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                     U.S. SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   FORM 10-KSB

ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 31, 1998.

Commission File No. 000-20685

                             AMERICAN WAGERING, INC.
                 (Name of Small Business Issuer in its Charter)
             Nevada                                              88-0344658
-------------------------------                              -------------------
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                               Identification No.)


                    675 Grier Drive, Las Vegas, Nevada 89119
               ---------------------------------------------------
               (Address of principal executive offices) (Zip Code)


                                 (702) 735-0101
                           ---------------------------
                           (Issuer's telephone number)

Securities registered under Section 12(b) of the Exchange Act:   None

Securities registered under Section 12(g) of the Exchange Act:

                                 Title of Class
                          ----------------------------
                          Common Stock, $.01 par value

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.

                                                     Yes    X     No
                                                         -------      ---------

Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]

The issuer's revenues for the fiscal year ended January 31, 1998 were
$9,300,503.

The aggregate market value of the voting stock (which consists solely of shares
of Common Stock) held by non-affiliates of the issuer as of April 7, 1998
computed by reference to the average of the bid and asked prices of the
registrant's Common Stock as quoted by NASDAQ on such date, was approximately
$14,924,315

The number of shares of the issuer's Common Stock outstanding as of April 7,
1998 was 7,836,333.
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                                     PART I
Item 1

Business

                American Wagering, Inc. (the "Company") owns and operates
Leroy's Horse and Sports Place ("Leroy's"), the licensed bookmaker with the
largest number of sports book locations in the State of Nevada, and Computerized
Bookmaking Systems, Inc., a Nevada corporation ("CBS") which designs, installs
and maintains sports and race book equipment, software, including the
MEGA$PORTS(R) product for pari-mutuel sports wagering, and computer systems to
the sports betting industry. Through a central computer located at its Las
Vegas, Nevada headquarters, Leroy's operates a statewide network of sports and
race wagering facilities in 40 casinos. The Company offers casinos a "turn key"
sports wagering operation that allows casinos to satisfy their patrons' desires
for sports gaming without bearing the risk and overhead associated with
conducting the operation themselves. By combining volume from a number of
locations, the Company believes it more effectively hedges risks and more
efficiently covers fixed overhead. In addition, since its sports book operation
is its primary business, the Company believes it responds more quickly to
customer requests, such as providing faster pay off on winning tickets presented
other than in person than do many casinos, which operate sports books as an
ancillary part of their businesses.

                The Company also owns Leroy's Hotel Corporation (the "Hotel
Operator"), which owns and operates a 150-room Howard Johnson's hotel and
through, its wholly-owned subsidiary, B-P Food Corporation, an adjacent
International House of Pancakes restaurant, (the hotel and restaurant are
collectively referred to as "Hotel"). Leroy's operates the adjacent casino (the
hotel and casino collectively referred to as the "Hotel/Casino"). On April 22,
1998 the Company determined to concentrate its business efforts on its core
competency, sports wagering, and is seeking a qualified buyer for the Hotel,
food and beverage operations. In the Company's accompanying consolidated
financial statements for and as of the fiscal year ended January 31, 1998, the
results of the Hotel, food and beverage operations have been accounted for as
discontinued operations. The Hotel/Casino is located at 3111 W. Tropicana
Avenue, Las Vegas, Nevada, which is approximately one-half mile west of the Las
Vegas Strip and adjacent to a major exit from Interstate 15, the freeway linking
Las Vegas with Southern California.

                The Company currently operates 71 gaming devices (including slot
machines, video poker machines and video keno machines) and its home sports and
race book operation in approximately 5,600 square feet of space at the
Hotel/Casino. In conjunction with the sale of the Hotel, it intends to negotiate
the leaseback, and continue to operate the casino. The ground lease between the
Company and the owner of the land underlying the Hotel/Casino is the subject of
certain litigation. See "Hotel/Casino Operation," "Strategy -- Hotel/Casino" and
"Legal Proceedings."

                On May 15, 1996, the Company completed an initial public
offering (the "Offering") of its Common Stock at an offering price of $6.00 per
share with 2,250,000 shares sold. On June 28, 1996 the underwriters of the
Offering exercised an over-allotment option and purchased an additional 337,500
shares of the Company's Common Stock at $6.00 per share. Prior to the Offering,
the business of the Company had been operated by Leroy's, which commenced
operations in April 1978, the Hotel Operator, which commenced operations in 1995
and B-P Gaming Corporation ("B-P"), the former licensed operator of the casino,
which commenced operations in 1979, and all of which were under common ownership
with the Company. On May 10, 1996 a corporate reorganization was effected on a
tax free basis pursuant to Section 351 of the Internal Revenue Code, which
resulted in Leroy's and the Hotel Operator becoming wholly-owned subsidiaries
and B-P becoming a 50% owned subsidiary of the Company (the "Reorganization").
In the Reorganization, Messrs. Salerno, Barengo, Ciunci, Merillat and Roxborough
as the stockholders of Leroy's, the Hotel Operator and B-P ("Original
Stockholders") exchanged all the issued and outstanding stock in Leroy's, the
Hotel Operator and B-P, respectively owned by them, for an aggregate of
5,249,900 shares of Common Stock of the Company with the resulting effect that
such stockholders owned an aggregate of 5.25 million shares of the Common Stock
of the Company.

                In February and March 1995, the Hotel Operator and the Original
Stockholders had purchased, respectively, 50% interests in BSRB Resorts Hotel, a

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Nevada general partnership, which owned and operated the Hotel and B-P. The
Hotel Operator and the Original Stockholders acquired their respective 50%
interests in the Partnership and B-P from the owner of those interests who had
filed for bankruptcy protection. The predecessor to the Partnership, Bruyea Pond
Las Vegas, a Nevada general partnership, comprised of two individual partners,
R. Paul Bruyea ("Bruyea") and Fletcher Pond ("Pond"), had filed for bankruptcy
protection in the District of Nevada on June 11, 1993. Pond had filed for
individual bankruptcy in the Southern District of California on August 5, 1992.
The Hotel Operator and the Original Stockholders purchased all of Pond's
interest in Bruyea Pond Las Vegas and B-P for a cash purchase price of $1.4
million (and assumed liabilities of $1.2 million) in the bankruptcy proceedings
pursuant to an order of the United States Bankruptcy Court, Southern District of
California, and one in bankruptcy court in the District of Nevada. On March 30,
1995, the Partnership succeeded to Bruyea Pond Las Vegas, with the Hotel
Operator and an affiliate of Bruyea constituting its two equal general partners.

                On May 15, 1996 the Company purchased the remaining 50%
interests in the Partnership and B-P for approximately $3.6 million in cash and
the assumption of approximately $1.5 million in liabilities from Bruyea and an
affiliate of Bruyea. The Company then contributed the interest in the hotel
operation to the Hotel Operator. On July 25, 1996, Leroy's was licensed by
Nevada regulatory authorities to operate the casino at the Hotel/Casino and B-P
was subsequently dissolved.

