongoing basis that we have effective internalcontrols over financial reporting. Additionally, internal control over financial reporting may not preventor detect misstatements because of its inherent limitations, including the possibilityof human error, the circumvention or overriding of controls, or fraud.Therefore, even effective internal controls can provide only reasonableassurance with respect to the preparation and fair presentation of financialstatements. In addition, projections of any evaluation of effectiveness ofinternal control over financial reporting to future periods are subject to therisk that the control may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

If wefail to maintain the adequacy of our internal controls, including any failureto implement the required new or improved controls, this could have a materialadverse effect on our business, financial position and results of operations.

Our newand limited staff in finance and accounting has faced an increased workload dueto the lack of a permanent replacement Chief Financial Officer  (“CFO”); the upcoming requirements of Section404 and the turnover that has taken place in that department. We haveexperienced an extremely high level of turnover of seasoned staff, which hascompounded the workload for the finance and accounting department from fiscal2005 through fiscal 2007. This has also caused us to have positions open, numeroustraining challenges, and overburdened personnel, for extended periods of time;at a time when we need *more*resourcesavailable. As of the fiscal year ended January 31, 2007, the finance andaccounting department has a limited but fully-staffed department, with theexception of a CFO.

The combinationof the delays in hiring a permanent CFO and the staffing shortages and turnoverin finance and accounting have led to significant deficiencies and materialweaknesses in our internal control over financial reporting, as reported inItem 8A of this Form 10-KSB, and have significantly increased the risk of asignificant deficiency or material weakness in our internal control overfinancial reporting next year.  Such adeficiency or weakness could cause us to again fail to meet our Exchange Actreporting obligations, cause the OTCBB to remove our stock from quotation andcause investors to lose confidence in our reported financial information, allof which could lead to a decline in the price of our common stock.

**LITIGATION MAY SUBJECT US TOSIGNIFICANT EXPENSES AND LIABILITY. **From time totime in the course of our business, we may be subject to litigation claims orother legal disputes, which may not be covered under our insurance policies oras to which our insurance carriers may seek to deny coverage.  Consequently, we might incur adversejudgments, costly settlements or significant legal fees, any or all of whichmight have a material adverse effect on us.

**Item 2.    Description of Property**

Our corporate office islocated in a 29,250 square foot building at 675 Grier Drive, Las Vegas,Nevada.  On January 7, 2005, we completeda sale and leaseback of the property. Prior to the sale, the building was ownedby our CBS subsidiary. We realized a gain of $1,638,000 on the sale of thebuilding.  However, pursuant to Statementof Financial Accounting Standards (“SFAS”) No. 28, *Accountingfor Sales with Lease-backs*, only a portion of the gain has beenrecognized.  The gain has been deferredand will be amortized against the lease payments over the initial lease term (5years).  CBS leases the building from thenew owner for a rent of $30,750 per month (triple net).  The lease has an initial term expiringFebruary 1, 2010 with options for two additional five-year terms.  CBS, in turn, sublets a portion of thebuilding to AWI (2,830 square feet; $5,236 per month), Leroy’s (6,769 squarefeet; $11,014 per month) and the remainder of the space is rented tounaffiliated parties at various amounts. In addition, CBS 

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leases 1,847 square feetof office/warehouse space in Reno, Nevada to provide 24/7 maintenance serviceto our Northern Nevada customers.  Thisspace is located at 960 Matley Lane, Suite 21, Reno, Nevada. On September 1,2006, a new lease became effective, whereby CBS pays $676, $703 and $731 permonth, for each twelve month period ending September 30, 2007, 2008 and 2009,respectively. The lease expires on September 30, 2009.

Leroy’s operates raceand/or sports books subject to lease agreements with the host casinooperators.  The average book occupiesapproximately 300 square feet and ranges from 80 to 10,000 square feet.

Sturgeon’s is located at1420 Cornell Avenue in Lovelock, Nevada. The facility contains over 65,000 square feet.

The properties owned byus are adequately insured. We believe that the existing facilities in Las Vegasand Reno satisfy our present and foreseeable needs and we do not anticipate anychanges.

**Item 3.    Legal Proceedings**

In accordance with SFASNo. 5, *Accounting for Contingencies*, we willnot accrue for a loss contingency relating to a matter if we believe that (1)the matter has been fully resolved to the satisfaction of both parties; or (2)although an unfavorable outcome in the proceeding may be possible, we do notconsider it to be probable or reasonably estimable.  Consistent with our accounting policy, wewill record legal defense costs when incurred, or accrue them, depending on theconditions in SFAS No. 5 above.

**Racusin**

On October 6, 2006, the9th Circuit reversed the decision of the BAPwhich previously ruled in our favor that the bankruptcy claim of Racusin wassubject to subordination under Section 510(b) of the U.S. Bankruptcy Code.In reversing the BAP’s ruling, the 9th Circuit ruled thatRacusin’s claim was not subject to subordination and remanded the case forfurther proceedings.

On October 20, 2006, wepetitioned the 9th Circuit for a panel rehearing or, in thealternative, a rehearing *en banc*.  On December 15, 2006, Racusin filed aresponse to our petition at the 9th Circuit’s request.

The manner in which Racusin’sclaim is ultimately resolved will be based on the 9thCircuit’s decision and a September 3, 2004 Settlement Agreement among AWI,Leroy’s and Racusin (the “Settlement Agreement”), which is described furtherand appears in Exhibit 99.1 in the Form 8-K that we filed on September 7,2004.

If the 9thCircuit rehears the case and affirms the BAP’s ruling, then Racusin’s claimwill be resolved by the issuance of 250,000 shares of AWI common stock toRacusin, in accordance with the Settlement Agreement. Those shares were issuedin Racusin’s name on July 27, 2005 pursuant to the BAP’s ruling and arecurrently held in trust by the Bankruptcy Court pending a resolution of thismatter.

If the 9thCircuit declines to rehear the case or if it rehears the case and reverses theBAP’s ruling, then the 250,000 shares that we issued in Racusin’s name will becancelled and Racusin’s claim will be resolved by a series of cash payments byus to (or for the benefit of) Racusin, in accordance with the SettlementAgreement, expected to begin within 30 days after the 9th Circuit’s decision,in the aggregate amount of $2,682,374 plus interest at 8% per annum.

Pending theoutcome of our petition for a rehearing, we have taken the following actions:

(1)          We have not cancelledthe certificate for the 250,000 shares that we issued in Racusin’s name.Instead, this certificate will remain in trust with the Bankruptcy Court untilsuch time as a resolution to this matter is reached. However, notwithstandingthis, we have treated such shares as not issued and have reduced common stockby $2,500 and additional paid-in capital by $2,377,500 (reversal of ourprevious recording of the elimination of the Racusin claim through our issuanceof common stock);

(2)          We have recordedlitigation judgment expense in the amount of $386,698 for the fiscal year endedJanuary 31, 2007 to account for accrued interest from the effective dateof our Plan (March 11, 2005) through September 11, 2006 ($302,374) andinterest from September 12, 2006 to January 31, 2007 ($84,324); and

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(3)          We have recorded debt inthe amount of $2,682,374, as of January 31, 2007 to account for thebalance due Racusin should he prevail in this matter.

In the event we areunsuccessful in our efforts for a favorable ruling by a rehearing, we will beobligated to make payments pursuant to the Settlement Agreement, approximatelyas follows, plus interest at 8.00% per annum on the unpaid balance asfollows:
| First 12 months  |       | $       | 1,502,374     |       |
|------------------|------------|---------|---------------|------------|
| Second 12 months |       | 300,000 |          |
| Third 12 months  |       | 300,000 |          |
| Fourth 12 months |       | 300,000 |          |
| Fifth 12 months  |       | 280,000 |          |
| **Total**        | ** ** | **$**   | **2,682,374** | ** ** |

##### If the 9th Circuit grants our petition, we anticipate that therehearing would occur 12 to 18 months later. If our petition is denied, weanticipate that our payments to (or for the benefit of) Racusin will beginwithin 30 days after the denial.

**Other**

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

**Item 4.    Submission of Matters to a Vote of Security Holders**

None.

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**PART II**

**Item 5.    Market for Common Equity, Related Stockholder Matters and SmallBusiness Issuer Purchases of Equity Stock**

**(a)  Market information.** Our common stock is traded on the OTC Bulletin Board (“OTCBB”) under thesymbol “BETM.OB.”  The following tablesets forth the range of high and low closing sale prices for our common stockfor each of the periods indicated as reported by the OTCBB.  These quotations reflect inter-dealer prices,without retail mark-up, mark-down or commission and may not represent actualtransactions.

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

 

| BETM.OB - Fiscal Year Ending January 31, 2006 | ** ** |
|----------------------------------------------------------------------------------|------------|
| **Quarter Ended**                                                           | ** ** | **High $** | ** ** | **Low $** | ** ** |
| April 30, 2005                                                                   |       | 2.50 |   | 0.55 |   |
| July 31, 2005                                                                    |       | 2.01 |   | 1.46 |   |
| October 31, 2005                                                                 |       | 1.80 |   | 1.21 |   |
| January 31, 2006                                                                 |       | 1.83 |   | 1.25 |   |

 

Weconsider our common stock to be thinly traded and, accordingly, reported salesprices or quotations may not be a true market-based valuation of our commonstock.

**(b) Holders**.  As of January 31, 2007, there were 59 recordholders of our common stock.  We believethere are more owners of our common stock whose shares are held by nominees orin street name.

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

**(d) Securities authorized for issuance underequity compensation plans.** The following table provides information regarding the securitiesunderlying outstanding options and securities remaining available for issuanceunder our equity compensation plans as of January 31, 2007.

**Equity Compensation Plans Approved by SecurityHolders:**
| ** **                                                  | ** ** | **(a)**                                                                                                                                              | ** ** | **(b)**                                                                                                    | ** ** | **(c)**                                                                                                                                                                                                      | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Plan Category**                                      | ** ** | **Number of securities to  be issued upon exercise  of outstanding options,  warrants and rights** | ** ** | **Weighed-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected  in column (a))** | ** ** |
| Equity compensation  plans approved by security holders:    |       |                                                                                                                                                 |       |                                                                                                       |       |                                                                                                                                                                                                         |       |
| 2001 Stock  Option Plan                                     |       | 737,749                                                                                                                                              |       | $                                                                                                          | 1.89       |                                                                                                                                                                                                         | 180,317    |   |
| Directors Stock  Option Plan                                |       | 20,000                                                                                                                                               |       | 1.30                                                                                                       |       | —                                                                                                                                                                                                       |       |
| Equity compensation  plans not approved by security holders |       | None                                                                                                                                                 |       | None                                                                                                       |       | None                                                                                                                                                                                                         |       |
| **Total**                                                   |       | 757,749                                                                                                                                              |       | 1.87                                                                                                       |       | 180,317                                                                                                                                                                                                      |       |
|                                                             |            |                                                                                                                                                      |            |                                                                                                            |            |                                                                                                                                                                                                              |            |  |

 

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**Item 6.    Management’s Discussion and Analysis or Plan of Operation**

**Overview.**  Our primary operating strategies for theforeseeable future are to focus on our core businesses relating to the race andsports industry, the operation of Sturgeon’s and the acquisition of additionalhotel/casino operations through AWIG. Concerning Leroy’s, we intend to continue operating existing sportsbooks, adding new books where and when appropriate, and continue to become moreefficient in order to reduce expenses. Regarding CBS, we intend to continue developing, selling and maintainingcomputerized race and sports wagering systems for the gaming industry.  As to AWIM, we intend to continue developingthe self-service wagering kiosk, installing the kiosk in Leroy’s locations toassist in controlling escalating personnel costs, and marketing the kiosk tonon-Leroy’s locations. With regard to AWI Int’l, we intend to seek strategicalliances with third party gaming suppliers and/or gaming operators that desireto utilize our expertise in the race and sports industry to gain a competitiveadvantage by offering the gaming operator and/or the betting patron awell-rounded gaming experience. Regarding AWIG, we intend to seek additionalhotel/casino acquisitions that meet our established criteria.  As to Sturgeon’s, we intend to continue tooperate the facility, change the slot mix where and when appropriate, andmodify existing procedures to increase efficiency and reduce expenses.  We have implemented, and are continuing toinitiate, other cost cutting measures.

Where appropriate, wewill continue to explore possible new locations for our products, includingforeign jurisdictions. We will also continue our review of existing Leroy’slocations in order to close those locations that are not operating efficiently.Based on our strategy, the number of race and sports books operated by Leroy’smay increase or decrease in the future, due to the closure of unprofitablelocations or host properties, closures due to other factors beyond our controland/or the possible opening of new locations with greater potential forprofitability.   There is no assurancethat Leroy’s will be able to add new locations and/or that any new locations soadded will be profitable.

**Liquidity and capital resources.**  In 2003, AWI and Leroy’s filed Chapter 11Petitions.  On February 28, 2005, theBankruptcy Court confirmed the Plan of AWI and Leroy’s.  On March 11, 2005, AWI and Leroy’sconsummated the Plan and formally emerged from Chapter 11 proceedings aftercompleting all required actions and all remaining conditions.  On September 26, 2005, the BankruptcyCourt issued an order closing the Chapter 11 cases of AWI and Leroy’s. Allrequired distributions have been made, subject to the following discussionabout Racusin.  On April 14, 2005,the BAP ruled in favor of AWI and Leroy’s relating to the treatment of Racusin’sclaim.  Racusin appealed to the 9th Circuit, and onOctober 6, 2006, the 9th Circuit reversed the BAP.  AWI and Leroy’s requested a panel rehearingor rehearing *en banc*, and Racusin has filed aresponse to our request. The requested panel rehearing or rehearing *en banc* remains pending, We cannot predict whether the panelrehearing or rehearing *en banc* will begranted nor can we predict the outcome if such rehearing is granted. However,an unfavorable ruling by the 9th Circuit could have an adverse affect on ourliquidity and future results.

NevadaGaming Commission Regulation 22.040 (“Regulation 22.040”) requires us tomaintain reserves (cash, surety bonds, irrevocable standby letter of credit,etc.) sufficient to cover any outstanding wagering liability including unpaidwinning tickets, future tickets and telephone account deposits; since September1, 2005  to August 2006, we maintained aRegulation 22.040 reserve in the amount of $2.4 million; which was increased to$3.0 million in August 2006 in the form of a surety bond issued by Fidelity andDeposit Company of Maryland (a subsidiary of Zurich American Insurance) (“Fidelity”). This $3.0 million surety bond is secured by a$1.0 million cash deposit, in the form of certificates of deposit at GreatBasin Bank of Nevada (“Great Basin Bank”).

If we are required toincrease the Regulation 22.040 reserve and are unable to do so, it would havean adverse impact on us including, but not limited to, requiring a significantreduction in the number of race/sports locations operated by Leroy’s, anelimination or reduction of telephone wagering accounts, and a reduction inhandle (total amount wagered).

In conjunction with theacquisition of Sturgeon’s on March 1, 2006, we entered into two financingagreements as follows:
| ** **          | ** ** | **(1) Great Basin Bank**                                                                                                                 | ** ** | **(2) Victor and Terina Salerno** |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|
| Date:               |       | February 21, 2006                                                                                                                                       |       | February 16, 2006                                     |
| Lender:             |       | Great Basin Bank of Nevada                                                                                                                              |       | Victor and Terina Salerno                             |
| Borrower:           |       | AWIG                                                                                                                                                    |       | AWI                                                   |
| Guarantor #1:       |       | AWI                                                                                                                                                     |       | Victor and Terina Salerno                             |
| Guarantor #2:       |       | Sturgeon’s                                                                                                                                         |       | N/A                                                   |
| Facility:           |       | Commercial loan                                                                                                                                         |       | Guaranty Agreement                                    |
| Amount:             |       | $1,500,000                                                                                                                                              |       | not to exceed $500,000                                |
| Rate:               |       | Wall Street Journal- prime +2%                                                                                                                          |       | 10% per annum                                         |
| Maturity Date:      |       | March 1, 2008 (interest only is payable prior to  maturity)                                                                                             |       | February 21, 2011                                     |
| Collateral:         |       | 1st deed of trust  on Sturgeon’s Inn & Casino and a security interest in Sturgeon’s Inn  & Casino personal property and fixtures |       | None                                                  |
| Prepayment Penalty: |       | None                                                                                                                                                    |       | None                                                  |

 

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NegativeCovenants-(for Great Basin Bank only):

AWIG may not do any of the following (unless thebank consents):

(a)          create,incur or assume other indebtedness, except for trade debt incurred in thenormal course of business;

(b)         pledgeassets to secure other borrowings;

(c)          make loansto, or investments in, any other person or entity or guaranty any other parties’debts other than in the ordinary course of business; or

(d)         paydividends (including to AWI).

ClosingCosts-(for Great Basin Bank only):  Normal closing costs plus a loan origination fee of 2%

We believe we willcontinue to successfully meet our long-term obligations.  The following table summarizes our cashpayment obligations for the next five fiscal years:
|                  | ** ** | **2008**  | ** **    | **2009**   | ** ** | **2010**      | ** ** | **2011** | ** **  | **2012**   | ** ** |
|------------------|------------|-----------|---------------|------------|------------|---------------|------------|----------|-------------|------------|------------|
| Sturgeon’s  |       | $         | 135,487       |       | $          | 1,650,209     |       | $        | 50,498      |       | $          | — |   | $ | — |   |
| Other debt       |       | 56,700    |          | 33,606     |       | 33,123        |       | 11,092   |        | 1,548      |       |
| Kiosks           |       | 186,056   |          | 208,978    |       | 135,600       |       | —   |        | —     |       |
| Racusin          |       | 1,502,374 |          | 300,000    |       | 300,000       |       | 300,000  |        | 280,000    |       |
| Operating leases |       | 541,704   |          | 483,999    |       | 423,824       |       | 318,434  |        | 87,795     |       |
| ** **       | ** ** | **$**     | **2,422,321** | ** ** | **$**      | **2,676,792** | ** ** | **$**    | **941,054** | ** ** | $          | 629,526 |   | $ | 369,343 |   |

 

Long-term debt includesloans for the service automobiles utilized in the Leroy’s and CBS operations,and the loans from Great Basin Bank. We have no indebtedness under the GuarantyAgreement with Victor and Terina Salerno The loan from Great Basin Bank is duein one payment on March 1, 2008.  OurGuaranty Agreement indebtedness, if any, has no fixed maturity date.  Interest on the loan from Great Basin Bank isat a variable annual rate equal to the Wall Street Journal-listed prime rateplus 2.0% (as of January 31, 2007 our rate was 10.25%) and is due monthly;interest on our Guaranty Agreement indebtedness, if any, is at an annual rateof 10.00% and is due monthly.  Includedin the operating leases are rents payable at the Leroy’s operating locations,an automobile, and copy machines.  Rentat the Leroy’s locations includes the base rent due per the contractterms.  The rental leases also includethree locations in which the rent is calculated based on a formula relating tothe activity of the location.  The rentto be paid for that location was estimated for the purpose of this schedule.