                On October 25, 1996, the Company purchased CBS (formerly known
as Autotote CBS, Inc.) for $3 million in cash and agreed to guarantee CBS's
obligation under its current mortgage of approximately $2 million on the real
estate and building where the Company maintains its corporate offices. CBS is
involved in a joint venture with IGT-North America ("IGT"), a subsidiary of
International Game Technology. CBS and IGT each own a fifty percent interest in
the joint venture company named Mega$ports, Inc., a Nevada corporation
("Mega$ports(R)"). Mega$ports, an enterprise which began operations in July
1997, is engaged in the design, manufacture and distribution of a pari-mutuel
sport wagering system.

                On November 11, 1997, the Company signed a definitive agreement
to acquire all the outstanding stock of Imagineering Systems, Inc. ("ISI"), one
of the leading providers of keno systems for a combination of cash and stock in
an aggregate amount of approximately $1 million. The closing of this transaction
is contingent on receiving regulatory approvals and certain other events. The
purchase also includes a new division named Keno International, which is
currently in the development stage. Imagineering Systems, Inc. is based in Reno,
Nevada and currently manufactures, distributes and services the hardware and
software for keno systems, operated by casinos and gaming establishments in 14
jurisdictions around the world.

Las Vegas Metropolitan Market

                The market for 21 of the Company's 40 sports books and for the
Hotel/Casino is the "Las Vegas" metropolitan area (hereinafter "Las Vegas")
gaming market. Currently, the Las Vegas gaming market is comprised of 93 casinos
with an aggregate of approximately 58 sports books. The Las Vegas gaming market
attracts both local residents and Las Vegas visitors. Las Vegas' population was
approximately 1.2 million in 1997. Las Vegas is Nevada's principal tourist
destination. Gaming and entertainment are the major attractions, complemented by
warm weather and the availability of many year-round recreational activities.
The number of visitors traveling to Las Vegas has increased from approximately
17.2 million in 1988 to approximately 30.5 million visitors in 1997. Las Vegas'
principal tourist market is the western region of the United States, most
significantly Southern California and Arizona. Las Vegas is also among the
nation's most popular convention sites, having hosted approximately 3,750
conventions in 1997, which were attended by more than 3.5 million people who it
is estimated spent $4.4 billion, excluding gaming activity.

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                The number of hotel and motel rooms in Las Vegas has increased
by approximately 72% from 61,000 in 1988 to approximately 105,000 in 1997.
Despite the significant increase in the supply of rooms, Las Vegas's hotel
occupancy rate exceeded 86% for 1997. The Las Vegas Convention and Visitors
Authority forecasts the supply of rooms available in Las Vegas to increase by
approximately 20% or 21,049 rooms by the year 2000.

                From 1988 to 1997, gaming revenues for Clark County (which
consists principally of Las Vegas) have increased from approximately $3.1
billion in 1988 to approximately $6.1 billion in 1997. The Clark County gaming
market has historically achieved significant growth despite adverse economic,
regulatory and competitive events during the past decade, including the
expansion of gaming in other jurisdictions across the United States.

Reno Area Market

                The market for ten of the Company's sports books is the Reno
area gaming market. Reno is the second largest city in Nevada with an area
population of approximately 276,000 in 1997. Reno is located at the base of the
Sierra Nevada mountains along Interstate 80, approximately 135 miles east of
Sacramento, California. The Reno area is a popular resort spot which attracts
tourists by offering gaming as well as numerous other summer and winter
recreational activities. The greater Reno area attracted a total of 5.8 million
visitors in 1997. Currently, the Reno area gaming market is comprised of 54
casinos with an aggregate of approximately 23 sports books.

Sports Wagering

                Sports wagering is legal in the State of Nevada, and in numerous
foreign countries, including Canada, Mexico and Australia. Sports wagering at
Nevada's sports books increased from $293 million in 1980 to $2.4 billion in
1997. During that same period, the number of sports books increased from 24 to
136 in Nevada. With the advent of cable and satellite television, both
commercially and privately, viewing access to sporting events has increased
significantly. When sporting events are televised, there is wider recognition of
the sports and the teams involved and increased excitement, which the Company
believes, leads to more interest in sports betting.

                A sports wagering facility or "sports book" is a gambling
establishment that sets odds and point spreads and accepts bets on the outcome
of sporting events, such as football, basketball, baseball and hockey games.
Sports books set odds and point spreads aiming not to reflect the final result,
but to maintain a "balanced book" by offering odds or point spreads that will
attract equal amounts of bets on each side of a particular event. As a general
matter, a customer's odds or point spread (the "line") are fixed at the time he
makes his bet regardless of any subsequent movement in the line. Under this
system, the sports book operator attracts bets by changing or "moving" the line
up or down to encourage wagering on a specific team. To the extent that a book
on a particular event is not balanced, the book-making operation takes a risk on
the outcome of the event.

                Inherent to betting is a long-term percentage against the
player. Profits from bookmaking, table games, keno and slot machines are the
results of steady play against a statistical advantage that the gambling
operator or "house" possesses. The house advantage in bookmaking, however, is
fundamentally different from other gambling games. There are mathematical
advantages to table games and slot machines in favor of the casino. While there
are exceptions (for instance, card counters), statistically all pit players
exhaust their bankroll after an indefinite period of play. In pari-mutuel
wagering, which is used by major North American horse racing tracks, jai alai
establishments, and the Mega$ports (R) operations, a wager is pooled with all
other wagers, the house receives a percentage for operating expenses, profit and
taxes and the remainder is distributed to the winners. Therefore, the
racetrack's, jai alai establishment's and the Mega$sports operation's, gross
revenues are directly related to the amount wagered (the "handle").

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                For each type of sports bet there is a "theoretical percentage",
which is the advantage a bookmaker would have if the odds guaranteed it a
constant commission regardless of the outcome. For example, for a straight
football bet involving the outcome of one game, it is common practice that the
customer wagers $11 to win $10. Accordingly, if the book was evenly balanced,
the sports book would earn $1 for each $22 wagered or 4.55% (the winner would
receive $21) of the handle, before expenses. The sports book, however, does not
have a built in statistical edge as do the betting tables, slot machines or the
racetrack. The fundamental difference is part of the appeal for many sports
customers, but it also creates risk for the sports book. A bookmaker operates in
a system, which is interrelated with oddsmakers and customers. Bookmakers
collect bets, adjust odds to account for the preferences of their patrons and
pay the winners. Customers have opinions concerning the posted odds and bet into
the odds accordingly. Oddsmakers (whose services are purchased by the
bookmakers) ideally make the lines that will split the bets evenly between the
participants in the sporting event so that the bookmaker will realize profits
over time.