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Other Debt:

Various automobileloans, totaling $110,843 as January 31, 2007 are also included in Long-termDebt with various maturities ranging from one to five years and interest ratesranging from 11.5% to 12.0%.

Racusin:

As of January 31, 2007,$2,682,374 of long-term debt was outstanding for the Racusin case in the eventthat we do not prevail in this litigation.

During the fiscal yearended January 31, 2007, we spent $1,163,462, primarily for the purchase ofupgraded computers and networks, leasehold improvements, new kiosk locationsand other furniture and equipment. In addition, we acquired Sturgeon’s,resulting in total acquistions for the year of $3,218,466.

We believe that we willbe able to satisfy our operating cash requirements for at least the next 12months from existing cash balances and anticipated cash flows.  We plan to accumulate cash liquidity duringthe current fiscal year (ending January 31, 2008) to help us fund the possibleacquisition of additional hotel/casino operations, purchase of kiosks,seasonality of sports betting, timing of system sales, Section 404 of theSarbanes-Oxley Act of 2002 compliance and the possible effects of legislationto ban wagering on amateur athletic events.

**Off-balance sheet arrangements.**  We do not have any off-balance sheetfinancing arrangements or liabilities.

**Results of operations.**  We report our results of operations throughthree operating segments:  Wagering(Leroy’s, and AWI), Hotel/Casino (AWIG and Sturgeon’s) and Systems (CBS andAWIM for fiscal 2007).  Although numerousfactors are taken into consideration, the operating income (loss) of thesegment represents a significant profitability measure used by us in allocatingresources and assessing performance of the segments.

**Summary.**

The increase in revenuesfor the year ending January 31, 2007 is attributed to an increase in wageringsegment revenues of $2,368,280 (+31.50%) and increase in Hotel/Casino revenueof $2,844,326 (+100.00%), and an increase in systems segment revenues of$1,631,618 (+32.57%).

The increase in costsand expenses for the year ending January 31, 2007 is attributed to an increasein direct wagering segment costs and expenses of $870,077 (+14.24%), anincrease in direct Hotel/Casino costs and expenses of $2,570,895 (+100.00%),partially offset by a decrease in direct systems segment costs and expenses of$63,120 (-2.73%).

The decrease in otherincome (expense) for the year ending January 31, 2007 is due, in part, to thefollowing factors:  Interest incomeincreased $46,356 (+80.97%); interest expense increased $177,032 (+673.61%);reorganization expense decreased $43,493 (-100.00%); litigation expenseincreased $715,322, (+217.67%); and other income decreased $37,711 (-24.59%).

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

**Wagering Segment.**  The Wagering Segment is comprised of the operatingresults of Leroy’s and the allocation from AWI. For fiscal 2006, AWIM and AWIGwere also part of the Wagering Segment as AWIG reflected pre-acquisition costsfor Sturgeon’s, which was not yet acquired. For fiscal 2007, AWIG andSturgeon’s are part of the Hotel/Casino Segment and AWIM is now reported in theSystems Segment.

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**Wagering Segment revenues for theyear ended January 31, 2007 increased $2,368,280(+31.50%) over the year endedJanuary 31, 2006. **We attributethis increase to the following factors:

Sports handle (the totalamount wagered) experienced an increase of (+3.48%) over the prior fiscal yearas a result of additional wagering locations, physical improvements to existinglocations and continued marketing; the payouts associated with that handleincreased (+1.37%); which resulted in a higher hold percentage (win divided byhandle) of 8.9% compared to last year’s sports hold percentage of 6.25%. ActualRace and Pari-Mutuel win revenue increased by 3.87%, due to additional handlevolume and increased win percentage.

**Wagering Segment total costs andexpenses for fiscal year 2007 increased $726,289 (+9.45%) over fiscal year2006. **Thisincrease may be attributed to the following factors:

Direct costs increasedby $870,077 (+14.24%) primarily attributable to increased wages due toadditional personnel and increases in rent paid to our Leroy’s customers.

Selling, General andAdministrative Costs:  Selling, generaland administrative costs decreased by $84,197 (-6.39%); primarily due to ourprior year presentation, which included costs from our AWIG and AWIMsubsidiaries.

Depreciation andAmortization:  Depreciation andamortization expense decreased by $59,590 (-25.30%) over the prior fiscal yearprimarily due to our prior year presentation, which included costs from our AWIGand AWIM subsidiaries.

Note that an increase ordecrease in handle is not necessarily indicative of an increase or decrease inrevenues or profits. Elimination of unprofitable locations, closure of hostproperties, changes in state and/or federal regulations, and other factorsbeyond our control may result in declines in handle.

We intend to continue toopen new locations that we expect to operate profitably and to continue ourreview of existing locations in order to close those locations that are notoperating efficiently.  There is noassurance that the number of race and sports books operated by us will notdecrease in the future due to elimination of unprofitable locations, closure ofhost properties, and other factors beyond our control, that we will be able toadd new locations, and/or that any new locations so added will be profitable.

**Hotel/Casino Segment**. TheHotel/Casino Segment is comprised of the operating results of AWIG and Sturgeon’sfor fiscal 2007.  AWIG’s results for 2006reflected only the pre-acquisition costs for Sturgeon’s and was categorized aspart of the Wagering Segment. Accordingly, there was not a reportable Hotel/Casino Segment for fiscal2006.

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The increase inHotel/Casino revenue, expenses and resulting operating loss, is due to theacquisition and commencement of operations of Sturgeon’s on March 1, 2006.

**Systems Segment.**  The Systems Segment is comprised of theoperating results of CBS and AWIM for fiscal 2007 and CBS and Contest SportsSystems, Inc. (“CSS”) in fiscal 2006. CSS was dissolved in fiscal 2007. AWIM was included in the WageringSegment in fiscal 2006.

**Systems Segment revenues forfiscal year 2007 increased $1,633,347 (+32.62%) over fiscal year 2006. **This increase may be attributed to thefollowing factors:

System sales increased$1,073,736 (+40.91%) over the prior fiscal year due to increased sales,installations and upgrades of wagering terminals and related fees to customers.

Revenues frommaintenance contracts increased by $464,364 (+19.84%) over the prior fiscalyear.  This increase is attributable tothe addition of the number of new customers and the higher fees charged tocustomers.

Othersystems revenues decreased by $25,521 (-60.56%) over the prior fiscalyear.  Other revenues primarily consistof party rentals and other special events. We consider this revenue immaterial to our overall operation and we donot expect it to have a significant impact on our future operations.

**Systems Segment total costs andexpenses for fiscal year 2007 increased $776,252 (+15.92%) over fiscal year2006.**  We attribute thisincrease to the following factors:

Direct costs for systemsdecreased by $63,120 (-2.73%) over the prior fiscal year primarily due todecreased wages and benefits resulting from a reduction and realignment ofpersonnel, improving our operational efficiencies.

Research and developmentcosts increased by $111,214 (+10.90%) from the prior fiscal year primarily dueto higher costs for technical support and personnel.

Selling, general andadministrative costs increased by $553,474 (+39.91%) over the prior fiscal yearprimarily due to costs related to the recognition of stock-based compensationexpense in fiscal 2007.

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Depreciation andamortization increased by $174,683 (+113.09%) from the prior fiscal year dueprimarily to the acquisition and upgrades to our networks.

**Other income and (expenses).**  The other income and (expenses) categoriesare primarily administrative in nature and, as such, are not directlyattributable to any operating segment. Accordingly, these items are generally not taken into consideration byus when we allocate resources to the segments or assess the performance of thesegments.

Interest Income:  The majority of interest income isattributable to interest earned on restricted cash deposits required for theRegulation 22.040 reserve.  (Refer to thediscussion regarding this matter located at “Liquidity and Capital Resources”above.)  The remainder of the interestincome is attributable to interest earned on interest-bearing checkingaccounts.  The increase in interestincome of $46,356 (+80.97%) is primarily due to our increased cash balancesfrom 2006 to 2007.

Interest Expense:  The increase in interest expense is primarilydue to our financing of Sturgeon’s. (Refer to the discussion regarding theSturgeon’s acquisition financing located in “Liquidity and Capital Resources”above.)

Reorganization Expense:No such costs were incurred in fiscal 2007. Reorganization expense includes all fees and charges paid (or accrued)by us in regards to the Chapter 11 proceedings of AWI and Leroy’s; these feesand charges include fees to the U.S. Trustees’ Office, fees for our legalcounsel, fees for the creditors’/equity holders’ legal counsel, financialadvisors fee, etc.  incurred in fiscal2006.

LitigationJudgment:  The litigation judgment amountfor fiscal year 2007 is attributable to the recognition of a judgment relatedto Racusin, which was a reversal of the prior year’s income amount recognizeddue to the prior ruling on this case. Please refer to Part I, Item 3 (“Legal Proceedings”) for additionalinformation.

**Criticalaccounting estimates and policies.**  Although our financial statements necessarilymake use of certain accounting estimates by our management, we believe that,except as discussed below, we do not employ any critical accounting policies orestimates that are either selected from among available alternatives, orrequire the exercise of significant management judgment to apply, or that ifchanged are likely to affect future periods. The following summarizes ourcritical estimates and policies.

Wagering:  We record wagering revenues in compliancewith Nevada law and the regulations of the Nevada gaming regulators.  For sports and non pari-mutuel race, we usean accrual method wherein the handle (total amount wagered) is recognized onthe day the event occurs (rather than the day the wager is accepted) decreasedby the total amount owed to patrons with winning wagers.  This gross calculation (handle less payouts)is then adjusted upward to account for any winning wagers that were notredeemed (cashed) within the specified time period.  For pari-mutuel race, commission and breakagerevenues are recorded when the wagers are settled, typically the same day asthe wager.  Other sources of revenue arerelatively insignificant.

Hotel/CasinoRevenue: We report the wagering revenues of Sturgeon’s, which is primarilycomprised of slot revenue, hotel room revenue and food and beverage revenue, incompliance with Nevada law and the regulations of 

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theNevada gaming regulators. These revenues are generally in the form of cash,personal checks, credit cards, or gaming chips and tokens, which do not requireestimates. We do estimate certain liabilities with payment periods that extendfor longer than several months. We believe these estimates are reasonable basedon our assumptions related to possible outcomes in the future. Future actualresults might differ materially from these estimates. Slot revenue is the drop(the total amount removed from the machine) less the fills and thepayouts.  Bingo revenue is calculated asthe total handle (the amount wagered) less the payouts. For non-gamingrevenues, such as food and beverage, hotel, etc., we record revenues incompliance with generally accepted accounting principles, recognizing revenuewhen it is earned. The Sturgeon’s acquisition was completed on March 1, 2006and wagering revenues for the Sturgeon’s operation are being reported for thefirst time in the fiscal year ended January 31, 2007.

System— Software:  We recognize softwarerevenue in accordance with the provisions of Statement of Position (“SOP”)97-2, *Software Revenue Recognition*, as amendedby SOP 98-9, *Software Revenue Recognition, With Respectto Certain Transactions*. Software license fees represent revenues related to licenses forrace/sports software delivered to customers for in-house use.  Revenues from software license agreements(including any related training revenue) are recognized upon installation ofthe software.

System— Hardware:  We recognize hardwarerevenue (including any related installation revenue) upon installation of thehardware.

System— Maintenance:  We negotiate maintenanceagreements with each of our customers to provide for the long-term care of thesoftware and hardware.  Pursuant to theterms of the various maintenance agreements, a fixed sum is due at thebeginning of each month regardless of whether the customer requires serviceduring that month.  We recognizemaintenance revenue on the first day of each month for which the maintenanceagreement is in place; we maintain an allowance for doubtful accounts in theevent that any such revenue recorded is not realized.

Accountingfor long-lived assets:  Owned propertyand equipment are recorded at cost and depreciated to residual values over theestimated useful lives using the straight-line method.  Leasehold improvements on operating leasesare amortized over the life of the lease or the life of the asset, whichever isshorter.  The useful life, currentlyestimated, of our equipment generally ranges from 3 to 10 years.  We test for impairment losses on long-livedassets used in operations when events and circumstances indicate that theassets might be impaired, under the standards of SFAS No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*.An impairment loss is recognized if the carrying amount of the asset is notrecoverable from its undiscounted cash flows and is measured as the differencebetween the carrying amount and fair value of the asset.

Accounting for income taxes:In assessing when to realize deferred tax assets, we consider whether it ismore likely than not that some or all of the deferred tax assets will not berealized in accordance with SFAS No. 109, *Accountingfor Income Taxes*. We believe that we will continue to be profitableat least for the short-term future and, therefore, it is more likely than notthat the recorded net deferred tax asset of $440,481, which resulted primarilyfrom net operating loss carry-forwards and unrealized losses, will be realized.We have assessed a need for a valuation allowance against the remainder of thedeferred tax asset primarily due to our previous history of losses and wecontinue to reevaluate this asset periodically. (See **Recent Accounting Pronouncements** below.)

Stock-based compensation: OnFebruary 1, 2006, as required, we adopted SFAS No. 123R, *Share-Based Payment*, using the modifiedprospective method. Fair values of stock options are estimated using theBlack-Scholes method based on assumptions that we consider reasonable and thatwe disclose in our financial statements. Previously, we used AccountingPrinciples Board Opinion No. 25, *Stock-BasedCompensation*, to account for employee stock options.

Accounting forcontingencies:  Contingent liabilitiesare provided for in accordance with SFAS No. 5, *Accountingfor Contingencies*.  Accordingto SFAS No. 5, an estimated loss from a loss contingency is charged to incomeif:  (a) it is probable that an asset hasbeen impaired or a liability has been incurred at the date of the financialstatements; and (b) the amount of the loss can reasonably be estimated.  Disclosure in the notes to the financialstatements is required for loss contingencies not meeting both conditions ifthere is a reasonable possibility that a loss may have been incurred.  We record legal defense costs as period costswhen the related services are provided. Gain contingencies are not recorded until realized.

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**RecentAccounting Pronouncements.** In February 2006, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 155, *Accounting forCertain Hybrid Financial Instruments*, which amends SFAS No. 133,*Accounting for Derivative Instruments andHedging Activities*, and SFAS No. 140, *Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities — a replacement of FASB StatementNo. 125*. SFAS No. 155 will be effective for all financialinstruments issued or acquired beginning in the first interim period of afiscal year that begins after September 15, 2006. We do not expect toissue or acquire any financial instruments likely to be affected by SFASNo. 155 in the foreseeable future.

InJune 2006, the FASB issued FASB Interpretation No. 48, Accounting forUncertainty in Income Taxes, an interpretation of FASB Statement No. 109,Accounting for Income Taxes (“FIN 48”), effective for us beginning on February1, 2007. FIN 48 clarifies the recognition threshold a tax position is requiredto meet before being recognized in the financial statements. FIN 48 alsoprovides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosures, and transition of tax positions.Accordingly, tax positions are analyzed to determine whether it is more likelythan not they will be sustained when examined by the appropriate tax authority.Positions that meet the more-likely-than-not criteria are measured to determinethe amount of benefit to be recognized, whereas those positions that do notmeet the more-likely-than-not criteria are derecognized in the financialstatements. FIN 48 is effective for fiscal years beginning afterDecember 15, 2006. We adopted FIN 48 on February 1, 2007. We have reviewedthe net loss operating carryforwards available to reduce current and future taxobligations in the aggregate amount $2,960,650 as of January 31, 2006.  We have assessed the valuation allowanceagainst the remainder of the deferred tax assets in our calculations toestimate the effective tax rate for fiscal 2007, and we believe that morelikely than not there is sufficient loss carryforward to offset the currentyear’s net income of $1,830,700.  We haveconsidered and evaluated the components of the tax calculations and aresatisfied as to realization and probability of the permanent and temporarydifferences.  We additionally believethat we will continue to be profitable, for at least the short-term future, andit is therefore more likely than not that our net deferred tax asset of$440,481, which resulted primarily from net loss carryforwards, will be fullyrealized. Based on our evaluation, management believes that adoptingFIN 48 did not have a material effect on our net operating losscarryforwards or the related deferred tax assets or the valuation allowance.

InSeptember 2006, the FASB issued SFAS No. 157, *Fair ValueMeasurements* (“SFAS No. 157”), which defines fair value,establishes a framework for measuring fair value and expands disclosures aboutfair value measurements.  In February 2007,the FASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities – Including an Amendment of SFAS No 115*, which will permit the option of choosing to measure certaineligible items at fair value at specified election dates and report unrealizedgains and losses in earnings. SFAS Nos. 157 and 159 will become effectivefor us for financial statements issued for the fiscal year ending January 31,2009.  We are currently evaluating thelikely impact of this standard on our future consolidated financial statements.

26

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**Item 7.    Financial Statements**

Audited Financial Statements for Years Ended January31, 2007 and 2006, including:

a.               Reportof Independent Registered Public Accounting Firm

b.              ConsolidatedBalance Sheet

c.               ConsolidatedStatements of Operations

d.              ConsolidatedStatements of Stockholders’ Equity

e.               ConsolidatedStatements of Cash Flows

f.                 Notesto the Consolidated Financial Statements

27

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Boardof DirectorsAmerican Wagering, Inc.