                In practice, however, a sports book is rarely perfectly
balanced. The sports book's profit depends upon the reliability of the odds and
its acumen at adjusting the odds when required. Because customers are betting on
propositions of uncertain probability and are paid off according to the line at
which they make their bets rather than the closing odds (as in pari-mutuel
system), the sports book is not assured of a constant profit over time, much
less for a single event.

                A sports book attempts to limit the liability it incurs on an
event against potential flaws in the oddsmaker's setting of the line and the
integrity of the games. Limiting liability is accomplished by two main means,
the game limit and line movement. For example, the opening line for a football
game ideally would split the bets from the time it was posted until kick-off.
However, the opening line generally is unbalanced. Because a sports book does
not want to take the risk of accepting unlimited bets on one side of a game, it
creates a game limit -- the maximum amount of money that will be accepted at the
posted line. When the game limit is reached, the line is changed, or "moved", to
attract action on the "other" side. Movement in a line, however, does not
eliminate a bookmaker's risk.

                The game limit is established by the sports book based upon the
"earn" in a sport, which is a function of the amount the sports book would earn
if the odds guaranteed it a constant commission regardless of the outcome (the
"theoretical hold percentage"), the quality of the line and the customer mix.
For example, when the sports book anticipates that the majority of the bets will
come from sophisticated customers who know as much as, or more than, the
oddsmaker, the limit will be relatively low. The Company believes that events
with the highest fan popularity and media coverage, such as professional
football's Super Bowl, have a relatively small proportion of sophisticated
customers. Accordingly, the sports book's expected earn on such an event would
be higher and would justify a higher game limit.

                In order to effectively balance its books, a bookmaking
operation must take a sufficient volume of wagers to offset large wagers on any
given event. While many of the large casinos in Las Vegas have sufficient
customer traffic to underwrite the risks inherent in a sports book, some large
and smaller casinos typically do not. Sports books have been computerized and
automated in order to severely curtail fraud and to provide for more
sophisticated analysis and up-to-date information. Some larger casinos are not
interested in operating their own sports book because of the associated
overhead. As a result, many casinos cannot profitably operate a sports gambling
operation and, if they do, they are exposed to significant financial risks
associated with an "unbalanced book." Nevertheless, many of these casinos
believe that they need to offer their customers a sports book to remain
competitive with other casinos.



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Leroy's Horse and Sports Book Operation

                Leroy's retains its main sports book license at the Hotel/Casino
and operates 39 other sports books in major metropolitan areas in Nevada (of
which 21 are located in the Las Vegas area and 10 in the Reno area with 8 others
located throughout the State of Nevada, including the cities of Laughlin,
Mesquite, Elko and Jackpot) Leroy's operates sportsbooks in hotels and casinos
such as, the Riviera Hotel and Casino, the Four Queens Hotel and Casino, the
Continental Hotel and Casino, the Maxim Hotel and Casino, and the Stratosphere
Hotel and Casino in the Las Vegas area, and the Carson Valley Inn and Casino,
the Bonanza Hotel and Casino and the Rail City Hotel and Casino in the Reno
area. Under Nevada gaming law, the Company is permitted to own and operate
sports books located on the premises of other non-restricted gaming operations.
The Company currently owns and operates 40 sports books out of a total of 136
sports books operating in Nevada.

                When the Company began operations in 1978, it was one of only
seven sports and race books in Las Vegas. Currently, virtually every major
casino in Nevada offers its patrons a sports and race book. Of the other sports
books, 84 are operated by the casinos in which the sports books are located and
12 by casinos other than where the sports book are located. Generally, at its
sports book locations the Company pays the casinos in which it operates a flat
monthly rental for casino space, although in some instances it shares a portion
of its revenues with the casino.

                The typical sports book location for the Company encompasses
approximately 300 square feet, contains a board displaying the odds, television
monitors showing sporting events, betting stations, ticket sellers and cashiers.
As a bet is placed, the wagering data is entered into a computer terminal which
is connected via a dedicated phone line to the Company's centralized computer
system which confirms the line, determines that the bet is within the limits set
for the particular event, records the information on a central data base and
issues a ticket evidencing the bet. The ticket is then distributed to the
customer with the Company simultaneously recording the wager. Personnel at the
Company's main office monitor all bets and adjust the odds as necessary to
reflect the various bets throughout all of the Company's locations.

                The Company believes it has lower maximum betting limits than
many sports books, which operate at large casinos. It has established these
lower limits in an effort to limit bets from the more sophisticated customers
who often place larger bets. In addition, in order to limit the more
sophisticated bettors from utilizing strategies that would provide an advantage,
the Company sets even lower limits for bets placed over the telephone, which are
currently accepted only from within the State of Nevada. The Company believes
that the geographic spread of its locations to various parts of the State of
Nevada is more likely to attract bets from customers on both sides of a line,
thereby further limiting its risk.

                Professional and college football games currently comprise about
36% of the amount bet (the "handle") at the Company's locations with
professional and college basketball games at 29% and professional baseball games
next at about 25%. As a result, the Company's business historically has been
seasonal in nature with approximately 55% of its handle arising during the
months of September through January. The Company's revenues consist of football
game wagering of 37%, basketball wagering of 27% and baseball wagering of 18%,
with the remaining 18% representing all other sports wagering, including such
sports as, hockey and boxing.

                At 25 of its 40 sports book locations the Company has a license
to operate a race book but actually operated a race book at only one of those
locations during the fiscal year ended January 31,1998. The Company's race books
utilize the same personnel and facilities as its sports books, but the Company
does not set its own odds for race wagering. The Company accepts wagers for
races by offering race patrons the same odds as the racetracks at which the
races occur. The Company has only offered race wagering for a few major events
such as the Triple Crown and the Breeders Cup.

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                In December 1997, the Company joined the Nevada Pari-mutuel
Association to allow pari-mutuel race wagering at its home location, at the
Hotel/Casino. The Company, in association with a disseminator, currently offers
pari-mutuel wagering on events from eight racetracks throughout the country
including Santa Anita in California and Aqueduct in New York.

Hotel, Food and Beverage Operations

                The Hotel Operator currently owns and operates the hotel and,
through its wholly owned subsidiary, B-P Food Corporation, the restaurant
located at 3111 W. Tropicana Avenue, Las Vegas, Nevada. Leroy's operates the
casino and a race and sports book on the premises. The Hotel/Casino is located
approximately one-half mile west of the Las Vegas Strip and is adjacent to a
major exit from Interstate 15, the freeway linking Las Vegas with Southern
California. On April 22, 1998 the Company determined to concentrate its business
efforts on its core competency, sports wagering, and is seeking a qualified
buyer for the Hotel/Casino. In the Company's accompanying consolidated financial
statements for and as of the fiscal years ended January 31, 1998 and 1997, the
results of the Hotel, food and beverage operations have been accounted for as
discontinued operations.

                The Hotel, food and beverage operations currently consists of a
150-room franchised Howard Johnson's hotel, a 2,700 square foot bar, and a
franchised International House of Pancakes restaurant. The Company, through its
subsidiaries, is obligated pursuant to a franchise agreement with Howard
Johnson's, a franchise agreement with International House of Pancakes, a gaming
device participation agreement with Jackpot Enterprises, Inc., and a ground
lease with the owner of the parcel on which the building is located. The
franchise agreement with Howard Johnson's obligates the Company to pay a fee to
Howard Johnson's of 8.5% of total monthly room revenues. The franchise agreement
with International House of Pancakes obligates the Company to pay a fee of 7.5%
of weekly gross food sales to International House of Pancakes. The agreement
with Jackpot obligates the Company to pay 30% of the gaming devices net win to
Jackpot. The ground lease obligates the Company to pay a base rent amount of
$6,000 for the Hotel in addition to a calculated rent overage amount based on
excess occupancy over a specified level and 5% of all casino gross gaming
revenues to the landlord. The ground lease between the Company and the owner of
the land underlying the Hotel/Casino is the subject of certain litigation. See
"Strategy -- Discontinued Operations" and "Legal Proceedings."

                From 1992 through 1997, the Hotel/Casino's occupancy rate has
averaged approximately 73%. The Hotel/Casino currently draws most of its guests
from the leisure, commercial and contract market segments. 

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                The leisure segment consists of individuals and families either
vacationing in the Las Vegas area or en route to other destinations. Leisure
demand is strongest on the weekends, during holiday periods and summer months.
The majority of leisure travelers are generated from the overflow of larger
properties on the Las Vegas Strip and downtown Las Vegas and also from patrons
who make reservations via the Howard Johnson's nationwide reservation system.
The commercial market segment is comprised of business travelers visiting
various companies within the market area. Commercial demand is strongest Monday
through Thursday, declining significantly Friday and Saturday, and is relatively
constant throughout the year. The contract demand segment is primarily
associated with airline crews flying in and out of McCarran International
Airport. Airlines contract with local hotel operators for extended periods to
ensure availability of accommodations. Because they are able to guarantee a
specific usage on a daily basis, airlines can negotiate discounted room rates.

Casino Operations

                Within the hotel facility is approximately 5,600 square feet of
casino space containing 71 gaming devices, including 27 slot machines, 38 video
poker machines and 6 multi-game video machines.

Computerized Bookmaking Systems, Inc. Operations

                On October 25, 1996, the Company acquired from Autotote
Corporation, a Delaware corporation ("AC"), all of the outstanding shares of
capital stock ("Shares") of CBS, pursuant to a Stock Transfer Agreement between
the Company and AC, and the right to use certain software owned by AC and
Autotote Systems, Inc., a Delaware corporation ("ASI"), useful in CBS' business
("License") pursuant to a Technology Cross License Agreement, as amended, among
CBS, AC and ASI.

                As consideration for the Shares and License the Company paid $3
million in cash from its working capital to AC and agreed to guarantee, pursuant
to a Guaranty Agreement, CBS's obligation under its current mortgage of
approximately $2 million on the real estate and building in Las Vegas, Nevada
where the Company currently maintains its corporate offices.

                Simultaneously with the execution of the Stock Transfer
Agreement, (i) ASI appointed CBS as its distributor in Nevada of ASI products,
including Probe terminals, MKII terminals, video-cards, communication devices
and pari-mutuel race systems ("Distribution Products"), pursuant to an
Authorized Exclusive Distributorship Agreement between them ("Distributorship
Agreement"); (ii) ASI granted CBS the right under certain conditions, to
manufacture video gaming machines, Distribution Products pursuant to a
Manufacturing Agreement between them ("Manufacturing Agreement") and (iii) CBS
and ASI agreed to cooperate in pursuing business relating to international
sports and pari-mutuel wagering pursuant to an International Cooperation
Agreement between them ("International Agreement"). The Technology License
Agreement, the Stock Transfer Agreement, the Distribution Agreement,
Manufacturing Agreement and the International Agreement are the subject of
certain litigation between the Company and AC and ASI. (See "Legal Proceedings")

                CBS designs, installs and maintains sports and race book
equipment, software and computer systems for the sports betting industry. CBS is
the dominant provider of such equipment and software in the state of Nevada,
including major casinos along the Las Vegas strip.

                CBS provides its sports wagering systems to 82 out of 96 sports
and race books in Nevada which are not operated by Leroy's, at all 40 of Leroy's
sports and race books and at the leading operator of sports wagering facilities
in Mexico. Casinos and other sports wagering facilities generally purchase the
computerized wagering system from CBS and enter into an agreement with CBS for
repair and maintenance of the system and software support. Sports wagering
equipment sales revenue is reflected in equipment sales revenues and maintenance
contract revenues included in operating revenues from wagering systems
contracts. Under purchase agreements, CBS sells its sports wagering system to
the facility and provides training for the system operators and sell/cash
terminal clerks. CBS does not provide the operations and supervisory personnel
necessary to operate the system.

                In 1994, CBS signed a joint venture agreement with IGT

                                       8
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for the purpose of developing and marketing a pari-mutuel sports system, known
as MEGA$PORTS(R). MEGA$PORTS(R) offers opportunities to wager on the outcome of
individual sports contests, events occurring within or during the contests, and
outcomes of groups of sports contests. The MEGA$PORTS(R) pari-mutuel wagering
system currently consists of a central computer, communications equipment and
terminals. Pursuant to the terms of the joint venture agreement, the computer
system software and hardware for MEGA$PORTS(R) is provided by CBS and marketing
expertise is provided by IGT. Mega$ports,Inc. received its license by the Nevada
Gaming Authorities in June 1997 and began full operations in July 1997. CBS
recorded an equity in loss from joint venture of $1,791,828 for the fiscal year
ended January 31, 1998. The Mega$ports(R) products are currently offered at 59
sports books throughout Nevada, including 38 Leroy's locations.


Strategy

Sports Book

                The Company's strategy in the operation of its sports book is to
expand upon its current base of 40 locations. During the fiscal year 1998, the
Company upgraded its wagering system to include the latest technology in
hardware and software offered by its affiliate CBS. The new system allows
enhanced functionality and more efficient wager processing. The Company also
implemented an extensive marketing program, which was aimed at increasing
Leroy's name recognition. By developing a unique identifiable sport figure and
utilizing television, newspaper and radio, the sports wagering market was
exposed to the Leroy's product. The Company plans on utilizing last year's
campaign with the goal of increasing Leroy's market share of the total
statewide sports wagering handle.