We have audited theaccompanying consolidated balance sheet of American Wagering, Inc. andSubsidiaries (collectively, the “Company”) as of January 31, 2007, and therelated consolidated statements of operations, stockholders’ equity and cashflows for the years ended January 31, 2007 and 2006.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audits to obtain reasonable assuranceabout whether the financial statements are free of material misstatement.  The Company is not required to have, nor werewe engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting.  Accordingly, we express nosuch opinion.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

In our opinion, thefinancial statements referred to above present fairly, in all material respects,the financial position of the Company as of January 31, 2007, and the resultsof its operations and cash flows for the years ended January 31, 2007 and 2006in conformity with accounting principles generally accepted in the UnitedStates.

PIERCY BOWLER TAYLOR& KERN

/s/ Piercy Bowler Taylor& Kern

CertifiedPublic Accountants & Business AdvisorsA Professional CorporationLas Vegas, NevadaMay 29, 2007

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**AMERICANWAGERING, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETJANUARY 31, 2007**
| **ASSETS**                                                                                                                               | ** ** | ** **     | ** **     |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------|----------------|
| CURRENT ASSETS                                                                                                                           | ** ** | ** **     | ** **     |
| Cash and Cash Equivalents                                                                                                                |       | $              | 4,537,424      |   |
| Restricted Cash                                                                                                                          |       | 1,113,656      |           |
| Accounts Receivable, net of allowance for doubtful  accounts of $0                                                                       |       | 719,855        |           |
| Inventories                                                                                                                              |       | 357,330        |           |
| Deferred Tax Assets, net of allowance                                                                                                    |       | 440,481        |           |
| Prepaid Expenses and Other Current Assets                                                                                                |       | 573,750        |           |
| ** **                                                                                                                               | ** ** | **7,742,496**  | ** **     |
| Property and Equipment, net of depreciation and  amortization                                                                            |       | 4,461,665      |           |
| Goodwill                                                                                                                                 |       | 103,725        |           |
| Other Assets                                                                                                                             |       | 864,391        |           |
| ** **                                                                                                                               | ** ** | **$**          | **13,172,277** | ** ** |
|                                                                                                                                     |       |           |           |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                           | ** ** | ** **     | ** **     |
| CURRENT  LIABILITIES                                                                                                                     |       |           |           |
| Current Portion of Long-Term Debt                                                                                                        |       | $              | 1,880,617      |   |
| Accounts Payable                                                                                                                         |       | 788,729        |           |
| Accrued Expenses                                                                                                                         |       | 1,337,934      |           |
| Unpaid Winning Tickets                                                                                                                   |       | 1,198,373      |           |
| Customer Deposits and Other Current Liabilities                                                                                          |       | 1,331,271      |           |
| ** **                                                                                                                               | ** ** | **6,536,924**  | ** **     |
| Long-Term Debt,  less current portion                                                                                                    |       | 3,305,029      |           |
| Other Long-Term  Liabilities                                                                                                             |       | 988,292        |           |
| ** **                                                                                                                               | ** ** | **4,293,321**  | ** **     |
|                                                                                                                                     |       |           |           |
| Redeemable  Series A Preferred Stock (3,238 Shares)                                                                                      |       | 323,800        |           |
| ** **                                                                                                                               | ** ** | ** **     | ** **     |
| ** **                                                                                                                               | ** ** | **11,154,045** | ** **     |
| STOCKHOLDERS’  EQUITY                                                                                                               |       |           |           |
| Series A Preferred Stock — 10% cumulative; $100.00  par and liquidation value; 18,924 shares authorized; 10,924 shares  outstanding |       | 1,092,400      |           |
| Common Stock - $0.01 par value; 25,000,000 shares authorized;  8,129,880 shares issued and outstanding                                   |       | 81,299         |           |
| Additional Paid-In Capital                                                                                                               |       | 12,121,822     |           |
| Deficit                                                                                                                                  |       | (10,949,796    | )              |
| Treasury Stock, at cost (61,100 shares)                                                                                                  |       | (327,493       | )              |
| ** **                                                                                                                               | ** ** | **2,018,232**  | ** **     |
|                                                                                                                                     |       |           |           |
| ** **                                                                                                                               | ** ** | **$**          | **13,172,277** | ** ** |

 

**Seenotes to consolidated financial statements.**

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**AMERICANWAGERING, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONSFOR THE YEARS ENDED JANUARY 31, 2007 AND 2006**
| ** **                                     | ** ** | **2007**       | ** **    | **2006**       | ** ** |
|------------------------------------------------|------------|----------------|---------------|----------------|------------|
| **REVENUES:**                                  | ** ** | ** **     | ** **    | ** **     | ** ** |
| Wagering                                       |       | $              | 9,885,568     |           | $          | 7,517,288 |   |
| Hotel/Casino                                   |       | 2,844,326      |          | —         |       |
| Systems                                        |       | 6,640,499      |          | 5,007,152      |       |
| ** **                                     | ** ** | **19,370,393** | ** **    | **12,524,440** | ** ** |
|                                           |       |           |          |           |       |
| **OPERATING  COSTS AND EXPENSES:**             | ** ** | ** **     | ** **    | ** **     | ** ** |
| Direct Costs:                                  |       |           |          |           |       |
| Wagering                                       |       | 6,978,652      |          | 6,108,575      |       |
| Hotel/Casino                                   |       | 2,570,895      |          | —         |       |
| Systems                                        |       | 2,251,270      |          | 2,314,390      |       |
| ** **                                     | ** ** | **11,800,817** | ** **    | **8,422,965**  | ** ** |
|                                           |       |           |          |           |       |
| Research and Development                       |       | 1,131,265      |          | 1,020,051      |       |
| Selling, General and Administrative            |       | 3,499,623      |          | 2,704,814      |       |
| Depreciation and Amortization                  |       | 737,224        |          | 410,234        |       |
| ** **                                     | ** ** | **5,368,112**  | ** **    | **4,135,099**  | ** ** |
|                                           |       |           |          |           |       |
| ** **                                     | ** ** | **17,168,929** | ** **    | **12,558,064** | ** ** |
|                                           |       |           |          |           |       |
| **OPERATING  INCOME (LOSS)**                   | ** ** | **2,201,464**  | ** **    | **(33,624**    | **)**      |
| **OTHER  INCOME (EXPENSE):**                   |       |           |          |           |       |
| Interest Income                                |       | 103,605        |          | 57,249         |       |
| Interest Expense                               |       | (203,313       | )             | (26,281        | )          |
| Reorganization Expense                         |       | —         |          | (43,493        | )          |
| Litigation Judgment (Expense) Benefit          |       | (386,698       | )             | 328,624        |       |
| Other, net                                     |       | 115,642        |          | 153,353        |       |
| ** **                                     | ** ** | **(370,764**   | **)**         | **469,452**    | ** ** |
|                                           |       |           |          |           |       |
| **INCOME  BEFORE INCOME TAXES**                | ** ** | **1,830,700**  | ** **    | **435,828**    | ** ** |
|                                           |       |           |          |           |       |
| **PROVISION  FOR INCOME TAXES**                | ** ** | **—**     |          | 16,599         |       |
| ** **                                     | ** ** | ** **     | ** **    | ** **     | ** ** |
| **NET  INCOME**                                | ** ** | **$**          | **1,830,700** | ** **     | **$**      | **419,229** | ** ** |
| ** **                                     | ** ** | ** **     | ** **    | ** **     | ** ** |
| **BASIC  AND DILUTED INCOME PER COMMON SHARE** | ** ** | **$**          | **0.21**      | ** **     | **$**      | **0.03** | ** ** |

 

**See notes to consolidatedfinancial statements.**

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**AMERICAN WAGERING, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYFOR THE YEARS ENDED JANUARY 31, 2007 AND 2006**
| ** **                       | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Treasury Stock** | ** ** | **Additional  Paid-In** | ** ** | ** ** | ** ** | **Total** | ** ** |
|----------------------------------|------------|--------------------------|------------|-----------------------|------------|-------------------------|------------|-------------------------|------------|------------|------------|-----------|------------|
| ** **                       | ** ** | **Shares**               | ** ** | **Par**               | ** ** | **Shares**              | ** ** | **Par**                 | ** ** | **Shares** | ** ** | **Par**   | ** ** | **Capital** | ** ** | **Deficit** | ** ** | **Equity** | ** ** |
| **Balances, February 1, 2005**   |       | 10,924                   |       | $                     | 1,092,400  |                    | 7,897,946  |                    | $          | 78,979     |       | 61,100    |       | $ | (327,493 | ) | $ | 12,738,889 |   | $ | (12,916,485) |   | $ | 666,290 |   |
| Preferred Stock Dividends        |       |                     |       |                  |       |                    |       |                    |       |       |       |      |       |   |   | (141,620 | ) | (141,620 | ) |
| Net Income                       |       |                     |       |                  |       |                    |       |                    |       |       |       |      |       |   |   | 419,229 |   | 419,229 |   |
| Racusin Settlement               |       |                     |       |                  |       | 250,000                 |       | 2,500                   |       |       |       |      |       | 1,341,125 |   |   |   | 1,343,625 |   |
| Stock options exercised          |       |                     |       |                  |       | 100,918                 |       | 1,009                   |       |       |       |      |       | 59,672 |   |   |   | 60,681 |   |
|                             |       |                     |       |                  |       |                    |       |                    |       |       |       |      |       |   |   |   |   |   |   |
| **Balances, January 31, 2006**   |       | 10,924                   |       | 1,092,400             |       | 8,248,864               |       | 82,488                  |       | 61,100     |       | (327,493  | )          | 14,139,686 |   | (12,638,876 | ) | 2,348,205 |   |
| Preferred Stock Dividends        |       |                     |       |                  |       |                    |       |                    |       |       |       |      |       |   |   | (141,620 | ) | (141,620 | ) |
| Net Income                       |       |                     |       |                  |       |                    |       |                    |       |       |       |      |       |   |   | 1,830,700 |   | 1,830,700 |   |
| Racusin Settlement Reversed      |       |                     |       |                  |       | (250,000                | )          | (2,500                  | )          |       |       |      |       | (2,377,500 | ) |   |   | (2,380,000 | ) |
| Stock options exercised          |       |                     |       |                  |       | 131,016                 |       | 1,311                   |       |       |       |      |       | 81,174 |   |   |   | 82,485 |   |
| Stock based compensation expense |       |                     |       |                  |       |                    |       |                    |       |       |       |      |       | 278,462 |   |   |   | 278,462 |   |
| **Balances,  January 31, 2007**  |       | 10,924                   |       | $                     | 1,092,400  |                    | 8,129,880  |                    | $          | 81,299     |       | 61,100    |       | $ | (327,493 | ) | $ | 12,121,822 |   | $ | (10,949,796 | ) | $ | 2,018,232 |   |

 

**See notes to consolidatedfinancial statements**

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**AMERICANWAGERING, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE YEARS ENDED JANUARY 31, 2007 AND 2006**
| ** **                                                | ** ** | **2007**      | ** **    | **2006**       | ** ** |
|-----------------------------------------------------------|------------|---------------|---------------|----------------|------------|
| **CASH  AND CASH EQUIVALENTS AT BEGINNING OF PERIOD**     | ** ** | **$**         | **2,221,445** | ** **     | **$**      | **3,998,851** | ** ** |
| ** **                                                | ** ** | ** **    | ** **    | ** **     | ** ** |
| **Net  cash provided by (used in) operating activities**  |       | **3,038,802** | ** **    | **(520,543**   | **)**      |
|                                                      |       |          |          |           |       |
| INVESTING  ACTIVITIES                                     |       |          |          |           |       |
| Increases in restricted cash                              |       | (2,280,869    | )             | (58,045        | )          |
| Withdrawals from restricted cash                          |       | 2,463,417     |          | —         |       |
| Proceeds from the sale of property and equipment          |       | 68,033        |          | 27,943         |       |
| Purchase of property and equipment                        |       | (1,163,462    | )             | (741,102       | )          |
| **Net cash used in investing activities**                 |       | (912,881      | **)**         | **(771,204**   | **)**      |
|                                                      |       |          |          |           |       |
| FINANCING  ACTIVITIES                                     |       |          |          |           |       |
| Proceeds from borrowings                                  |       | 900,000       |          | —         |       |
| Repayment of borrowings                                   |       | (650,807      | )             | (191,321       | )          |
| Current dividends on preferred stock                      |       | (141,620      | )             | (141,620       | )          |
| Payment of preferred stock dividends in arrears           |       | —        |          | (213,400       | )          |
| Stock options exercised                                   |       | 82,485        |          | 60,682         |       |
| **Net cash provided by (used in) financing  activities**  |       | 190,058       | ** **    | **(485,659**   | **)**      |
|                                                      |       |          |          |           |       |
| **NET  INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS** | ** ** | **2,315,979** | ** **    | **(1,777,406** | **)**      |
| ** **                                                | ** ** | ** **    | ** **    | ** **     | ** ** |
| **CASH AND CASH EQUIVALENTS AT  END OF PERIOD**           | ** ** | **$**         | **4,537,424** | ** **     | **$**      | **2,221,445** | ** ** |

 

**See notes to consolidated financial statements.**

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**AMERICAN WAGERING, INC. AND SUBSIDIARIES**

# **NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

## **JANUARY31, 2007**

**1.  Nature of Operations and BackgroundInformation**

**Organization and business*.*** American Wagering, Inc. (“AWI”) wasincorporated in the state of Nevada in August of 1995.  AWI is a publicly traded holding company thatearns its revenues through the consolidated operations of its wholly ownedsubsidiaries.  Leroy’s Horse & SportsPlace, Inc. (“Leroy’s”) owns and operates 59 (as of April 27, 2007) race andsports wagering locations (“books”) in leased space within nonrestrictedcasinos throughout the state of Nevada. Computerized Bookmaking Systems, Inc. (“CBS”) designs, sells, installs,and maintains computerized race and sports wagering systems.  AWI Manufacturing, Inc. (“AWIM”) develops andleases self-service race and sports wagering kiosks to the gamingindustry.  Contest Sports Systems, Inc. (“CSS”),formerly a wholly owned subsidiary of CBS, was dissolved effective January 29,2007 due to inactivity. CSS had no significant income or expenses in fiscal2007 or 2006. AWI Gaming, Inc. (“AWIG”) was formed in June 2005 for the purposeof acquiring hotel/casino operations, which it did through Sturgeons, LLC, awholly owned subsidiary of AWIG, formed in July 2005 for the purpose of owningand operating Sturgeon’s Inn & Casino in Lovelock, Nevada (“Sturgeon’s”).  The acquisition of Sturgeon’s was completed onMarch 1, 2006. AWI International, Inc. (“AWI Int’l”) was formed in fiscal 2007and provides a myriad of services to gaming suppliers and gaming operators inforeign jurisdictions where wagering on race and sporting events is licensed.

**Basis of presentation.**  The consolidated financial statements includethe accounts of AWI and all of its subsidiaries for applicable periods, (collectivelyreferred to hereafter as the “Company”). With the exception of Sturgeon’s (which is a wholly owned subsidiary ofAWIG), all subsidiaries are wholly owned by AWI.  All significant inter-company accounts andtransactions have been eliminated in the consolidation.

**Concentrations.**  Because the Company operates primarily in thelarger metropolitan areas of Nevada in the highly regulated gaming industry,realization of its receivables and its future operations could be affected byadverse economic conditions in Nevada and its key feeder markets in the westernUnited States, and by possible future anti-wagering legislation andregulatory limitations on the scope of wagering.** **99% of the Company’s wageringrevenue comes from its Nevada race and sports books and more than one-fourthof that is derived from professional football events.  If the professional football season were tobe interrupted, this could have significant adverse impact on futureoperations.  Management also estimatesthat a significant amount of the Company’s Nevada noncasino wagering relates tocollege sports and, therefore, the passage of amateur sports anti-wagering legislationcould have a material adverse impact upon future operations.  In addition, because the Company generatessubstantial revenue from system sales to a relatively small population ofpotential customers, a decline in the size or number of these contracts couldalso adversely affect future operations.

TheCompany manages its concentrations of credit risk by evaluating thecreditworthiness of systems customers before extending credit and by perfectingand using, when necessary, security interests in the hardware andsoftware.  In establishing an allowancefor doubtful collection, if any, the Company considers the customer, therelative strength of the Company’s legal position, the related cost of anyproceedings, and general economic conditions. The maximum losses that the Company would incur if a customer failed topay would be limited to the amount due after any allowances provided.

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**Use ofestimates.**  Timelypreparation of financial statements in conformity with generally acceptedaccounting principles in the United States of America requires management tomake estimates and assumptions that affect reported amounts, which estimates mayrequire revision in future periods. Settings and adjustments of betting lines on sporting events that havenot yet taken place as of the most recent balance sheet date, valuation ofdeferred tax assets, and estimated costs of litigation, claims and assessments aresubject to change materially within one year.

**Cash and cash equivalents.**  Cash equivalents include highly liquidinvestments with initial maturities of three months or less.  Excluded from cash and cash equivalents, butincluded in current assets, are restricted amounts primarily required to bemaintained on deposit with a bank under Nevada Gaming Commission Regulation 22to fund gaming losses.

**Inventories.**  Inventories consisting primarily of systemscomponents and replacement parts are stated at the lower of cost (based on thefirst-in, first-out method) or market.

**Property and equipment.**  Property and equipment (Note 2) is stated atcost, net of accumulated depreciation and amortization, computed using thestraight-line method over the estimated useful lives of the assets(generally 3 to 10 years for equipment, furniture and fixtures, and 40 yearsfor building improvements, but limited to the lease term for leaseholdimprovements).

**Goodwill.**  As of the most recent balance sheet date,goodwill primarily consists of the excess of the purchase price over fair valueof net assets acquired in connection with the acquisition of CBS, thesubsidiary that designs, sells, installs, and maintains the Company’s primarycomputerized race and sports book systems product.  Goodwill is evaluated periodically forimpairment as events or circumstances warrant. Such evaluations include, among other analysis, cash flow andprofitability projections, including the impact on other operations of theCompany.  There were no impairmentprovisions taken for the fiscal year ended January 31, 2007.

**Revenue recognition.**  Service revenues are principally recognizedas services are provided to customers; the Company does not bill in advance.

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

**Hotel/Casino**: Revenues ofSturgeon’s (Note 11), consist primarily of slot revenue, recorded in compliancewith Nevada gaming law and regulations, hotel room and food and beveragerevenue.  Casino revenue, being reportedfor the first time for fiscal year ended January 31, 2007, is the aggregate netdifference between gaming wins and losses. Food and beverage and otheroperating revenues are recognized as services are performed. Advance depositsare recorded as deferred revenue until services are provided to the customer.Sturgeon’s casino gaming, food and beverage and other operating revenues areincluded in hotel/casino revenue.  Casinorevenues are recognized net of certain sales incentives in accordance withEmerging Issues Task Force Issue No. 01-9 *Accountingfor Consideration Given by a Vendor to a Customer (Including a Reseller of theVendor’s Products.)* Accordingly, cash incentives to patrons forgambling, which are not material, have been recognized as a direct reduction ofcasino revenue. Revenue does not include the retail value of food and beverage,and other services gratuitously furnished to patrons, which are not material.The estimated cost of providing such gratuities is included in wagering directexpenses.

**System — Software**:  The Company recognizes software developmentrevenue in accordance with the provisions of Statement of Position (“SOP”)97-2, *Software Revenue Recognition*, as amendedby SOP 98-9, *Software Revenue Recognition, With Respectto Certain Transactions*. Software license fees represent revenues related to licenses forrace/sports software delivered to customers for in-house use.  Revenues from software license agreements(including any related training revenue) are recognized upon installation ofthe software.

**System — Hardware**:  The Company recognizes revenue from the saleof hardware (and any related installation revenue) upon installation of thehardware.

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**System — Maintenance**:  The Company negotiates maintenance agreementswith each of its customers to provide for the long-term care of the softwareand hardware.  Pursuant to the terms ofthe various maintenance agreements, a fixed sum is due at the beginning of eachmonth regardless of whether the customer requires service during thatmonth.  The Company recognizesmaintenance revenue on the first day of each month for which the maintenanceagreement is in place.

**Advertising.**  The Company expenses all advertising costs asincurred.  Advertising expense was$395,091 and $240,448 for the fiscal years ended January 31, 2007 and 2006,respectively.

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

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

Theadoption of SFAS No. 123(R) resulted in incremental stock-basedcompensation expense for the year ended January 31, 2007, that causedincome before and after income tax provision to decrease by $278,462 ($0.03 pershare, basic and diluted). In addition, SFAS No. 123(R) requires theexcess tax benefits from stock option exercises, tax deductions in excess ofthe tax benefits recorded for compensation cost recognized, to be classified asa financing activity. There were no excess tax benefits recognized in fiscal2007 because of the utilization of our net operating loss carryforward.

Thefollowing table illustrates the effect on the net income if the Company hadapplied the alternative “fair-value” approach recognition provisions of SFASNo. 123 to the options granted to our employees and recorded the compensationexpense, for the fiscal year ended January 31, 2006: 
| Net income, as  reported                                                       |   | $      | 419,229 |   |
|--------------------------------------------------------------------------------|--------|--------|---------|--------|
| Less: total  stock-based compensation determined under fair-value based method |   | 399    |    |
| Pro forma net  income                                                          |   | $      | 418,830 |   |
| Basic and  diluted income per share:                                           |   |   |    |
| As reported                                                                    |   | $      | 0.03    |   |
| Pro forma                                                                      |   | $      | 0.03    |   |

 

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Theestimated per share weighted-average fair value of stock options granted duringfiscal 2007 and 2006, was $1.09 and $4.27, respectively. Stock options expectedto be exercised currently and in future periods are measured at estimated fairvalue with the expense associated with these awards being recognized on astraight-line basis over the award’s vesting period. We have estimated the fairvalue of options granted at the date of grant using the Black-Scholes MultipleOption pricing model with the following weighted-average assumptions in thefiscal years ended January 31: 

|                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
| Risk-free  interest rate             |       | 4.0      | %          | 4.0      | %          |
| Expected life of  options (in years) |       | 6.23     |       | 6.15     |       |
| Expected  volatility of stock price  |       | 75.41    | %          | 120.0    | %          |
| Expected dividend yield              |       | 0.0      | %          | 0.0      | %          |

 

Theexpected life (estimated period of time outstanding) of options granted wasestimated using the expected exercise behavior of employees. The risk-free rateused was based on the U.S. Treasury yield curve in effect at the time of grant.The expected volatility was based on historical volatility for the Company overthe past year. The expected dividend yield is based on historical information,that the Company did not have dividends in prior years.

TheCompany granted stock options for 40,000 shares of common stock to employeesand non-employee directors in fiscal 2007.

**Legal defense costs.**  The Company does not accrue for estimatedfuture legal and related defense costs, if any, to be incurred in connectionwith outstanding or threatened litigation and other disputed matters butrather, records such as period costs when the services are rendered.

**Net income per common share.**  Basic net income per share is computed bydividing net income by the weighted average number of common shares outstandingduring the year. Diluted income per common share considers potentially dilutivesecurities (options) as outstanding and net income is adjusted for preferredstock dividends.  For the operatingperiods presented, the tables below reconcile net income and weighted averageshares outstanding used to calculate basic and diluted income per share.

|                                                       | ** ** | **2007**  | ** **    | **2006**   | ** ** |
|-------------------------------------------------------|------------|-----------|---------------|------------|------------|
| ** **                                            |       |      | ** **    | ** ** | ** ** |
| Net income                                            | ** ** | $         | 1,830,700     |       | $          | 419,229 |   |
| Preferred stock (Note  4)                             | ** ** | (141,620  | )             | (141,620   | )          |
| **Net  income, available to common shares**           |       | **$**     | **1,689,080** | ** ** | **$**      | **277,609** | ** ** |
| Weighted average  number of common shares outstanding |       |      |          |       |       |
| Basic                                                 |       | 8,228,991 |          | 8,062,098  |       |
| Diluted                                               |       | 8,222,354 |          | 8,068,735  |       |

 

**2.  Property and Equipment**

Prior to the year endedJanuary 31, 2006, the Company completed a sale and leaseback of a building withan unrelated party.  The Company realizeda gain of $1,638,000 on the sale of the building.  However, pursuant to SFAS No. 28, *Accounting for Sales with Lease-backs*, only a portion of thegain was recognized in the fiscal years ended January 31, 2007 and 2006. Theremainder of the gain has been deferred and will be amortized against the leasepayments over the initial lease term (ending in January 2010); the deferredgain balance is carried on the consolidated balance sheet as “Other Long-TermLiabilities.”

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Property and equipmentconsists of the following as of January 31, 2007 and 2006:

|                                                 | ** ** | **2007**  | ** **    | **2006**   | ** ** |
|-------------------------------------------------|------------|-----------|---------------|------------|------------|
| Land                                            |       | $         | 505,558       |       | $          | — |   |
| Building and  building improvements             |       | 813,824   |          | 2,892      |       |
| Leasehold improvements                          |       | 147,207   |          | 34,300     |       |
| Equipment,  furniture and fixtures              |       | 6,122,131 |          | 4,440,608  |       |
|                                            |       | 7,588,720 |          | 4,477,800  |       |
| Less accumulated  depreciation and amortization |       | 3,127,055 |          | 2,429,960  |       |
| ** **                                      | ** ** | **$**     | **4,461,665** | ** ** | **$**      | **2,047,840** | ** ** |

 

Depreciation expense forthe fiscal years ended January 31, 2007 and 2006 was $736,608 and $408,025,respectively.

**3.   Long-term Debt**

Long-term debt on theconsolidated balance sheet as of January 31, 2007 was $5,185,646 and comprisedof the following:
| ** **      | ** ** | **2008**  | ** **    | **2009**   | ** ** | **2010**      | ** ** | **2011** | ** **  | **2012**   | ** ** |
|-----------------|------------|-----------|---------------|------------|------------|---------------|------------|----------|-------------|------------|------------|
| ** **      |       |      |          |       |       |          |       |     |        |       |       |
| Sturgeon’s |       | $         | 135,487       |       | 1,650,509  |          | $          | 50,198   |        | $          | —     |   | $ | — |   |
| Kiosks          |       | 186,056   |          | 208,978    |       | 133,600       |       | —   |        | —     |       |
| Racusin         |       | 1,502,374 |          | 300,000    |       | 300,000       |       | 300,000  |        | 280,000    |       |
| Other           |       | 56,700    |          | 35,981     |       | 33,123        |       | 11,092   |        | 1,548      |       |
| **Total**       | ** ** | **$**     | **1,880,617** | ** ** | **$**      | **2,195,468** | ** ** | **$**    | **516,921** | ** ** | **$**      | **311,092** | ** ** | **$** | **281,548** | ** ** |
|                 |            |           |               |            |            |               |            |          |             |            |            |  |  |  |  |  |

 

Sturgeon’s:

On March 1, 2006, AWIGacquired Sturgeon’s for $1,800,000 and separately purchased on-hand inventoriesof $148,075.  In connection with theacquisition, AWIG incurred initial indebtedness of $1,800,000, which included aloan of $1,500,000 from a bank, collateralized by a 1st deed of trust on theSturgeon’s real estate and a security interest in the personal property andfixtures of Sturgeon’s. Interest is payable monthly at the Wall StreetJournal-listed prime rate plus 2.00% and the principal is due in a singlepayment on March 1, 2008. Additionally, Sturgeon’s has two contractspayable outstanding to IGT, of which terms are similar in nature, maturing inMarch and May of 2009, with fixed interest rates of 10.50% and 10.75% per annumfor casino equipment with a total balance outstanding of $200,707 at January31, 2007.

Kiosks:

On August 8, 2006, the Company entered into asale/lease-back transaction with a finance company involving 75 race/sportskiosks for a sale price of $600,000 (less a $2,500 documentation fee and a 5%closing fee). Lease payments are $238,032 per year for 3 years. At theconclusion of the lease term, the Company may exercise a bargain re-purchaseoption for $1. Accordingly, the Company has accounted for this transaction as acapital lease. The outstanding balance as of January 31, 2007 was $342,579.

Other:

Primarily various automobile loans, at January 31,2007 are also included in Long-term Debt with various maturities ranging fromone to five years and interest rates ranging from 11.5% to 12.0%.

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Racusin:

As of January 31, 2007,$1,182,374 of long-term debt was outstanding for the Racusin case in the eventthat the Company does not prevail in this litigation.

**4.  Series APreferred Stock**

The Series A Preferred Stock is held by twopersons.  One shareholder is an officerand director of the Company (the “Officer/Director Shareholder”); this relatedparty owns a total of 8,900 shares (5,662 regular shares and 3,238 redeemableshares).  The other shareholder is adirector of the Company (the “Director Shareholder”); this related party owns atotal of 5,262 shares (all regular shares).

Holders of the Series A Preferred Stock are entitledto receive, upon declaration by the Board of Directors, cumulative cashdividends monthly at the annual rate of 10% per share.  Interest at the rate of 10%, compounded annually,accrues on Series A Preferred Stock dividends that have accumulated but havenot been paid.  The Series A PreferredStock is not convertible but is callable, in whole or (on a pro rata basis) inpart, at any time at the option of the Company. There were no shares called during the fiscal years ending January 31,2007 or 2006.  The holders of Series APreferred Stock are not entitled to vote (on a cumulative basis or otherwise)as a class or with AWI’s common stock (the “Common Stock”) upon any matterssubmitted to shareholders for a vote, except as mandated under Nevada law. Inthe event of any voluntary or involuntary liquidation, dissolution or windingup of the Company, the holders of the Series A Preferred Stock shall beentitled to receive, prior and in preference to any distribution of any assetsor surplus funds, an amount equal to $100 per share plus all accumulated andunpaid dividends thereon and any unpaid interest due.

Over the years, the Officer/Director Shareholder has forgonehis right to have shares redeemed in accordance with the pro-rata provisionapplicable when shares were called, and accordingly, the affected 3,238 shareshave been reclassified as “Redeemable Series A Preferred Stock” (in theliabilities section); these may be put to the Company for redemption at anytime.

Upon their emergence from bankruptcy on March 11,2005, and pursuant to the terms and conditions of AWI’s and Leroy’s RestatedAmended Joint Plan of Reorganization, all accrued Series A Preferred Stockdividends, unpaid during the Chapter 11 process, plus interest at the FederalJudgment Rate (1.13%) were paid.

**5.  Capital Stock and Stock Options**

**Stock repurchase.**  In 1999, the Board of Directors approved aprogram to repurchase up to 250,000 shares of the Company’s publicly held CommonStock from time to time in the open market. As of January 31, 2007, 61,100 shares had been repurchased and are heldby the Company as treasury stock, and accordingly are non-voting.  The timing and amount of future sharerepurchases, if any, will depend on various factors, including marketconditions, available alternative investments and the Company’s financialposition.

**2001 stock option plan.**  Ingeneral, AWI may, upon approval

 

38

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from the Board ofDirectors, award options to any employee at any time excepting that no employeemay receive in excess of 250,000 options per year and the 2001 Plan may notgrant more than 1,150,000 options in total. The 2001 Plan does not require any specific vesting schedule and/orterm; as such, vesting and term is left to the discretion of AWI, as approvedby the Board of Directors.  It isscheduled to terminate on August 8, 2011. 

Pursuant to the terms ofthe 2001 Plan, the exercise price of options must be equal to or greater thanthe market value of the Common Stock on the date of the grant.  The following tables summarize the currentstatus of the 2001 Plan:

|                                              | ** ** | **2007**                   | ** ** | **2006**                               | ** ** |
|----------------------------------------------|------------|----------------------------|------------|----------------------------------------|------------|
| ** **                                   | ** ** | **NUMBER OF  SHARES** | ** ** | **WEIGHTED  AVERAGE  EXERCISE  PRICE** | ** ** | **NUMBER OF  SHARES** | ** ** | **WEIGHTED  AVERAGE  EXERCISE  PRICE** | ** ** |
| **Outstanding at Beginning of  Fiscal Year** |       | 887,998                    | ** ** | **$**                                  | **1.64**   | ** ** | **253,242** | ** ** | **$** | **0.61** | ** ** |
| Granted Price > or =  Market Price        |       | 30,000                     |       | 1.50                                   |       | 750,000 |   | 1.83 |   |
| Exercised                                    |       | (131,016                   | )          | 0.62                                   |       | (100,918 | ) | 0.60 |   |
| Cancelled                                    |       | (49,233                    | )          | 1.79                                   |       | (14,326 | ) | 0.57 |   |
| **Outstanding at End of Fiscal  Year**       | ** ** | **737,749**                | ** ** | **1.81**                               | ** ** | **887,998** | ** ** | **1.64** | ** ** |
| **Exercisable at End of Fiscal Year**        | ** ** | **362,000**                | ** ** | ** **                             | ** ** | **137,998** | ** ** | ** ** | ** ** |
|                                              |            |                            |            |                                        |            |  |  |  |  |  |  |

 

**Outstanding and Exercisable byPrice Range as of January 31, 2007**
| **OPTIONS OUTSTANDING** | ** ** | **OPTIONS EXERCISABLE** | ** ** |
|------------------------------|------------|------------------------------|------------|
| **PRICE RANGE**         | ** ** | ** **                   | ** ** | **NUMBER  OUTSTANDING** | ** ** | **REMAINING  LIFE** | ** ** | **WEIGHTED  AVERAGE  EXERCISE  PRICE** | ** ** | **NUMBER  EXERCISABLE** | ** ** | **WEIGHTED  AVERAGE  EXERCISE  PRICE** | ** ** |
| $1.25                        |       | 100,000                      |       | 6.87 |   | $ | 1.25 |   | 20,000 |   | $ | 1.25 |   |
| $1.50                        |       | 30,000                       |       | 5.34 |   | 1.50 |   | — |   | — |   |
| $1.80                        |       | 250,000                      |       | 8.36 |   | 1.80 |   | 50,000 |   | 1.80 |   |
| $2.00                        |       | 357,749                      |       | 4.58 |   | 2.00 |   | 292,000 |   | 2.00 |   |
| ** **                   | ** ** | **737,749**                  | ** ** | **6.23** | ** ** | **1.81** | ** ** | **362,000** | ** ** | **0.62** | ** ** |
| **Available For Grant**      | ** ** | **180,317**                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Vesting Schedule**

| Vested at January 31, 2007                             |       | 362,000     |       |
|--------------------------------------------------------|------------|-------------|------------|
| Vesting, fiscal year  ending January 31, 2008          |       | 145,749     |       |
| Vesting, fiscal year  ending January 31, 2009          |       | 80,000      |       |
| Vesting, fiscal year  ending January 31, 2010          |       | 80,000      |       |
| Vesting, fiscal year  ending January 31, 2011          |       | 70,000      |       |
| **Number of Options Outstanding  at January 31, 2007** | ** ** | **737,749** | ** ** |

 

**Directors stock option plan.**  In 1996, the Company adopted the “DirectorsStock Option Plan” (the “Directors Plan”). The Directors Plan was extended inAugust 2006 to terminate on April 30, 2011.Each non-employee director of theCompany is awarded options for 400 shares of stock on the last day of eachfiscal year unless another amount/date is approved by the Board of Directors;these grants do not require any additional approval from the Board of Directors.  No more than 20,000 options may be grantedpursuant to the Directors Plan.  TheDirectors 