                The Company presents casinos with a "turn key" sports book
operation that allows the casinos to satisfy their patrons' desires for sports
gaming without bearing the risk and overhead associated with operating the books
themselves. Utilizing its computer and communication expertise and equipment,
the Company runs all of its satellite locations from one central hub, thereby
reducing the overhead that each individual location would have in personnel and
equipment. On March 11, 1998, the Company announced the signing of five new
contracts to operate sports and race books at casino properties throughout the
state upon approval of the Nevada Gaming Commission. The Company will continue
to work diligently to increase the number of casinos where Leroy's operates
sports and race books. The Company believes that there are a number of existing
and proposed Nevada casinos, which are potential customers over the next several
years. Legalized sports betting is a growing multi-billion dollar business
(approximately $3 billion was wagered on sporting events in Las Vegas in 1997).
The Company believes that as televised sporting events continue to proliferate,
sports betting will continue to grow and Leroy's can capitalize on such growth.

                On July 1, 1995, the State of Nevada amended Nevada Law to allow
licensed Nevada sports and race book operations to accept by use of wire
communications facilities, including telephones and computers, interstate
pari-mutuel wagers from bettors in jurisdictions in which such pari-mutuel
wagering is legal. At least six states, including Nevada and numerous foreign
jurisdictions, including Canada, Mexico, and Australia, permit pari-mutuel
wagering by telephone. The Company is exploring possibilities to expand its
sports and race book operations to take advantage of opportunities created by
this law. The Company has had preliminary discussions with a number of private
entities in North American and foreign jurisdictions concerning the Company's
operation of their sports books and the acceptance of sports and race wagers
through Leroy's. However, the regulations of the Nevada Gaming Commission,
issued prior to the enactment of the law, and the vast majority of states
currently prohibit licensed sports and race books in Nevada from accepting
telephone bets from interstate locations. In the event the Nevada Gaming
Commission does not amend its regulations to comport with the new law, the
Company may submit a petition to amend (including proposed regulations) the
Commission's current regulations.

                                       9
<PAGE>


                The Company believes that expansion into the interstate
pari-mutuel wagering market may reduce some of the risks inherent in its sports
book operations. With pari-mutuel wagering, the Company believes it will be able
to create forms of wagering that will be pooled and will assure that the Company
will receive a percentage of each pool for operating expenses, profit and taxes,
before the remainder of the pool is distributed to winners. The Company also is
exploring the expansion of its operations outside the United States. The Company
believes that several Caribbean and South American countries and Australia,
which already have casinos and legalized sports gaming present attractive
expansion opportunities. A bill entitled the "Internet Gambling Prohibition Act
of 1997" has been introduced in Congress, which if it becomes law would
adversely impact the Company's ability to take advantage of interstate
pari-mutuel wagering opportunities. See "Regulation and Licensing and Interstate
Wagering."

                The Company does not accept wagers through the Internet. If the
Company is able to take advantage of the interstate pari-mutuel wagering
opportunities, the Company may directly advertise in the jurisdictions where
pari-mutuel wagering is legal. The Company is advertising Leroy's name on the
Internet and maintains a website at http://www.leroys.com.

Discontinued Operations

                On April 22, 1998 the Company determined to concentrate its
business efforts on its core competency, sports wagering, and is seeking a
qualified buyer for the hotel, food and beverage operations. In the Company's
accompanying consolidated financial statements for and as of the fiscal years
ended January 31, 1998 and 1997, the results of the hotel, food and beverage
operations have been accounted for as discontinued operations. The Company
anticipates leasing back the casino portion of the hotel facility as a provision
of the proposed sale. The ground lease between the Company and the owner of the
land underlying the Hotel/Casino is the subject of certain litigation. (See
"Legal Proceedings").

                Until the Hotel facility is sold the Company's business strategy
will emphasize on increasing occupancy by attracting and retaining customers
from the Las Vegas area and repeat visitors. The Company plans to capitalize on
the increased inbound auto traffic from California and its sales staff will
continue to pursue meeting room groups through leads with the Las Vegas
Convention Authority.

Computerized Bookmaking Systems

                The Company's business strategy is to continue to develop,
distribute, and support state of the art race and sports wagering systems to its
customers. The Company is in the process of developing a self-service wagering
terminal. Within the next year, subject to regulatory approval, CBS intends to
introduce self-service terminals that allow players to watch live videos of race
and sport events, to place wagers on race and sports, and to play any one of a
number of video slot games. CBS products are capable of concurrently operating
race and sports books and MEGA$PORTS(R) from a single system. Keno and other
games may be added. The advantages of such terminals include multiple data
applications over a single communication line and lower overall costs for each
product.

                The Company believes that MEGA$PORTS(R), which offers
opportunities for sports wagering by creating pari-mutuel pools on sporting
events, presents a business expansion opportunity for CBS. 

                MEGA$PORTS(R) combines the interest of sporting events with the
potential for large pari-mutuel payoffs. This allows customers two distinct
types of wagering. Daily wagering called "Mega-Picks", on a wide variety of
possibilities such as,


                                       10
<PAGE>

highest scorer in professional basketball; football team to score the most or
least points; quarterback to pass for the most yards; and other unique
possibilities. Any event with a field of players serves as an opportunity to
accept wagers. Weekly multiple proposition, such as Mega$ports Pick "22" and
Pick "10" MEGACARDS(R) invite customers to pick all professional football
winners, all professional basketball winners, or a combination of winners
ranging between 14-22 events on a given Sunday. Megasports Pick "22" jackpots
began at $1,000,000 and increased progressively as tickets were sold.

                The Company believes potential exists for MEGA$PORTS(R) products
in the global market. International rivalries could add more interest to global
events with the introduction of MEGA$PORTS(R). As different geographical groups
wager, revenues could be generated in these new MEGA$PORTS(R) wagering
propositions.

                It is, and has been, the Company's strategy to increase the
public's awareness of Mega$ports pari-mutuel sports wagering products. Toward
this goal, the Company implemented a marketing plan aimed at increasing the
typical sports better's awareness of the new pari-mutual sports wagering system.
In the past, pari-mutuel wagering systems have been used exclusively for race
wagering. For sports betters, the concept of pari-mutuel sports wagering is
vastly different when compared to types of wagers offered by traditional
sports books. The acceptance, by bettors, of pari-mutuel sports wagering in the
state of Nevada has been slower than anticipated. The Company believes that
continued exposure of Mega$ports products to the sports wagering market will
prompt greater acceptance and allow bettors to enjoy new ways to wager on
sporting events. The Company has implemented a cost reduction program and
restructured the joint venture to better match its business activity. There can
be no assurance that the increased acceptance of pari-mutuel sports wagering by
the public or the reduction of costs of Mega$ports will result in the
profitability of Mega$ports.


Regulation and Licensing

                The ownership and operation of casino gaming facilities,
including race and sports books, in Nevada are subject to extensive state and
local regulation. The Company's gaming operations are subject to the Nevada
Gaming Control Act and the regulations promulgated thereunder (hereinafter
collectively referred to as the "Nevada Act") and various local regulations. The
Company's gaming operations also are subject to the licensing and regulatory
control of the Nevada Gaming Commission (hereinafter referred to as the
"Commission"), the Nevada State Gaming Control Board (hereinafter referred to as
the "Board"), the Clark County Liquor Gaming Licensing Board, the City of Las
Vegas and smaller local jurisdictions. The Commission, the Board, the Clark
County Liquor Gaming Licensing Board, the City of Las Vegas and such smaller
local jurisdictions are hereinafter collectively referred to as the "Nevada
Gaming Authorities."