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Plan provides thatoptions will vest 100% after one year of service and will expire 10 years fromthe grant date.  Pursuant to the terms ofthe Directors Plan, the exercise price of options must be equal to the marketvalue of the Company’s common stock on the date of the grant.  The following tables summarize the currentstatus of the Directors Plan:

|                                      | ** ** | **2007**                   | ** ** | **2006**                                     | ** ** |
|--------------------------------------|------------|----------------------------|------------|----------------------------------------------|------------|
| ** **                           | ** ** | **NUMBER OF  SHARES** | ** ** | **WEIGHTED  AVERAGE  EXERCISE   PRICE** | ** ** | **NUMBER OF  SHARES** | ** ** | **WEIGHTED  AVERAGE  EXERCISE   PRICE** | ** ** |
| **Outstanding at Beginning of Year** | ** ** | **10,000**                 | ** ** | **$**                                        | **1.59**   | ** ** | **2,400** | ** ** | **$** | **0.31** | ** ** |
| Granted Price > or =  Market      |       | 10,000                     |       | 1.00                                         |       | 7,600 |   | 2.00 |   |
| **Outstanding at End of Year**       | ** ** | **20,000**                 | ** ** | **1.30**                                     | ** ** | **10,000** | ** ** | **1.59** | ** ** |
| **Exercisable at End of Year**       | ** ** | **6,200**                  | ** ** | ** **                                   | ** ** | **2,400** | ** ** | ** ** | ** ** |
|                                      |            |                            |            |                                              |            |  |  |  |  |  |  |

 

**Outstanding and Exercisable byPrice Range as of January 31, 2007**

| OPTIONS OUTSTANDING | ** ** | **OPTIONS EXERCISABLE** | ** ** |
|--------------------------|------------|------------------------------|------------|
| **PRICE RANGE**     | ** ** | ** **                   | ** ** | **NUMBER  OUTSTANDING** | ** ** | **REMAINING  LIFE** | ** ** | **WEIGHTED  AVERAGE  EXERCISE  PRICE** | ** ** | **NUMBER  EXERCISABLE** | ** ** | **WEIGHTED  AVERAGE  EXERCISE  PRICE** | ** ** |
| $0.12                    |       | 400                          |       | 6.00 |   | $ | 0.12 |   | 400 |   | $ | 0.12 |   |
| $0.15                    |       | 800                          |       | 7.00 |   | 0.15 |   | 800 |   | 0.15 |   |
| $0.35                    |       | 400                          |       | 5.00 |   | 0.35 |   | 400 |   | 0.35 |   |
| $0.55                    |       | 800                          |       | 8.00 |   | 0.55 |   | 800 |   | 0.55 |   |
| $1.00                    |       | 10,000                       |       | 9.52 |   | 1.00 |   | — |   | 0.00 |   |
| $2.00                    |       | 7,600                        |       | 8.58 |   | 2.00 |   | 3,800 |   | 2.00 |   |
| **01-31-2007**           | ** ** | **20,000**                   | ** ** | **9.16** | ** ** | **1.30** | ** ** | **6,200** | ** ** | **1.35** | ** ** |
| **Available For Grant**  | ** ** | **—**                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                          |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Vesting Schedule**

| Vested at January 31, 2007                             |       | 6,200      |       |
|--------------------------------------------------------|------------|------------|------------|
| Vesting, fiscal year  ending January 31, 2008          |       | 8,800      |       |
| Vesting, fiscal year  ending January 31, 2009          |       | 5,000      |       |
| **Number of Options Outstanding  at January 31, 2007** | ** ** | **20,000** | ** ** |

 

**6. Commitments and Contingencies**

**Gaming reserve requirement.**  Pursuant to NGC Regulation 22.040, Leroy’s isrequired to maintain a reserve to cover any outstanding wagering liability suchas unpaid winning tickets, future tickets and telephone account deposits. Priorto September 1, 2006, the amount in this reserve was $2,400,000. Due toincreased wagering activity, the Company increased this reserve to $3,000,000as of September 1, 2006. The Company has met this requirement by the purchaseof a surety bond issued from Fidelity and Deposit Company of Maryland (asubsidiary of Zurich American Insurance) (“Fidelity”). The surety bond issecured by a $1,000,000 Irrevocable Letter of Credit (“ILOC”) issued to thebenefit of Fidelity by Great Basin Bank of Nevada (“Great Basin Bank”). TheILOC is secured by a certificate of deposit for $1,000,000 held by Great BasinBank. We believe the current surety bond will be sufficient 

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to satisfy our NGCRegulation 22.040 reserve requirement for the next 12 months.  An inability to maintain or increase thereserve as necessary would have an adverse impact upon the Company including,but not limited to, requiring a significant reduction in the number oflocations operated by Leroy’s and/or requiring a significant reduction in thehandle (total amount wagered).

**Litigation judgments and settlements.**  The Company has settled all previouslitigation, except for the “Racusin” matter discussed below. Currently, theCompany is not a party in any litigation and has no knowledge of any pendinglegal proceedings in any court or agency of government or governmentalauthority, except as noted below.  In accordance with an interpretation of SFAS No. 5, *Accountingfor Contingencies*, the Company has recorded allowances for probablelosses equal to the lower end of the estimated probable loss range for thefollowing matters and periodically revises these estimates as known facts andcircumstances change.

**Racusin.**  OnOctober 6, 2006, the United States Court of Appeals for the Ninth Circuit(the “9th Circuit”) reversed the decision of the AppellatePanel of the Ninth Circuit (the “BAP”), which previously ruled in our favorthat the bankruptcy claim of Michael Racusin, d/b/a M. Racusin &Company (“Racusin”), was subject to subordination under Section 510(b) ofthe U.S. Bankruptcy Code. In reversing the BAP’s ruling, the 9th Circuit ruled that Racusin’sclaim was not subject to subordination and remanded the case for furtherproceedings.

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

The manner in which Racusin’sclaim is ultimately resolved will be based on the 9th Circuit’s decision and a September 3,2004 Settlement Agreement among AWI, Leroy’s and Racusin (the “SettlementAgreement”), which is described further and appears in Exhibit 99.1 in the Form8-K that we filed on September 7, 2004.

If the 9th Circuit rehears the case andaffirms the BAP’s ruling, then Racusin’s claim will be resolved by the issuanceof 250,000 shares of Common Stock to Racusin, in accordance with the SettlementAgreement. Those shares were issued in Racusin’s name on July 27, 2005pursuant to the BAP’s ruling and are currently held in trust by the UnitedStates Bankruptcy Court for the District of Nevada pending a resolution of thismatter.

If the 9th Circuit declines to rehear thecase or if it rehears the case and reverses the BAP’s ruling, then the 250,000shares that we issued in Racusin’s name will be cancelled and Racusin’s claimwill be resolved by a series of cash payments by us to (or for the benefit of)Racusin, in accordance with the Settlement Agreement, in the aggregate amountof $2,682,374 plus interest at 8% per annum.

##### If the 9th Circuit grants our petition for rehearing, weanticipate that the rehearing would occur 12 to 18 months later. If ourpetition is denied, we anticipate that our payments to (or for the benefit of)Racusin will begin within 30 days after the denial.

**Operating leases.**  The Company has operating lease commitmentsfor the majority of its race and sports book locations and for leased officeequipment.  Future minimum lease paymentsunder non-cancelable operating leases total $541,704, $483,999, $423,824,$318,434 and $87,795, respectively for each of the five succeeding fiscal years.  Rent expense for all operating leases wasapproximately $631,500 and $482,421 during the fiscal years ended January 31,2007 and 2006, respectively.

**Long-term employment commitments.**  The Company has employment agreements withthe following executive officers:

VictorSalerno: The initial term of Mr. Salerno’s employment agreement expires onJanuary 31, 2008; the employment agreement will automatically renew for additional5-year terms unless either party gives the other party 180-days written noticeto terminate. During the initial term, Mr. Salerno can resign without causeupon 30 days written notice to AWI.  Mr.Salerno’s current annual base salary is $240,000, which is subject to annualreview.  In addition, Mr. Salerno isentitled to a performance bonus each year equal to 5% of our pre-tax earnings(as defined in the agreement) for the prior fiscal year, employer contributionsto a profit-sharing or retirement plan of not less than 4% of his base salary,health and life insurance coverage, and use of an automobile that we providefor him.

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BruceDewing: The initial term of Mr. Dewing’s employment agreement expires onJanuary 31, 2008; the employment agreement will automatically renew foradditional 3-year terms unless either party gives the other party 180-dayswritten notice to terminate.  During theinitial term, Mr. Dewing can resign without cause upon 30 days written noticeto us. Mr. Dewing’s current annual base salary is $180,000, which is subject toannual review.  In addition, Mr. Dewingis entitled to a performance bonus each year equal to 2% of our pre-taxearnings (as defined in the agreement) for the prior fiscal year, employercontributions to a profit-sharing or retirement plan of not less than 4% of hisbase salary, health insurance coverage for him and his wife, use of anautomobile that we provide for him, and stock options to purchase 250,000shares of our Common Stock under a five year vesting schedule.

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

| Fiscal Year Ending January 31, | ** ** | ** ** | ** ** | **Base  Salary** | ** ** | **Retirement  Plan** | ** ** | **Total** | ** ** |
|----------------------------------------------------|------------|------------|------------|------------------|------------|----------------------|------------|-----------|------------|
| 2007                                               |       | $          | 420,000    |             | $          | 16,800               |       | $         | 436,800    |   |
| 2008                                               |       | $          | 420,000    |             | $          | 16,800               |       | $         | 436,800    |   |

 

**7.  Related Party Transactions**

The Company has engagedin the following related-party transactions during the years ended January 31,2007 and 2006:

In return for personallyguaranteeing certain irrevocable letters of credit (“ILOCs”) obtained by theCompany to satisfy the NGC Regulation 22.040 reserve requirement, VictorSalerno was paid $8,750 by the Company on June 30, 2005 and $52,500 on June 30,2004.  Effective September 1, 2006, theILOCs were replaced with a surety bond from Fidelity which is nowcollateralized by a $1.0 million cash deposit, held at Great Basin Bank. 

See Note 11 for detailsof related party transactions relative to financing the acquisition ofSturgeon’s.

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**8.  IncomeTaxes**

The tax effect of significant temporarydifferences representing deferred tax assets and liabilities for the Company isas of January 31, 2007, follows:
| Deferred tax assets:             |       |          |        |
|----------------------------------|------------|---------------|-------------|
| Net operating  loss carryforward |       | $             | 1,601,889   |   |
| Depreciation and  amortization   |       | 88,797        |        |
| Deferred gain on  sale of asset  |       | 320,678       |        |
| Accrued liabilities              |       | 353,575       |        |
| Customer  deposits               |       | 53,958        |        |
| Other                            |       | 29,205        |        |
| ** **                       | ** ** | **2,448,102** | ** **  |
| Valuation allowance              |       | (1,891,407    | )           |
| ** **                       | ** ** | **556,695**   | ** **  |
| Deferred tax  liabilities:       | ** ** | ** **    | ** **  |
| Advance payments                 |       | (116,214      | )           |
| Net deferred tax assets          | ** ** | **$**         | **440,481** | ** ** |

 

Thedifference between the normal federal statutory tax rate of 34.00% applied toincome from continuing operations before income taxes and the Company’seffective tax rate is:
|                                                | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|------------------------------------------------|------------|------------|------------|------------|------------|
| Income taxes at  federal statutory rate        |       | $          | 622,438    |       | $          | 164,781 |   |
| Non-deductible  expenses                       |       | 92,321     |       | 8,497      |       |
| CSS dissolution                                |       | (1,106,283 | )          | —     |       |
| Benefit of Net  Operating Loss carryforwards   |       | 593,603    |       | (674,150   | )          |
| Other temporary  differences                   |       | (483,053   | )          | (346,726   | )          |
| Decrease in  deferred tax valuation allowances |       | 280,974    |       | 864,197    |       |
| ** **                                     | ** ** | **$**      | **—** | ** ** | **$**      | **16,599** | ** ** |

 

At January 31, 2007, the Company had federal taxnet operating loss (“NOL”) carryforwards available to potentially reduce futuretax obligations in the aggregate amount of $2,960,653; of which $1,856,102 isexpected to expire in 2019.  In assessingthe realizability of deferred tax assets, the Company considers whether it ismore likely than not that some portion or all of the deferred tax assets willnot be realized.  The ultimaterealization of deferred tax assets is dependent upon the generation of futuretaxable income during the periods in which those temporary differences becomedeductible. Management believes that the Company will continue to be profitablefor at least the short-term future and that it is therefore more likely thannot that our net deferred tax asset of $440,481, which resulted primarily fromNOLs, will be fully realized. The determination of profitability in the futureis partially based on the market penetration of our kiosks and systems sales;our sports betting volumes and other factors.

In June 2006, the FASB issued FASBInterpretation No. 48, Accounting for Uncertainty in Income Taxes, aninterpretation of FASB Statement No. 109, Accounting for Income Taxes (“FIN48”), effective for us beginning on February 1, 2007. FIN 48 clarifies therecognition threshold a tax position is required to meet before beingrecognized in the financial statements. FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosures, and transition of tax positions. Accordingly, taxpositions are analyzed to determine whether it is more likely than not theywill be sustained when examined by the appropriate tax authority. Positionsthat meet the more-likely-than-not criteria are measured to determine theamount of benefit to be recognized, whereas those positions that do not meetthe more-likely-than-not criteria are derecognized in the financial statements.FIN 48 will be effective for us for periods beginning on February 1, 2007.  Based on its evaluation, management believesthat adopting FIN 48 will not have a material effect on the Company’s net NOLcarryforwards or the related deferred tax assets or the valuation allowance.

Management has assessedthe valuation allowance against the remainder of the deferred tax assets and continuesto reevaluate this asset periodically. The change in the deferred tax assetvaluation allowance for the years ended January 31, 2007 and 2006, based onthese estimates, created an income tax expense (benefit) of approximately $500,000and $350,000, respectively, which offset the current income tax expense(benefit) for the year ended January 31, 2007.

**9.  Business Segments—** Wereport our results of operations through three operating segments:  Wagering, Hotel/Casino, and Systems.

**Wagering Segment**.  The Wagering Segment is comprised of theoperating results of Leroy’s and the allocation from AWI.  For fiscal 2006, AWIM and AWIG were also partof the Wagering Segment as AWIG reflected start-up costs for Sturgeon’s, whichwas not yet acquired at the time. For fiscal 2007, AWIG and Sturgeon’s areexcluded from the Wagering Segment and included in the Hotel/Casino Segment andAWIM is now reported in the Systems Segment. The following table indicates theprimary components of revenue and operating costs resulting in this segment’soperating income (loss).

43

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|                                      | ** ** | **Year Ended January 31,** | ** **    |
|--------------------------------------|------------|-------------------------------------------|---------------|
| ** **                           | ** ** | **2007**                                  | ** **    | **2006** | ** ** |
| **Revenue**                          | ** ** | **$**                                     | **9,885,568** | ** ** | **$** | **7,517,288** | ** ** |
| Direct Costs                         |       | 6,978,652                                 |          | 6,108,575 |   |
| Selling, General and  Administrative |       | 1,233,791                                 |          | 1,317,988 |   |
| Depreciation and  Amortization       |       | 196,185                                   |          | 255,775 |   |
| ** **                           | ** ** | **8,408,628**                             | ** **    | **7,682,338** | ** ** |
| **Operating Income (Loss)**          | ** ** | **$**                                     | **1,476,940** | ** ** | **($165,050** | **)** |
|                                      |            |                                           |               |  |  |  |  |

 

**Hotel/Casino Segment**. TheHotel/Casino Segment is comprised of the operating results of AWIG andSturgeon’s for fiscal 2007 (Note 11). AWIG’s results for 2006 reflected only the pre-acquisition costs forSturgeon’s and was categorized as part of the Wagering Segment. Accordingly,there is no reportable Hotel/Casino Segment for 2006. The following tableindicates the primary components of revenue and operating costs resulting inthis segment’s operating loss.
|                                                                | ** ** | **Year Ended January 31,** | ** **   |
|----------------------------------------------------------------|------------|-------------------------------------------|--------------|
| ** **                                                     | ** ** | **2007**                                  | ** **   |
| **Revenue**                                                    |       |                                      | ** **   |
| Casino                                                         |       | $                                         | 1,447,918    | ** ** |
| Hotel                                                          |       | 550,391                                   | ** **   |
| Food/Beverage                                                  |       | 966,927                                   | ** **   |
| Less: Casino Cash  Incentives and Other Promotional Allowances |       | (120,910                                  | )            |
| ** **                                                     | ** ** | **2,844,326**                             | ** **   |
| **Direct  Costs and Expenses**                                 |       |                                      | ** **   |
| Casino                                                         |       | 660,643                                   | ** **   |
| Hotel                                                          |       | 221,226                                   | ** **   |
| Food/Beverage                                                  |       | 1,009,135                                 | ** **   |
| Unallocated                                                    |       | 679,891                                   | ** **   |
|                                                           |       | 2,570,895                                 | ** **   |
| Selling, General and Administrative                            |       | 352,661                                   | ** **   |
| Depreciation and  Amortization                                 |       | 184,768                                   | ** **   |
| ** **                                                     | ** ** | **3,108,324**                             | ** **   |
| **Operating Loss**                                             | ** ** | **$**                                     | **(263,998** | **)** |

 

**Systems Segment.**  The Systems Segment is comprised of theoperating results of CBS and AWIM for fiscal 2007 and CBS and CSS in fiscal2006.  CSS was dissolved in fiscal 2007.AWIM was included in the Wagering Segment in fiscal 2006. The following tableindicates the primary components of revenue and operating costs resulting inthis segment’s operating income.
|                                      | ** ** | **Year Ending January 31,** | ** **    |
|--------------------------------------|------------|--------------------------------------------|---------------|
| ** **                           | ** ** | **2007**                                   | ** **    | **2006** | ** ** |
| **Revenue**                          | ** ** | **$**                                      | **6,640,499** | ** ** | **$** | **5,007,152** | ** ** |
| Direct Costs                         |       | 2,251,270                                  |          | 2,314,390 |   |
| Research and  Development            |       | 1,131,265                                  |          | 1,020,051 |   |
| Selling, General  and Administrative |       | 1,940,300                                  |          | 1,386,826 |   |
| Depreciation and  Amortization       |       | 329,142                                    |          | 154,459 |   |
| ** **                           | ** ** | **5,651,977**                              | ** **    | **4,875,726** | ** ** |
| **Operating Income**                 | ** ** | **$**                                      | **988,522**   | ** ** | **$** | **131,426** | ** ** |

 

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**Other information.**  Other information regarding the WageringSegment, Hotel/Casino Segment, and Systems Segment and certain otherunallocated items are set forth below.

|                       | ** ** | **2007**  | ** **    | **2006**   | ** ** |
|-----------------------|------------|-----------|---------------|------------|------------|
| Capital Expenditures  |       |      |          |       |       |
| Wagering              |       | $         | 438,223       |       | $          | 538,021 |   |
| Hotel/Casino          |       | 2,402,840 |          | —     |       |
| Systems               |       | 356,515   |          | 208,785    |       |
| Unallocated           |       | 20,888    |          | 33,456     |       |
| ** **            | ** ** | **$**     | **3,218,466** | ** ** | **$**      | **780,262** | ** ** |
| Identifiable Property |       |      |          |       |       |
| Wagering              |       | $         | 2,359,006     |       | $          | 5,410,514 |   |
| Hotel/Casino          |       | 1,789,735 |          | —     |       |
| Systems               |       | 2,438,322 |          | 1,788,741  |       |
| Unallocated           |       | 2,049,106 |          | 390,327    |       |
| ** **            | ** ** | **$**     | **8,636,169** | ** ** | **$**      | **7,589,582** | ** ** |

 

Goodwill, in the amountof $103,725, for the fiscal years ended January 31, 2007 and 2006, is relatedto the Systems Segment.

**10.  Supplementary Cash Flow Information**

**Reconciliation of net income tonet cash provided by (used in) operating activities.**

|                                                          | ** ** | **2007** | ** **    | **2006**   | ** ** |
|----------------------------------------------------------|------------|----------|---------------|------------|------------|
| Net income                                               |       | $        | 1,830,700     |       | $          | 419,229 |   |
| Depreciation and amortization                            |       | 737,224  |          | 410,234    |       |
| Deferred gain realized                                   |       | (327,600 | )             | (327,601   | )          |
| SFAS 123(R) stock based  compensation                    |       | 278,462  |          | —     |       |
| Non-cash litigation  judgments                           |       | 302,374  |          | (342,245   | )          |
| Decrease (increase) in  operating assets:                |       |     |          |       |       |
| Accounts  receivable                                     |       | (385,705 | )             | (211,530   | )          |
| Inventories                                              |       | 206,513  |          | (362,336   | )          |
| Prepaid expenses                                         |       | (166,054 | )             | (102,702   | )          |
| Other                                                    |       | (569,640 | )             | 22,362     |       |
| Increase (decrease) in  operating liabilities:           |       |     |          |       |       |
| Accounts payable                                         |       | 304,877  |          | (192,379   | )          |
| Accrued expenses                                         |       | 453,737  |          | (151,553   | )          |
| Unpaid winning  tickets                                  |       | 459,299  |          | (62,000    | )          |
| Customer  deposits and other                             |       | (85,385  | )             | 379,978    |       |
| **Net cash provided by (used in)  operating activities** | ** ** | **$**    | **3,038,802** | ** ** | **$**      | **(520,543** | **)** |
| **Cash paid for interest**                               | ** ** | **$**    | **203,313**   | ** ** | **$**      | **26,281** | ** ** |

 

**11. ****Acquisition of Sturgeon’s**

On March 1, 2006, AWIGacquired Sturgeon’s for $1,800,000 and separately purchased on-hand inventoriestotaling $148,075. In connection with the acquisition, AWIG incurredindebtedness of $1,800,000, which included a loan of $1,500,000 from a bank, collateralizedby a 1st deedof trust on the Sturgeon’s real estate and a security interest in the personalproperty and fixtures of Sturgeon’s. Interest is payable monthly at the WallStreet Journal-listed prime rate plus 2% and the principal is due in a singlepayment on March 1, 2008. An additional $300,000 was advanced by VictorSalerno, AWI’s CEO, and his wife, AWI’s General Counsel, under an agreementwith AWI that expires in 2011 and which provides for guarantees of Companyindebtedness and advances not to exceed $500,000 

45

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in the aggregate. Under theagreement monthly interest payments at 10.00% per annum were made by AWIto Mr. and Mrs. Salerno on the balance outstanding, which amount($300,000) has been fully repaid. In addition, the Company agreed to reimburseMr. and Mrs. Salerno for finance charges, fees and other expensesthey incur under a $500,000 personal revolving line of credit with their bank,to the extent the line of credit was or will be used to provide funding for theCompany.

In accordance with SFASNo. 141, *Business Combinations*,the Company performed a valuation corroborated by an independent appraisalreport to determine, among other things, the cost of the acquired entity and toassign that cost to the assets acquired on the basis of their fair values.Based upon this valuation process, the Company determined an overall assetvalue for Sturgeon’s of $2,091,570, which amount exceeded the purchase price of$1,800,000 and resulting in tentative negative goodwill in the amount of $291,570.The Company attributed the negative goodwill primarily to the value of the landwhich increased dramatically between the time the purchase agreement wasexecuted and the time the Nevada Gaming Commission approved the acquisition andit was consummated. However, pursuant to paragraphs 44 and 45 of SFASNo. 141, the negative goodwill was apportioned to each asset class on apro rata basis. As all eligible assets were reduced on a pro rata basis and accordingly,no unallocated negative goodwill remained to be recognized as an extraordinarygain from the acquisition of Sturgeon’s nor was any portion of the purchaseprice available for allocation to future operations.

The following unaudited proforma consolidated financial information has been prepared assuming that theacquisition of Sturgeon’s had occurred on February 1, 2005, the beginning offiscal year 2006.

|                             | ** ** | **Fiscal Years Ended January 31,** | ** ** |
|-----------------------------|------------|--------------------------------------------------------|------------|
| ** **                  | ** ** | **2007**                                               | ** ** | **2006** | ** ** |
| Revenues                    |       | 19,554,416                                             |       | 14,708,463 |   |
| Operating Expenses          |       | 17,428,299                                             |       | 13,907,194 |   |
| Operating Income            |       | 2,126,117                                              |       | 801,269 |   |
| Other Expense               |       | (356,432                                               | )          | (455,120 | ) |
| Income Before  Income Taxes |       | 1,769,685                                              |       | 346,149 |   |
| Income Tax Provision        |       | —                                                 |       | 17,000 |   |
| Net Income                  |       | 1,769,685                                              |       | 329,149 |   |
| Basic Income Per Share      |       | $                                                      | 0.21       |   | 0.16 |   |
| Diluted Income Per  Share   |       | $                                                      | 0.21       |   | 0.15 |   |

 

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These unaudited pro formaresults are presented for comparative purposes only. The pro forma results arenot necessarily indicative of what our actual results would have been had theacquisition been completed as of the beginning of each fiscal year, or offuture results.

**12.  Financial Instruments**

The Company’s financialinstruments consist of cash and cash equivalents, restricted cash, accounts andnotes receivable, accounts payable, accrued expenses, unpaid winning tickets,advance deposits, and long-term debt. The Company’s cash equivalents are diversified among security types andissuers, and approximate fair value.  Thefair values of other financial instruments that are short-term or that havelittle or no risk are considered to have a fair value equal to book value.  Assets and liabilities that are included inthis category are cash, accounts receivable, accounts payable, accruedexpenses, unpaid winning tickets and advance deposits.  The Company believes the fair values of notesreceivable and long-term liabilities are also not materially different fromtheir carrying values due to the instruments’ interest rates approximatingmarket rates for similar borrowings at January 31, 2007 and 2006.

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**Item 8.    Changes in and Disagreements With Accountants on Accounting andFinancial Disclosure**

None.

**Item 8A.Controls and Procedures**

We carried out anevaluation of the effectiveness of the design and operation of our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under theExchange Act as of January 31, 2007. This evaluation was carried out under the supervision and with theparticipation of our management, including our CEO, and Interim PrincipalFinancial Officer, Mr. Victor Salerno. Based upon that evaluation, our CEO, whois also the Interim Principal Financial Officer, concluded that our disclosurecontrols and procedures are not effective. There were no changes in our internal control over financial reportingthat occurred during our fourth fiscal quarter that has materially affected, oris reasonably likely to materially affect, our internal control over financialreporting except as reported below.

Our former CFO gave us 30days written notice of termination of his employment on November 17, 2006.  Since then, we have appointed persons toassist in the preparation of our quarterly and annual reports on Forms 10-QSBand 10-KSB, respectively, and we have continued to seek personnel on both afull-time and part-time basis for our accounting department.  Thus far, we have not found a suitablepermanent replacement to fill the CFO position nor have we hired enough otheraccounting staff.  That situation,together with our relatively small accounting staff, coupled with a concurrentthree-year routine gaming audit, created the need for additional time tocomplete our Form 10-KSB and thus was not timely.  As such we believe we have a material weaknessdue to this issue. We are making efforts to find a suitable replacement CFO andtrain our new staff.

Disclosure controls andprocedures are controls and other procedures that are designed to ensure thatinformation required to be disclosed in our reports filed or submitted underthe Exchange Act is recorded, processed, summarized and reported, within thetime periods specified in the SEC’s rules and forms. Disclosure controls andprocedures include, without limitation, controls and procedures designed toensure that information required to be disclosed in our reports filed orsubmitted under the Exchange Act is accumulated and communicated to management,including our CEO and Interim Principal Financial Officer, as appropriate, toallow timely decisions regarding required disclosure.

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met.  In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events.  Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

**Item8B.  Other Information**

None.

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**PART III**

**Item 9.    Directors, Executive Officers, Promoters and Control Persons andCorporate Governance; Compliance with Section 16(a) of the Exchange Act**

Our directors andexecutive officers are as follows:
| **Name**              | ** ** | **Age** | ** ** | **Position**                                                                        |
|-----------------------|------------|---------|------------|-------------------------------------------------------------------------------------|
| Victor J.  Salerno    |       | 63      |       | President, CEO,  COO, Chairman of the Board and Interim Principal Financial Officer |
| Robert R.  Barengo    |       | 65      |       | Director                                                                            |
| W. Larry Swecker      |       | 62      |       | Director                                                                            |
| Judith L.  Zimbelmann |       | 55      |       | Director                                                                            |
| Bruce Dewing          |       | 57      |       | Director and  President of AWIG                                                     |

**Victor J. Salerno** has beenour President, CEO, COO, and Chairman of the Board since our inception.  On December 18, 2006, Mr. Salerno wasappointed as our Interim Principal Financial Officer, due to the resignation ofthe former CFO. Mr. Salerno has been the President, CEO and a Director of Leroy’ssince September, 1979.  Mr. Salernoserved as an Executive Vice-President and Director of Autotote CBS Corporation(subsequently purchased by us and renamed Computerized Bookmaking Systems,Inc.).  He is a past President of theNevada Association of Race and Sports Operators

**Robert R. Barengo** became aDirector on July 1, 2005 and previously served on our Board of Directors from1992 to 2000.  Mr. Barengo has owned andoperated his own law practice for over 30 years during which he has handled,among other matters, general business, municipal finance, bonding, investmentbanking, government and administration law, and gaming law.  Mr. Barengo has extensive elected office andlegislative experience as a Nevada Assemblyman (1972-1982) where he served onvarious committees including Interim Finance, Ways and Means, Commerce andJudiciary; Chairman of the Judiciary Committee (1973-1979); Speaker Pro Tempore(1978-1981); Chairman of the Legislative Commission (1981-1983); Speaker of theAssembly (1981-1983); and Judge Pro-Tem for the City of Sparks Municipal Courtand the City of Reno Municipal Court (1976-1995).  Mr. Barengo also served on the Board ofDirectors of Riviera Holdings Corporation, a publicly reporting company, from1992 to April 2005 and also served as that company’s Director of Government andPublic Affairs from January 2001 to April 2005. Mr. Barengo serves as Chairmanof the Audit Committee.

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

**Judith L. Zimbelmann** became aDirector in January, 2001 and serves on the Audit Committee and theCompensation Committee Ms. Zimbelmann is the daughter of Leroy Merillat, thefounder of Leroy’s Horse & Sports Place, and was formerly married to VictorSalerno.  Ms. Zimbelmann is a privateinvestor with numerous holdings and is a member and officer of UV Doctor, LLC(which provides ultra-violet lighting for sterilization).

**Bruce Dewing** became a Director in July, 2003 and President of AWIG in July, 2005. Mr. Dewing has over thirty years of progressive experience in hotel/casino senior level management positions.  Mr. Dewing was formerly the President of the Holder Hospitality Group, Inc. where he oversaw the daily operations of five casinos, an AM radio station, a statewide (Nevada) slot route, several event companies and over 1,500 executives and employees.  Mr. Dewing is a founding member of the Air Service Task Force for Washoe County (Nevada) Airport Authority, a member of the Advisory Board to Washoe Airport Authority, a Board member of the Reno Air Race Association, and a Board member of the Nevada Hotel and Lodging Association.

49

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**Licensing.**  Pursuant to Nevada gaming regulations/statutesand the status of Leroy’s, AWIM, AWIG and Sturgeon’s as gaming licensees,officers and directors of Leroy’s, AWIM, AWIG and Sturgeon’s must beinvestigated and licensed by the Commission, a process that may be both lengthyand expensive.  Mr. Salerno is licensedby the Commission to be an officer and director of Leroy’s, AWIM and AWIG.  In addition, Mr. Dewing is licensed by theCommission to be an officer and director of AWIG. Judith Zimbelmann is licensedby the Commission to be an officer and director of Leroy’s, AWIM and AWIG.

### **Involvementin certain legal proceedings.**  To the best of our knowledge, during the pastfive years, none of the following occurred with respect to our directors orexecutive officers:  (1) any bankruptcypetition filed by or against any business of which such person was a generalpartner or executive officer either at the time of the bankruptcy or within twoyears prior to that time (with the exception of the Chapter 11 proceedings forAWI and Leroy’s, during which Mr. Salerno held his positions with us); (2) anyconviction in a criminal proceeding or being subject to a pending criminalproceeding  (excluding  traffic violations and other minor offenses); (3) being subject  to  anyorder, judgment or decree, not subsequently reversed, suspended or  vacated, of  any  court of  any  competent jurisdiction,  permanently  or temporarily enjoining, barring, suspendingor otherwise limiting his or her involvement in any  type of business, securitiesor banking activities; and (4) being found by a  court  of competent  jurisdiction  (in a  civil action), the SEC or theCommodities  Futures  Trading Commission  to  have violated a federal or state securities or commodities law, and thejudgment has not been reversed, suspended or vacated.

**Section 16(a) beneficial ownership reportingcompliance. **Section 16(a) of the Exchange Act requires our directors and executiveofficers and persons who beneficially own more than 10% of our common stock tofile with the SEC certain reports regarding their stock ownership (“Section16(a) Reports”).  Such persons arerequired to furnish us with copies of all Section 16(a) Reports they file.  Based solely on our review of such reports(and amendments thereto) that were furnished to us and written representationsmade to us by reporting persons in connection with certain of these reportingrequirements, we believe that all the reporting persons met their Section 16(a)reporting obligations on a timely basis during our last fiscal year, except asfollows:  Robert Barengo made a late Form4 filing to report stock options that we granted to him on August 7, 2006 andJudith Zimbelmann made a late Form 4 filing to report her exercise of stockoptions on August 3, 2006. We have also determined that on July 2006, there wasa late filing of a Form 4 by W. Larry Swecker to report his purchaseof shares on October 31, 2001.

**Code ofethics disclosure compliance.** We have adopted, and have filed with the SEC, a Code of Ethics forFinancial Executives, which include our principal executive officer, principalfinancial officer, principal accounting officer or controller, or personsperforming similar functions.

**Item 10. Executive Compensation**

The following table summarizesthe compensation of our executive officers, including one who left employment, andremuneration paid or accrued by the Company for the last two fiscal years toour named executive officers.

50

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**Summary Compensation Table**
| Name and principal

**position**

**(a)**                           | ** ** | **Year  Ended  01/31  (b)** | ** ** | **Salary  (c)** | ** ** | **Bonus  (d)** | ** ** | **Stock**

**Awards  (e)** | ** ** | **Option  Awards  (5)**(f) | ** ** | **Non-equity  incentive  plan**

**compensation**(7)  (g) | ** ** | **Nonqualified  deferred  compensation**

**earnings  (h)** | ** ** | **All other  compensation**(3)  (i) | ** ** | **Total  (j)** | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------|------------|----------------|------------|----------------------------|------------|----------------------------|------------|-----------------------------------------------------------|------------|-------------------------------------------------------------|------------|------------------------------------------|------------|----------------|------------|
| Victor Salerno, CEO, COO, President, and  Interim Principal Financial Officer |       | 2007                        |       | $               | 240,000    |           | —     |                       | —     |                       | $          | 30,104                                                    |       | $                                                           | 21,791     |                                     | —     |           | $          | 18,780 |   | $ | 310,765 |   |
|                                                                               |       | 2006                        |       | $               | 240,000    |           | —     |                       | —     |                       | —     |                                                      | $          | 21,791                                                      |       | —                                   |       | $              | 8,424      |   | $ | 270,215 |   |
| ** **                                                                    | ** ** | ** **                  | ** ** | ** **      | ** ** | ** **     | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                                                | ** ** | ** **                                                  | ** ** | ** **                               | ** ** | ** **     | ** ** |
| Timothy F. Lockinger, Former CFO,  Secretary, Treasurer and Director          |       | 2007                        |       | $               | 144,231    | (2)            | —     |                       | —     |                       | $          | 30,104                                                    | (6)        | $                                                           | 8,717      |                                     | —     |           | $     | 278,557 | (4) | $ | 461,609 |   |
|                                                                               |       | 2006                        |       | $               | 150,000    |           | —     |                       | —     |                       | —     |                                                      | $          | 8,717                                                       |       | —                                   |       | $              | 5,270      |   | 163,987 |   |
| ** **                                                                    | ** ** | ** **                  | ** ** | ** **      | ** ** | ** **     | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                                                | ** ** | ** **                                                  | ** ** | ** **                               | ** ** | ** **     | ** ** |
| Bruce Dewing, Director of AWI and  President of AWIG                          |       | 2007                        |       | $               | 180,000    | (1)            | —     |                       | —     |                       | $          | 109,139                                                   |       | $                                                           | 8,717      |                                     | —     |           | $          | 10,890 |   | $ | 308,746 |   |
|                                                                               |       | 2006                        |       | $               | 89,077     | (1)            | —     |                       | —     |                       | —     |                                                      | $          | 8,717                                                       |       | —                                   |       | —         |       | $ | 97,794 |   |

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(1)   Mr. Dewing’s annual salary as President ofAWIG is $180,000; since being employed by AWIG in July, 2005, Mr. Dewing nolonger receives compensation as a non-employee Director of AWI.  The amounts reported for the fiscal yearending January 31, 2006 reflect our payments to Mr. Dewing as a non-employeeDirector for the period February 1, 2005 through June 30, 2005 and as Presidentof AWIG for the period July 1, 2005 through January 31, 2006.  Prior to fiscal year ending January 31, 2006,Mr. Dewing was not an executive officer. 