                The laws, regulations and supervisory procedures of the Nevada
Gaming Authorities have their genesis in various declarations of public policy
which are concerned with, among other things: (i) the prevention of unsavory or
unsuitable persons from having a direct or indirect involvement with gaming at
any time or in any capacity; (ii) the establishment and maintenance of
responsible accounting practices and procedures; (iii) the maintenance of
effective controls over the financial practices of licensees, including the
establishment of minimum procedures for internal fiscal affairs and the
safeguarding of assets and revenues, providing reliable record keeping and
requiring the filing of periodic reports with the Nevada Gaming Authorities;
(iv) the prevention of cheating and fraudulent practices; and (v) the creation
of a source of state and local revenues though taxation and licensing fees.
Changes in such laws, regulations and procedures could have an adverse effect on
the Company's gaming operations.

                Leroy's is currently licensed by the Nevada Gaming Authorities.
Leroy's holds 40 non-restricted sports book gaming licenses. Gaming licenses
require the periodic payment of fees and taxes. Furthermore, gaming licenses are
not transferable.

                The Company is registered in Nevada as a publicly traded
corporation; and as such, is required to submit, on a periodic basis, detailed
financial and operating reports to the Commission. Additionally, the Company may
be required to furnish any other information requested by the Commission. No
person may become a stockholder of, or receive any percentage of profits from
Leroy's, without first obtaining licenses and approvals from the Nevada Gaming
Authorities. The Company and Leroy's have received, from the Nevada Gaming
Authorities, various registrations, approvals, permits and licenses required to
permit to engage in gaming activities in Nevada.

                                       11
<PAGE>

                The Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company or Leroy's,
in order to determine whether such individual is suitable or should be licensed
as a business associate of a gaming licensee. Officers, directors and certain
key employees of Leroy's must file applications with the Nevada Gaming
Authorities and may be required to be licensed or found suitable by the Nevada
Gaming Authorities. Officers, directors and key employees of the Company who are
actively and directly involved in the gaming activities of Leroy's may be
required to be licensed or found suitable by the Nevada Gaming Authorities. The
Nevada Gaming Authorities may deny an application of licensing for any cause
deemed reasonable. A finding of suitability is comparable to licensing, and both
require the submission of detailed personal and financial information followed
by a thorough investigation. An applicant for licensing or a finding of
suitability must pay all of the costs of the investigation. Changes in licensed
positions with the Company or Leroy's must be reported to the Nevada Gaming
Authorities. In addition to their authority to deny an application for a finding
of suitability or licensure, the Nevada Gaming Authorities also have
jurisdiction to disapprove a change in a corporate position. The officers and
directors of the Company, and its subsidiaries, have been found suitable by the
Nevada Gaming Authorities.

                If the Nevada Gaming Authorities were to find an officer,
director or key employee unsuitable for licensing or unsuitable to continue
having a relationship with the Company or Leroy's, the companies involved would
be required to sever all relationships with such a person. Additionally, the
Commission may require the Company or Leroy's to terminate the employment of any
person who refuses to file appropriate applications. Determinations of
suitability or questions pertaining to licensing are not subject to judicial
review in Nevada.

                If it were determined that the Nevada Act was violated by
Leroy's or the Company, the gaming licenses or registration held by the Company
and Leroy's could be limited, conditioned, suspended or revoked subject to
compliance with certain statutory and regulatory procedures. However, at the
discretion of the Commission, the Company and Leroy's and any person involved
could be subject to substantial fines for each separate violation of the Nevada
Act. Furthermore, a supervisor could be appointed by the Commission to operate
the Company's gaming properties and, under certain circumstances, earnings
generated during the supervisor's appointment (except for the reasonable rental
value of the Company's gaming properties) could be forfeited to the State of
Nevada. Limitation, conditioning or suspension of any gaming license or the
appointment of a supervisor could, and certainly the revocation of any gaming
license would, materially adversely affect the Company's gaming operations.

                The beneficial holder of the Company's voting securities,
regardless of the number of shares owned, may be required to file an
application, be investigated, and have his suitability as a beneficial holder of
the Company's voting securities be determined if the Commission has reason to
believe that such ownership would otherwise be inconsistent with the declared
policies of the State of Nevada. The applicant must pay all costs of the
investigation incurred by the Nevada Gaming Authorities in conducting such an
investigation. In addition, the Clark County Liquor Gaming Licensing Board has
taken the position that it has the authority to approve all persons owning or
controlling the stock of any corporation controlling a gaming license.

                The Nevada Act requires any person who acquires more than five
percent (5%) of the Company's voting securities to report the acquisition to the
Commission. The Nevada Act requires that beneficial owners of more than ten
percent (10%) of the Company's voting securities apply to the Commission for a
finding of suitability within thirty (30) days after the Chairman of the Board
mails written notice requiring such a filing. Under certain circumstances, an
"institutional investor," as defined in the Nevada Act, which acquires more than
ten percent (10%), but not more than fifteen percent (15%), of the Company's
voting securities may apply to the Commission for a waiver of such a finding of
suitability if such institutional investor holds the voting securities for
investment purposes only. An institutional investment shall not be deemed to
hold the voting securities for investment purposes only unless the voting

                                       12
<PAGE>

securities were acquired and are held in the ordinary course of business as an
institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of the board of directors
of the Company, any change in the Company's corporate charter, bylaws,
management, policies or operations of the Company, or any of its gaming
affiliates, or any other action which the Commission finds to be inconsistent
with holding the Company's voting securities for investment purposes only.
Activities which are not deemed to be inconsistent with holding voting
securities for investment purposes only include: (i) voting on all matters voted
on by stockholders; (ii) making financial and other inquiries of management of
the type normally made by securities analysts for informational purposes and not
to cause a change in its management, policies or operations; and (iii) such
other activities as the Commission may determine to be consistent with such
investment intent. If the Commission grants a waiver to an "institutional
investor" the waiver does not include a waiver or exemption from the requirement
for prior approval to "acquire control" of a registered corporation. If the
beneficial holder of voting securities who must be found suitable is a
corporation, partnership or trust, it must submit detailed business and
financial information including a list of the beneficial owners. The applicant
is required to pay all costs of investigation.