(2)   Mr. Lockinger resigned his positions as CFO,Secretary, and Treasurer effective December 14, 2006 and resigned his positionas Director on February 9, 2007. (See footnotes 4 and 6 in this section below.)

(3)   These amounts include the Company’s matchingcontributions under our 401(k) plan.  Mr.Dewing was not eligible for our 401(k) plan until he completed one year ofservice (on June 30, 2006). Vehicle expenses are also included in theseamounts.

(4)   The Company accrued $270,000 for severancepursuant to Mr. Lockinger’s severance agreement; which was paid to him inFebruary 2007. 

(5)   The dollar amounts in column (f) are the sameamounts recognized in our consolidated financial statements for stock-basedcompensation expense in accordance with FAS 123(R) for these executive officersfor fiscal 2007. We included those amounts in the “Selling General andAdministrative Expenses” line item in our Consolidated Statements of Operationsfor the year ended January 31, 2007, which appear in our financialstatements in this Form 10-KSB.  Pleaserefer also to notes 1 and 5 to those financial statements for further informationabout our calculation of those amounts, which we based on the reported marketprice of our common stock on the OTCBB on the date we granted the options.

(6)   Options for 25,000 shares that we previouslygranted to Mr. Lockinger were terminated on December 14, 2006 inconnection with the termination of his employment.  The amount reported in the table does notreflect the termination of these options.

(7)   These amounts are the annual performancebonuses that the executives earned under their respective employmentagreements, which are based on a pre-established percentage of our pre-taxearnings (as defined in their agreements) for the reported fiscal year (5% forMr. Salerno; 4% for Mr. Dewing and Mr. Lockinger).

**Employment agreements.** We have thefollowing employment agreements with the following executive officers;

Victor Salerno:  Mr. Salerno’s employment agreement becameeffective on July 1, 2002 and the initial term expires on January 31,2008.  The employment agreement willautomatically renew for successive five-year terms unless either party givesthe other party 180-days written notice to terminate.  During the initial term, Mr. Salerno canresign without cause upon 30 days’ written notice to us.  Mr. Salerno’s current annual base salary is$240,000, which is subject to annual review. In addition, Mr. Salerno is entitled to an annual performance bonusequal to 5% of our pre-tax earnings (as defined in his agreement) for the priorfiscal year, employer contributions to a profit-sharing or retirement plan ofnot less than 4% of his base salary, health and life insurance coverage, anduse of an automobile that we provide for him. Mr. Salerno is also entitled to participate in our benefit plansavailable to our officers and employees generally.  Mr. Salerno’s agreement also entitles him to certainbenefits if his employment terminates within 24 months after a change incontrol of AWI, as described below under “Payments in the Event of a Change inControl.”

Bruce Dewing:  Mr. Dewing’s employment agreement becameeffective on July 1, 2005 and the initial term expires on January 31,2008.  The employment agreement willautomatically renew for successive three-year terms unless either party givesthe other party 180-days written notice to terminate.  During the initial term, Mr. Dewing canresign without cause upon 30 days’ written notice to us.  Mr. Dewing’s current annual base salary is$180,000, which is subject to annual review. In addition, Mr. Dewing is entitled to a performance bonus each yearequal to 2% of our pre-tax earnings (as defined in his agreement) for the priorfiscal year, employer contributions to a profit-

51

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sharing or retirementplan of not less than 4% of his base salary, health insurance coverage for himand his wife, use of an automobile that we provide for him, and options topurchase 250,000 shares of our common stock under a five-year vestingschedule.  Mr. Dewing is also entitled toparticipate in our benefit plans available to our officers and employeesgenerally.  Mr. Dewing’s agreement alsoentitles him to certain benefits if his employment terminates within 24 monthsafter a change in control of AWI, as described below under “Payments in theEvent of a Change in Control.”

For two years followingthe termination of Mr. Salerno’s or Mr. Dewing’s employment with us,he is restricted from (1) contacting, soliciting or accepting businessfrom any of our customers with whom he had business contact on our behalf or(2) soliciting our employees or prospective employees to leave theiremployment with us.

The following table providesinformation concerning executive officers’ unexercised stock options as ofJanuary 31, 2007.

**OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END**

 
| ** **         | ** ** | **Option awards**                                                                                                     | ** ** |
|--------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|
| **Name**

**(a)**  | ** ** | **Number of**

**securities**

**underlying**

**unexercised**

**options**

**# exercisable**

**(1)**

**(b)** | ** ** | **Number of**

**securities**

**underlying**

**unexercised**

**options**

**# unexercisable **

**(1)**

**(c)** | ** ** | **Equity**

**incentive plan**

**awards:**

**Number of**

**securities**

**underlying**

**unearned**

**options**

** **#

**(d)** | ** ** | **Option**

**exercise**

**price**

**$**

**(e)** | ** ** | **Option**

**expiration**

**date**

**(f)** | ** ** |
| Victor J. Salerno  |       | 25,000                                                                                                                     |       | 25,000 |   | — |   | $ | 2.00 |   | 08/31/2012 |   |
| Timothy  Lockinger |       | —                                                                                                                     |       | 25,000 |   | — |   | $ | 2.00 |   | 05/06/2007 |   |
| Bruce Dewing       |       | 50,000                                                                                                                     |       | 200,000 |   | — |   | $ | 1.80 |   | 06/10/2015 |   |
| Bruce Dewing       |       | 400                                                                                                                        |       | — |   | — |   | $ | 0.15 |   | 01/31/2014 |   |
| Bruce Dewing       |       | 400                                                                                                                        |       | — |   | — |   | $ | 0.55 |   | 01/31/2015 |   |

----

(1)   For information on vesting dates, see theschedule of stock option grants following the Director Compensation tablebelow.

**Payments in the Event of a Change in Control**

Our employmentagreements with Mr. Salerno and Mr. Dewing, which are described above followingthe Summary Compensation Table, provide for certain payments to each of them inconnection with a termination of their employment within 24 months after achange in control of AWI.

Mr. Salerno’s agreementprovides that if his employment terminates for any reason (other than death,disability or his resignation without cause during the initial term of hisagreement, which ends on January 31, 2008) within 24 months after a change incontrol of AWI, then we will pay, as termination benefits to Mr. Salerno, anamount equal to five times his base salary then in effect and we will continuehis coverage under our health and welfare benefit plans for five years.  Also in the event of a change in control ofAWI, all of his stock options and any other stock-based awards will becomeexercisable or non-forfeitable.

Mr. Dewing’s agreementprovides that if his employment terminates for any reason (other than death,disability or his resignation without cause during the initial term of hisagreement, which ends on January 31, 2008) within 24 months after a change incontrol of AWI, then we will pay, as termination benefits to Mr. Dewing, anamount equal to three times his base salary then in effect and we will continuehis coverage under our health and welfare benefit plans for 30 months.  Also in the event of a change in control ofAWI, all of his stock options and any other stock-based awards will becomeexercisable or non-forfeitable.

52

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**Compensation of Directors. **Directors who are not our employees orconsultants receive a fee of $1,000 per month plus travel expenses.  In addition, each Committee Chairman (auditcommittee, compensation committee, etc.) receives an additional $1,000 permonth for each committee chaired. The following table summarizes Directorcompensation for the fiscal year ended January 31, 2007.

**DirectorCompensation**
| **Name**

**(a)** | ** ** | **Fees**

**Earned or**

**Paid in**

**Cash**

**$**

**(b)** | ** ** | **Stock**

**Awards**

**$**

**(c)** | ** ** | **Option**

**Awards**

**$**

**(d)** | ** ** | **Non-Equity**

**Incentive Plan**

**Compensation**

**$**

**(e)** | ** ** | **Nonqualified**

**Deferred**

**Compensation**

**Earnings**

**$**

**(f)** | ** ** | **All Other**

**Compensation**

**$**

**(g)** | ** ** | **Tota**

**$**

**Sum (b-g)** | ** ** |
|-------------------|------------|--------------------------------------------------------------------------|------------|---------------------------------------|------------|----------------------------------------|------------|---------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------|------------|
| W. Larry Swecker  |       | $                                                                        | 24,000     |                                  | —     |                                   | $          | 4,108                                                                     |       | —                                                                         |       | —                                               |       | —                              |       | $ | 28,108 |   |
| Robert R. Barengo |       | $                                                                        | 18,000     |                                  | —     |                                   | $          | 4,108                                                                     |       | —                                                                         |       | —                                               |       | —                              |       | $ | 22,108 |   |

----

(a)   This table includes only non-employeedirectors whose compensation is not reported in the Summary Compensation Table.

(b)   W. Larry Swecker is chairman of theCompensation Committee for fiscal 2007. Robert R. Barengo became chairman of the Audit Committee in August 2006.

(c)   No stock awards were given to anynon-employee Directors or consultant. The dollar amounts in column (d) are thesame amount recognized in our consolidated financial statements for stock-basedcompensation expense in accordance with FAS 123R for these Directors.  Mr. Swecker and Mr. Barengo were issued 5,000each in stock option awards in fiscal 2007. We included those amounts in the“Selling General and Administrative” line item in our Consolidated Statement ofOperations for the year ended January 31, 2007, which appears in ourfinancial statements in this Form 10-KSB. Please refer also to notes 1 and 5 to those financial statements forfurther information about our calculation of those amounts, which we based onthe reported market price of our common stock on the OTCBB on the date wegranted the options.

(d)   Mr. Swecker had 10,400 in stock option awardsoutstanding at January 31, 2007. Mr. Barengo had 8,800 in stock option awardsoutstanding at January 31, 2007.

We have granted the following stock options toour Directors (excluding terminated options):
| **DATE**   | ** ** | **GRANTED TO**       | ** ** | **NUMBER  OF SHARES** | ** ** | **TERMS**                                                                                                                                                                                                |
|------------|------------|----------------------|------------|-----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 08/09/2001 |       | Victor J. Salerno    |       | 30,000 (1)            |       | $0.70 exercise price per share; became fully  exercisable on August 9, 2001; exercised on August 8, 2006                                                                                                 |
| 08/09/2001 |       | Timothy F. Lockinger |       | 15,000 (1)            |       | $0.70 exercise price per share; exercised on  December 21, 2005                                                                                                                                          |
| 08/09/2001 |       | Judith L. Zimbelmann |       | 1,200 (1)             |       | $0.60 exercise price per share; became fully  exercisable on August 9, 2001; exercised on August 3, 2006                                                                                                 |
| 01/31/2002 |       | W. Larry Swecker     |       | 400 (2)               |       | $0.35 exercise price per share; became fully  exercisable on January 31, 2003; expires on January 31, 2012                                                                                               |
| 01/31/2003 |       | W. Larry Swecker     |       | 400 (2)               |       | $0.12 exercise price per share; became fully  exercisable on January 31, 2004; expires on January 31, 2013                                                                                               |
| 01/31/2004 |       | W. Larry Swecker     |       | 400 (2)               |       | $0.15 exercise price per share; became fully  exercisable January 31, 2005; expires on January 31, 2014                                                                                                  |
| 01/31/2004 |       | Bruce Dewing         |       | 400 (2)               |       | $0.15 exercise price per share; became fully  exercisable on January 31, 2005; expires on January 31, 2014                                                                                               |
| 01/31/2005 |       | W. Larry Swecker     |       | 400 (2)               |       | $0.55 exercise price per share; became fully  exercisable on January 31, 2006; expires on January 31, 2015                                                                                               |
| 01/31/2005 |       | Bruce Dewing         |       | 400 (2)               |       | $0.55 exercise price per share; became fully  exercisable on January 31, 2006; expires on January 31, 2015                                                                                               |
| 07/11/2005 |       | Bruce Dewing         |       | 250,000 (1)           |       | $1.80 exercise price per share; fully exercisable  over a 5-year vesting schedule (20% per year commencing June 10, 2006);  expires on June 10, 2015                                                     |
| 08/31/2005 |       | Robert R. Barengo    |       | 3,800 (2)             |       | $2.00 exercise price per share; fully exercisable  over a 2-year vesting schedule (50% per year commencing August 31, 2006);  expires on August 31, 2015                                                 |
| 08/31/2005 |       | Timothy F. Lockinger |       | 50,000 (1)            |       | $2.00 exercise price per share; fully exercisable  over a 2-year vesting schedule (50% per year commencing August 31, 2006);  expires on August 31, 2012; 25,000 options terminated on December 14, 2006 |
| 08/31/2005 |       | Victor J. Salerno    |       | 50,000 (1)            |       | $2.00 exercise price per share; fully exercisable  over a 2-year vesting schedule (50% per year commencing August 31, 2006);  expires on August 31, 2012                                                 |
| 08/31/2005 |       | W. Larry Swecker     |       | 3,800 (2)             |       | $2.00 exercise price per share; fully exercisable  over a 2-year vesting schedule (50% per year commencing August 31, 2006);  expires on August 31, 2015                                                 |
| 08/31/2005 |       | Judith Zimbelmann    |       | 3,000 (1)             |       | $2.00 exercise price per share; fully exercisable  over a 2-year vesting schedule (50% per year commencing August 31, 2006);  expires on August 31, 2012                                                 |
| 08/07/2006 |       | Robert R. Barengo    |       | 5,000 (2)             |       | $1.50 exercise price per share; fully exercisable  over a 2-year vesting schedule (50% per year commencing August 7, 2007);  expires on August 7, 2011                                                   |
| 08/07/2006 |       | W. Larry Swecker     |       | 5,000 (2)             |       | $1.50 exercise price per share; fully exercisable  over a 2-year vesting schedule (50% per year commencing August 7, 2007);  expires on August 7, 2011                                                   |

----

(1)           Stockoptions were issued pursuant to our 2001 Stock Option Plan.

(2)           Stockoptions were issued pursuant to our Director’s Stock Option Plan.

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**Item 11. Security Ownership ofCertain Beneficial Owners and Management and Related Stockholder Matters.**

The following table setsforth, as of May 27, 2007, the number and percentage of outstanding shares ofour common stock, which, according to information supplied to us, arebeneficially owned by: (i) each person who is a beneficial owner of more than5.00% of our outstanding common stock; (ii) each of our directors, and namedexecutive officers individually; and (iii) all of our current directors andexecutive officers as a group.  Under SECrules, a person is deemed a beneficial owner of our common stock with respectto which he or she has or shares voting power (which includes the power to voteor to direct the voting of the security), or investment power (which includesthe power to dispose of, or to direct the disposition of, the security).

A person is also deemedthe beneficial owner of shares with respect to which he or she could obtainvoting or investment power within 60 days of May 27, 2007 (such as upon theexercise of options or warrants).  Thepercentage of outstanding common stock represented by each named person’s stockownership assumes the exercise by that person of all stock options that areexercisable within 60 days of May 27, 2007 but does not assume the exercise ofstock options by any other persons.  Thepercentage of outstanding common stock represented by the stock ownership ofall directors and executive officers as a group assumes the exercise by allmembers of that group of their respective stock options that are exercisablewithin 60 days of May 27, 2007, but does not assume the exercise of options byany persons outside of that group.

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

54

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| **Name**                                            | ** ** | **Number of Shares** | ** ** | **Percentage of  Outstanding Shares** | ** ** |
|-----------------------------------------------------|------------|--------------------------------|------------|-------------------------------------------------|------------|
| Victor J. Salerno (1)                               |       | 2,463,054                      |       | 29.99                                           | %          |
| Timothy Lockinger (2)                               |       | 61,685                         |       | 0.75                                            | %          |
| Judy Zimbelmann (3)                                 |       | 1,002,700                      |       | 12.21                                           | %          |
| Robert R. Barengo (4)                               |       | 526,900                        |       | 6.42                                            | %          |
| W. Larry Swecker (5)                                |       | 23,500                         |       | 0.29                                            | %          |
| Bruce Dewing (6)                                    |       | 95,600                         |       | 1.16                                            | %          |
| All directors and executive officers as a group (7) |       | 4,111,754                      |       | 50.07                                           | %          |

p

----

| (1) |   | Mr. Salerno has 25,000 in vested stock options that  he has the right to exercise to acquire shares within the next 60 days, (July  27, 2007) which are included in the table above.                                                                                                                                                 |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Mr. Lockinger resigned from the Company as CFO,  Secretary and Treasurer as of February 9, 2007 and as a Director as of  December 14, 2006. All of his unexercised stock options have terminated or  expired. His stock ownership is not included in the stock ownership of  directors and executive officers as a group.            |
| (3) |   | Ms. Zimbelmann has 1,500 in vested stock options  that she has the right to exercise to acquire shares within the next 60 days,  (July 27, 2007) which are included in the table above.                                                                                                                                              |
| (4) |   | Mr. Barengo has 1.900 in vested stock options that  he has the right to exercise to acquire shares within the next 60 days, (July  27, 2007) which are included in the table above.                                                                                                                                                  |
| (5) |   | Mr. Swecker has 3,500 in vested stock options that  he has the right to exercise to acquire shares within the next 60 days, (July  27, 2007) which are included in the table above.                                                                                                                                                  |
| (6) |   | Mr. Dewing and his wife share the voting and  investment power with respect to 44,800 shares included above. Mr. Dewing has  50,800 in vested stock options that he has the right to exercise to acquire  shares within the next 60 days, (July 27, 2007) which are included in the  table above.                                    |
| (7) |   | Our current directors and executive officers as a  group have options for 82,700 shares, which they can exercise within the next  60 days (by July 27, 2007). Those shares are included in the table above. Mr.  Lockinger’s stock ownership is not included in this total of all directors  and executive officers as a group. |

 

Formore information regarding common stock authorized for issuance under ourequity compensation plans, please read Part II, Item 5 of this Form 10-KSB.