                Any person who fails, or refuses to, apply for a finding of
suitability, or a license within thirty (30) days after being ordered to do so
by the Commission, or the Chairman of the Board, may be found unsuitable. The
same restrictions apply to a record owner if the record owner, after request,
fails to identify the beneficial owners. Any stockholder found unsuitable and
who holds, directly or indirectly, any beneficial ownership of the common stock
of a registered corporation beyond such period of time as may be prescribed by
the Commission may be guilty of a criminal offense. The Company is subject to
disciplinary action if, after it receives notice that a person is unsuitable to
be a stockholder or to have any other relationship with the Company or its
Subsidiaries, the Company (i) pays that person any dividend or interest upon
voting securities of the Company, (ii) allows that person to exercise, directly
or indirectly, any voting fight conferred through securities held by that
person, (iii) pays remuneration in any form to that person for services rendered
or otherwise, or (iv) fails to pursue all lawful efforts to require such
unsuitable person to relinquish his voting securities for cash at fair market
value.

                The Company is required to maintain a current stock ledger in
Nevada, which may be examined by the Nevada Gaming Authorities at any time. If
any securities are held in trust by an agent or by a nominee, the record holder
may be required to disclose the identity of the beneficial owner to the Nevada
Gaming Authorities. A failure to make such a disclosure may be grounds for
finding the record holder unsuitable. The Company is also required to render
maximum assistance in determining the identity of the beneficial owner. The
Commission has the power to require the Company's stock certificates to bear a
legend indicating that the securities are subject to the Nevada Act. However, to
date, the Commission has not imposed such a requirement on the Company.

                Changes in control of the Company through merger, consolidation,
stock or asset acquisitions, management or consulting agreements, or any act or
conduct by a person whereby he obtains control, may not occur without the prior
approval of the Commission. Entities seeking to acquire control of a registered
corporation must satisfy the Board and the Commission in a variety of stringent
standards prior to assuming control of such registered corporation. The
Commission may also require controlling stockholders, officers, directors and
other persons having a material relationship or involvement with the entity
proposed to acquire control, to be investigated and licensed as part of the
approval process related to the transaction.

                The Nevada legislature has declared that some corporate
acquisitions opposed by management, repurchases of voting securities and
corporate defense tactics affecting Nevada gaming licensee, and registered
corporations that are affiliated with those operations, may be injurious to
stable and productive corporate gaming. The Commission has established a
regulatory scheme to ameliorate the potentially adverse effects of these


                                       13
<PAGE>
business practices upon Nevada's gaming industry and to further Nevada's policy
to: (i) assure the financial stability of corporate gaming operators and their
affiliates; (ii) preserve the beneficial aspects of conducting business in the
corporate form; and (iii) promote a neutral environment for the orderly
governance of corporate affairs. Approvals are, in certain circumstances,
required from the Commission before the Company can make exceptional repurchases
of voting securities above the current market price thereof and before a
corporate acquisition opposed by management can be consummated. The Nevada Act
also requires prior approval of a plan of recapitalization proposed by the
Company's board of directors in response to a tender offer made directly to the
Registered corporation's stockholders for the purposes of acquiring control of
the registered corporation.

                License fees and taxes, computed in various ways dependent upon
the type of gaming activity involved, are payable to the State of Nevada and to
the counties and cities in which the Nevada licensee's respective operations are
conducted. Depending upon the particular fee or tax involved, these fees
indicate taxes are payable either monthly, quarterly or annually and are based
upon either: (i) a percentage of gross revenues received; (ii) the number of
gaming devices operated, or (iii) the number of table games operated. A casino
entertainment tax is also paid by casino operations where entertainment is
furnished in connection with the selling of food or refreshments. Nevada
licensees that hold a license as an operator of a slot route, or a
manufacturer's or distributor's license, also pay certain fees and taxes to the
State of Nevada.

                Any person who is licensed, required to be licensed, registered,
or required to be registered, or is under common control with such person
(hereinafter collectively referred to as "Licensees") and who propose to become
involved in a gaming venture outside the State of Nevada is required to deposit
with the Board, and thereafter maintain, a revolving fund in the amount of
$10,000.00 to pay the expenses of investigation by the Board of his
participation in such foreign gaming. The revolving fund is subject to increase
or decrease in the discretion of the Commission. Thereafter, Licensees are
required to comply with certain reporting requirements imposed by the Nevada
Act. Licensees are also subject to disciplinary action by the Commission if they
knowingly violate any laws of the foreign jurisdiction pertaining to the foreign
gaming operation, fail to conduct the foreign gaming operation in accordance
with the standards of honesty and integrity required of Nevada gaming
operations, engage in activities that are harmful to the State of Nevada or its
ability to collect gaming taxes and fees, or employ a person in the foreign
operation who has been denied a license or finding of suitability in Nevada on
the basis of personal unsuitability. Recent changes in the Nevada Gaming Control
Act would allow the Company to seek a determination of suitability of any
associate or activity associated with the foreign gaming opportunity prior to
engaging in that activity.

Interstate Sports Wagering

                Sports wagering is legal in Nevada, and numerous foreign
jurisdictions, including Canada, Mexico and Australia. Pursuant to the
Professional and Amateur Sports Protection Act - (hereinafter referred to as the
"Sports Act"), which was effective January 1, 1993, the proliferation of
legalized sports books and wagering was significantly curtailed. Although the
Sports Act generally prohibits sports wagering in every jurisdiction, including
those jurisdictions subject to the Indian Gaming Regulatory Act, the Sports Act
does permit sports wagering in those jurisdictions that authorized sports
wagering prior to the effective date of the Act. Thus, sports books and wagering
are permitted to continue to operate in Nevada. Moreover, the Interstate Wire
Act (hereinafter referred to as the "Wire Act"), also prohibits those in the
business of betting and wagering from utilizing a wire communication facility
for the transmission in interstate or foreign commerce any bets, wagers or
information assisting in the placing of such bets and wagers on any sporting
event or contest unless such betting or wagering activity is specifically
authorized in each jurisdiction involved.

                                       14
<PAGE>

                The Company may not accept bets received by use of wire
communications facilities, including telephones and computers, unless such bets
originated in jurisdictions wherein such betting or wagering is legal. Nevada
has amended the Nevada Gaming Control Act to allow licensed race and
sports books in Nevada to accept interstate pari-mutuel wagers from other
jurisdictions in which pari-mutuel wagering is legal. However, the regulations
of the Nevada Gaming Commission currently prohibit any licensed race and sports
book in the State of Nevada from accepting any telephone wagers from interstate
locations. In order for the Company to take advantage of the business
opportunity provided by the law, the Nevada Gaming Commission must amend its
regulatory restrictions ab initio or the Company can petition the Commission to
remove such regulatory restrictions in whole or in part. There can be no
assurance that any regulatory amendment will be authorized, that any such
amendment would be favorable to the Company, or that any such amendment would
not be burdensome to the Company.

                On March 19, 1997 a bill entitled the "Internet Gambling
Prohibition Act of 1997" was introduced in Congress. Since its introduction the
bill has been amended several times. However, the general prohibitions of the
draft legislation would prohibit any person from engaging in the business of
betting or wagering via electronic communication facilities, including the
Internet, if the transmission is not legal in the state or foreign country in
which the transmission either originates or is received. If this bill becomes
law, the Company's ability to take advantage of interstate pari-mutuel wagering
opportunities would be adversely impacted. The Company does not accept wagers
through the Internet.