**Item 12.  Certain Relationships and Related Transactions**

Other thanas set forth below, there have been no transactions during our last two fiscalyears, nor are there any proposed transactions, to which we were or are to be aparty, in which any of the following persons had or is to have a direct orindirect material interest:

(a)          anydirector or executive officer;

(b)         anyperson who beneficially owns more than 5% of our outstanding common stock; or

(c)          anymember of the immediate family (including spouse, parents, children, siblingsand in-laws) of any of the foregoing persons.

Ourpolicy regarding related transactions requires that any director or executiveofficer who has an interest in any transaction disclose the presence and thenature of the interest to our Board of Directors prior to any approval of thetransaction by our Board of Directors. The transaction may then be approved by a majority of our disinteresteddirectors, provided that an interested director may be counted in determiningthe presence of a quorum at the meeting of our Board of Directors to approvethe transaction.  Our policy regardingcompensation for directors and executive officers is that our Board ofDirectors may, without regard to personal interest, establish the compensationof directors for services in any capacity.

Victor J. Salerno (our President, CEO, COO andChairman of the Board of Directors) owns 8,900 shares of Series A PreferredStock (5,662 regular shares and 3,238 redeemable shares).  Judith Zimbelmann (one of our directors) owns5,262 shares of Series A Preferred Stock (all regular shares).

Holders of the Series A Preferred Stock are entitledto receive, upon declaration by our Board of Directors, cumulative cashdividends monthly at the annual rate of 10% per share.  Interest at the annual rate of 10%,compounded annually, accrues on Series A Preferred Stock dividends that haveaccumulated but have not been paid.  TheSeries A Preferred Stock is not convertible but is callable, in whole or (on apro rata basis) in part, at any time at our option.  There were no shares called during the fiscalyears ending January 31, 2007 or 2006. The holders of Series A Preferred Stock are not entitled to vote (on acumulative basis or otherwise) as a class or with our common stock upon anymatters submitted to shareholders for a vote, except as mandated under Nevadalaw.

55

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In prior years, Mr. Salerno forwent his right to havehis shares redeemed when we made partial, pro rata calls of Series A PreferredStock for redemption.  Those affectedshares have been classified as “Redeemable Series A Preferred Stock” in theliabilities section of our Consolidated Balance Sheet, and may be put to us byMr. Salerno for redemption at any time. As of January 31, 2007, the amount of Series A Preferred Stock that maybe put to us by Mr. Salerno for immediate redemption (without prior approval byour Board of Directors) is $323,800 (3,238 shares).  When we and Leroy’s filed Chapter 11Petitions, this Redeemable Series A Preferred Stock became subject tocompromise under the Bankruptcy Code. (Under the Bankruptcy Code, the ordinary Series A Preferred Stock, whichis classified in the equity section of our Consolidated Balance Sheet, was notdesignated as subject to compromise.) Pursuant to the Plan that we and Leroy’s consummated on March 11, 2005(the “Effective Date”), the Redeemable Series A Preferred Stock is no longerconsidered subject to compromise, and we will pay the redemption price in theordinary course of business.

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

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

Thepayment on March 11, 2005 includes $1,977 of interest at the Federal JudgmentRate.

In return for Mr.Salerno’s personal guarantees of certain irrevocable letters of credit (“ILOCs”)that we obtained to meet the Regulation 22.040 reserve requirement, we paid Mr.Salerno $8,750 on June 30, 2005. Those ILOCs have been replaced with a suretybond and we do not anticipate that personal guarantees from Mr. Salerno inregard to the reserve requirement will be required in the future.

AWIG’s acquisition of Sturgeon’s was financed, inpart, through a $300,000 loan from Victor and Terina Salerno under their GuarantyAgreement with AWI.  The GuarantyAgreement provides for AWI to pay the Salernos interest at the rate of 10% perannum (payable monthly) on the outstanding portion of the loan and to reimbursethem for finance charges, fees and other expenses they incur under a personalrevolving line of credit with their bank that they used to provide thefunding.  The personal line of credit issecured by the Salernos’ residence and pro­vides for an interest rate of 0.5%below the prime rate published by The Wall Street Journal, adjusted annually.  Terina Salerno is the spouse of Victor Salernoas well as General Counsel of AWI.  SinceMay 1, 2006, the outstanding balance of the loan from the Salernos has beenzero. During fiscal 2007, we paid the Salernos a total of $2,055 of interestunder the Guaranty Agreement in addition to the $300,000 loan principal amountrepayment.

We employ on a full-time basis Terina Salerno, thewife of Victor Salerno, as our General Counsel. For our fiscal years endedJanuary 31, 2007 and 2006, her total annual compensation was $108,160 and$81,120, respectively.

We employ on a full-time basis John Salerno, the sonof Victor Salerno and Judith Zimbelmann, as a Vice President and gaming analystof Leroy’s. For our fiscal years ended January 31, 2007 and 2006 his totalannual compensation was $45,200 and $44,000, respectively.

**DirectorIndependence.**  Wefollow the director independence standards prescribed by NASDAQ. As such, themembers of our Board of Directors who are considered independent are RobertBarengo and W. Larry Swecker.

Underthe audit committee independence standards prescribed by NASDAQ, two of ourthree Audit Committee members, namely Robert Barengo (Chairman) and W. LarrySwecker are independent and Judith Zimbelmann is not.

Underthe director independence standards prescribed by NASDAQ, one of our twoCompensation Committee members, namely W. Larry Swecker, is independent andJudith Zimbelmann is not.

Ourentire Board of Directors serves as our Nominating Committee.

**Audit Committee financial expert.**  Our Board of Directors has determined that amember of our Audit Committee, W. Larry Swecker, who meets the audit committeeindependence criteria prescribed by NASDAQ, qualifies as an audit committeefinancial expert under the applicable rules of the SEC.  Mr. Swecker’s qualifications include, amongother things, his practice as a certified public accountant for the past 30years.

56

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**Item 13. Exhibits**
| EXHIBIT NUMBER | ** ** | **DESCRIPTION**                                                                                                                                                                                                                                                             |
|----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1*           |       | Restated Amended Joint Plan of Reorganization of  American Wagering Inc. and Leroy’s Horse & Sports Place, Inc. (see  Exhibit 2.1 to Form 10-KSB filed May 1, 2006, SEC File No. 000-20685)                                                                        |
|           |       |                                                                                                                                                                                                                                                                        |
| 3.1*           |       | By-Laws of American Wagering, Inc. (see Exhibit 3.1  to Form 8-K filed August 31, 2005, SEC File No. 000-20685)                                                                                                                                                             |
|           |       |                                                                                                                                                                                                                                                                        |
| 3.2*           |       | Amended and Restated Articles of Incorporation of  American Wagering, Inc. (see Exhibit 3.1 to Registration Statement on Form  SB-2 filed December 13, 1995, SEC File No. 33-80431)                                                                                         |
|           |       |                                                                                                                                                                                                                                                                        |
| 3.3*           |       | Certificate of Designations, Preferences and Rights  of Series A Preferred Stock of American Wagering, Inc. (see Exhibit 3.1.1 to  Form 8-K filed December 10, 1998, SEC File No. 000-20685)                                                                                |
|           |       |                                                                                                                                                                                                                                                                        |
| 10.1* (A)      |       | American Wagering, Inc. 2001 Stock Option Plan (see  Exhibit 99 to our Definitive Schedule 14A filed October 16, 2001, SEC File  No. 000-20685)                                                                                                                             |
|           |       |                                                                                                                                                                                                                                                                        |
| 10.2*          |       | Amended and Restated Guaranty Agreement dated June  8, 2006, between American Wagering, Inc. and Victor and Terina Salerno (see  Exhibit 10.1 to Form 10-QSB filed June 14, 2006, SEC File No. 000-20685)                                                                   |
|           |       |                                                                                                                                                                                                                                                                        |
| 10.3*          |       | Purchase and Sale Agreement for the acquisition of  Sturgeon’s Inn & Casino (see Exhibit 10.1 to Form 8-K filed June 21,  2005, SEC File No. 000-20685)                                                                                                            |
|           |       |                                                                                                                                                                                                                                                                        |
| 10.4*          |       | Lease Schedule No. 1 (with Options), dated July 14,  2006 by and between AWI Manufacturing Inc., American Wagering, Inc. and PDS  Gaming Corporation-Nevada, and Master Lease Agreement. (see Exhibit 10.2 to  Form 10-QSB filed December 26, 2006, SEC File No. 000-20685) |
|           |       |                                                                                                                                                                                                                                                                        |
| 10.5* (A)      |       | Executive Employment Agreement between American  Wagering, Inc. and Victor J. Salerno dated June 28, 2002 (see Exhibit 10.1 to  Form 10-QSB filed September 14, 2005, SEC File No. 000-20685)                                                                               |
|           |       |                                                                                                                                                                                                                                                                        |
| 10.6 (A)       |       | Severance Agreement between American Wagering, Inc.  and Timothy F. Lockinger dated February 9, 2007                                                                                                                                                                        |
|           |       |                                                                                                                                                                                                                                                                        |
| 10.7* (A)      |       | Executive Employment Agreement between American  Wagering, Inc. and Bruce Dewing dated June 14, 2005 (see Exhibit 99.1 to Form  8-K filed June 15, 2005, SEC File No. 000-20685)                                                                                            |
|           |       |                                                                                                                                                                                                                                                                        |
| 10.8 *(A)      |       | Form of stock option agreement under American  Wagering, Inc. 2001 Stock Option Plan (see Exhibit 10.6 to Form 10-KSB filed  May 1, 2006, SEC File No. 000-20685)                                                                                                           |
|           |       |                                                                                                                                                                                                                                                                        |
| 10.9* (A)      |       | American Wagering, Inc. Directors Stock Option Plan  and form of stock option agreement (see Exhibit 10.7 to Form 10-KSB filed May  1, 2006, SEC File No. 000-20685)                                                                                                        |
|           |       |                                                                                                                                                                                                                                                                        |
| 10.10* (A)     |       | Compensation terms for American Wagering, Inc.  directors (see Exhibit 10.8 to Form 10-KSB filed May 1, 2006, SEC File No.  000-20685)                                                                                                                                      |
|           |       |                                                                                                                                                                                                                                                                        |
| 10.11* (A)     |       | Amendment/Extension of Directors Stock Option Plan,  dated August 1, 2006 (see Exhibit 10.1 to Form 10-QSB filed December 26,  2006, SEC File No. 000-20685)                                                                                                                |
|           |       |                                                                                                                                                                                                                                                                        |

 

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| 10.12  |   | Commercial Loan Agreement, dated February 21, 2006,  between AWI Gaming, Inc. and Great Basin Bank of Nevada                                                                                                                                           |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                   |
| 10.13  |   | Promissory Note, dated February 21, 2006, executed  by AWI Gaming, Inc. in favor of Great Basin Bank of Nevada                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                   |
| 10.14  |   | Commercial Guaranty, dated February 21, 2006,  executed by American Wagering, Inc. in favor of Great Basin Bank of Nevada                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                   |
| 10.15  |   | Commercial Guaranty, dated February 21, 2006,  executed by Sturgeons, LLC in favor of Great Basin Bank of Nevada                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                   |
| 10.16  |   | Commercial Security Agreement, dated February 21,  2006, executed by AWI Gaming, Inc. in favor of Great Basin Bank of Nevada                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                   |
| 10.17  |   | Deed of Trust, dated February 21, 2006, among AWI  Gaming, Inc., Great Basin Bank of Nevada and Western Title Company Inc.                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                   |
| 10.18* |   | Settlement Agreement by American Wagering, Inc.,  Leroy’s Horse & Sports Place, Inc. and Michael Racusin d/b/a M. Racusin  & Co., dated September 3, 2004 (see Exhibit 99.1 to Form 8-K filed  September 7, 2004, SEC File No. 000-20685) |
|   |   |                                                                                                                                                                                                                                                   |
| 14.1*  |   | Code of Business Conduct and Ethics (see Exhibit  14.1 to Form 10-QSB filed June 14, 2005, SEC File No. 000-20685)                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                   |
| 21.1   |   | Subsidiaries of American Wagering, Inc.                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                   |
| 23.1   |   | Consent of Independent Registered Public Accounting  Firm                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                   |
| 31.1   |   | Certification of Principal Executive Officer  pursuant to Exchange Act Rule 13a-14(a)                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                   |
| 31.2   |   | Certification of Principal Financial Officer  pursuant to Exchange Act Rule 13a-14(a)                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                   |
| 32.1   |   | Certification of Chief Executive Officer and Chief  Financial Officer pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C.  Section 1350                                                                                                              |

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*                                         Thesedocuments are incorporated herein by reference as exhibits hereto.  Following the description of each suchexhibit is a reference to the document as it appeared in a specified reportpreviously filed with the SEC, to which there have been no amendments or changesunless otherwise indicated.

(A)                              Managementcontract or compensatory plan or arrangement.

**Item 14: Principal Accountant Fees and Services**

OurAudit Committee selected and our Board of Directors approved the firm of PiercyBowler Taylor & Kern (“PBTK”) as our independent registered accounting firmto audit our annual consolidated financial statements and perform quarterlyfinancial statement review services for the fiscal year ended January 31,2007.  PBTK previously performed similaraudit and review services for the years ended January 31, 2006, 2005, 2004,2003, 2002 and 2001.  PBTK’s primaryoffices are located at 6100 Elton Avenue, Suite 1000, Las Vegas, Nevada, 89107.

**AuditCommittee’s pre-approval of engagement.**  Our policy is that before we engage ourprincipal accountants annually to render audit or non-audit services, theengagement is reviewed and approved by our Audit Committee.  All of our principal accountants’ servicesfor which we paid tax-related fees or other non-audit fees for our last two 

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fiscalyears, as described below, were within the scope of the engagement that ourAudit Committee approved before we entered into the engagement.

**Totalfees.**  Total fees paidand accrued to PBTK are as follows:
| ** **                | ** ** | **Year Ending January 31,** | ** **  |
|---------------------------|------------|--------------------------------------------|-------------|
| **Service Provided** | ** ** | **2007**                                   | ** **  | **2006** | ** ** |
| Audit Service Fees        |       | $                                          | 95,432      |   | $ | 68,616 |   |
| Tax Service Fees          |       | 22,648                                     |        | 16,140 |   |
| Other Fees                |       | 15,434                                     |        | 12,179 |   |
| **Total**                 | ** ** | **$**                                      | **133,514** | ** ** | **$** | **96,935** | ** ** |

**AuditService Fees.**  Theaggregate fees for audit services were for the audits of our annualconsolidated financial statements and review of our quarterly consolidatedfinancial statements.  There were noAudit Related Services.

**Tax Fees.**  The aggregate fees for tax services were forprofessional services relating to tax compliance, tax advice, and tax planning.

**OtherFees.**  The aggregateOther Fees were for audits of our 401(k) plan and all gaming compliance auditservices.

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**SIGNATURES**

In accordance withSection 13 or 15(d) of the Exchange Act, the registrant caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.
|   | AMERICAN WAGERING,  INC.                                                     |
|--------|------------------------------------------------------------------------------|
|   |                                                                         |
|   |                                                                         |
|   | By: /s/ Victor Salerno                                                       |
|   | Victor Salerno                                                               |
|   | President, Chief Executive Officer and   Interim Principal Financial Officer |

In accordance with the Exchange Act, this reporthas been signed by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.
| Signature             | ** ** | **Title**                                                      | ** ** | **Date**     |
|-----------------------|------------|----------------------------------------------------------------|------------|--------------|
|                  |       |                                                           |       |         |
|                  |       |                                                           |       |         |
|                  |       |                                                           |       |         |
| /s/ Victor Salerno    |       | Chief Executive Officer, President, Director,                  |       | May 31, 2007 |
| Victor Salerno        |       | Interim Principal Financial Officer, Secretary, and  Treasurer |       |         |
|                  |       |                                                           |       |         |
|                  |       |                                                           |       |         |
| /s/ Robert R. Barengo |       | Director                                                       |       | May 31, 2007 |
| Robert R. Barengo     |       |                                                           |       |         |
|                  |       |                                                           |       |         |
|                  |       |                                                           |       |         |
| /s/ W. Larry Swecker  |       | Director                                                       |       | May 31, 2007 |
| W. Larry Swecker      |       |                                                           |       |         |
|                  |       |                                                           |       |         |
|                  |       |                                                           |       |         |
| /s/ Judith Zimbelmann |       | Director                                                       |       | May 31, 2007 |
| Judith Zimbelmann     |       |                                                           |       |         |
|                  |       |                                                           |       |         |
|                  |       |                                                           |       |         |
| /s/ Bruce Dewing      |       | Director                                                       |       | May 31, 2007 |
| Bruce Dewing          |       |                                                           |       |         |

 

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