Competition

                There is intense competition among companies in the gaming
industry, most of which have significantly greater financial, marketing,
technical and other resources than the Company. Leroy's faces competition from
all other sports and race wagering operations in the Las Vegas area and
throughout Nevada. There are currently 136 sports books in Nevada, of which the
Company owns and operates 40. Virtually all of the major casinos in Nevada
operate sports and race books, some of which are larger and offer more amenities
than the Company's locations and some casinos operate sports books at other
casinos. The Hotel/Casino faces competition from all other casinos and hotels in
the Las Vegas area, including competitors located on the Las Vegas Strip, west
of the Las Vegas Strip and in downtown Las Vegas. The Hotel/Casino is
substantially smaller than Las Vegas's premier "mega-resort" and casino hotels,
such as the MGM Grand, Luxor, Excalibur, Tropicana and Bally's and derives a
significant portion of its demand from mega-resort overflow. Hotel room
inventory in Las Vegas expanded by 6,300 rooms in 1997, a significant increase
that will further increase competition. The Hotel/Casino will directly compete
with a number of other operations targeted to local residents as well as with
gaming facilities not related to hotels.

                Gaming has become more accepted by society in recent years.
However, the gaming industry is subject to shifting consumer preferences and
perceptions. A dramatic shift in consumer acceptance or interest in gaming could
adversely affect the Company. In addition, the Company's operations compete with
gaming operations in other parts of the State of Nevada, such as Reno, Laughlin
and Mesquite, with facilities in other parts of the United States and the world
and with state-sponsored lotteries, on and off-track wagering, card parlors,
river boat and Native American gaming ventures and other forms of legalized
gaming. While the Las Vegas market is continuing to offer expanded tourist
attractions, such as theme parks being developed by other casinos, there can be
no assurance that the Las Vegas market will sustain its current growth or
current levels of tourism. Legalized casino gaming in other states and on Native
American reservations will provide strong competition to the Company and could
adversely affect the Company's operations, particularly if such gaming were to
occur in areas close to the Company's operations.

                Future operating results of the Company are subject to
significant business, economic, regulatory and competitive uncertainties and

                                       15
<PAGE>

contingencies, many of which are beyond the control of the Company. There can be
no assurance that the Company's overall business strategy will be successful in
achieving the Company's goal of attracting additional customers to the Company
or increasing the Company's gaming revenues and operating profits.




Employees

                The Company has approximately 271 full and part-time employees,
141 of which are employees of Leroy's, 97 of which are employees of the Hotel
Operator and 33 of which are employees of CBS. No employees of the Company are
currently represented by a labor union. The Company does not currently know
whether or to what extent, if any, its employees will in the future be governed
by collective bargaining agreements.

                The continuing proliferation of legalized gaming in the United
States and the resulting increase in the number of casinos have created a
competitive environment for qualified casino management personnel and other
experienced casino employees on a national basis. Management believes that this
industry-wide factor will make it more difficult for the Company to attract and
retain a trained labor force, which may adversely affect the business of the
Company. If the Company is unable to attract and retain qualified management
personnel, the growth and profitability of the Company may be adversely
affected.

Item 2.         Properties

                The Company's corporate offices and central computer operations
and CBS' operations are located in a facility of 29,250 square feet in Las
Vegas, Nevada, which is owned by CBS. CBS is a debtor under a loan of which
approximately $2 million is outstanding as of January 31,1998. The loan accrues
interest at an 8% annual interest rate, is due in full on September 2015 and is
secured by a deed of trust and assignment of leases and rents in favor of the
lender. The Company has guaranteed CBS' obligations under the loan.

                The Company retains its main sports and race book license at the
Hotel/Casino and operates 39 other sports books at locations in major
metropolitan areas in Nevada (of which 21 are located in the Las Vegas area and
10 in the Reno area, with 8 others located in cities throughout the State of
Nevada, including Laughlin, Elko, Mesquite and Jackpot). The Company is a lessee
at each location.

                At its satellite sports book locations, the Company leases
between 80 - 300 square feet from the casinos in which it operates for monthly
fees. Satellite location leases vary from one-year to six-year terms (except one
which is on a month to month basis) with automatic one-year extensions unless
either party gives ninety days prior notice of termination. Total rental expense
under the leases was approximately $544,000 and $479,000 for the years ended
January 31,1998 and 1997, respectively.

                The Hotel Operator leases the real property on which the
Hotel/Casino is located pursuant to an 80-year ground lease of which 61 years
are remaining. The method of calculation of percentage rent with respect to
gross gaming revenues under the lease is the subject of certain litigation. See
"Legal Proceedings." The Hotel Operator also is the debtor under a loan, of
which approximately $2.4 million of principal is outstanding as of January 31,
1998. The loan accrues interest at a current annual rate of 10.25% per year, is
due in full on April 5, 2001 and is secured by a deed of trust, assignment of
rents and security agreement in favor of the lender.



                                       16
<PAGE>
Item 3.         Legal Proceedings

Racusin

                On August 23, 1995, Leroy's filed a Complaint for Declaratory
Relief in the District Court of Clark County, Nevada, requesting that the Court
declare that two written agreements between Leroy's and Michael Racusin, d.b.a.
M. Racusin & Company, ("Racusin") are vague, ambiguous and unenforceable
contracts. Racusin had introduced certain underwriters, including Equity
Securities Trading Co., Inc. (one of the underwriters of the Company's initial
public offering) to Leroy's and provided Leroy's certain advisory services. The
specific language of the alleged unenforceable agreements provides that Leroy's
will pay to Racusin (i) a commission equal to 5% of the purchase price of
Leroy's in the event Racusin brings in a buyer for Leroy's and (ii) compensation
equal to 4.5% of the "final evaluation in the form of Leroy's common stock plus
$150,000 in cash upon completion of common offering or IPO."

                Racusin's position is that Racusin is entitled to either 4.5%
of the stock of Leroy's or 4.5% of the Company's common stock and $150,000 in
cash as a result of the completion of the Company's initial public offering of
its common stock in May 1996. The Company believes that the agreements are
unenforceable contracts.

                On September 27, 1995, Racusin answered the complaint asserting
that the two agreements are clear and speak for themselves. The case was removed
to the Nevada Federal District Court on September 30, 1995. On October 8, 1996
the Nevada Federal District Court granted Racusin's motion to join the Company
as a party to the litigation. On January 25, 1997, Racusin filed a motion for
summary judgment requesting the Court find that Leroy's is an alter ego of the
Company. It was the Company's position that Racusin cannot evidence that there
has been a defacto merger between the Company and Leroy's.

                On August 1, 1997, the U.S. District Court of Nevada orally
issued a declaratory judgement with respect to the lawsuit. The Court held that
pursuant to the terms of the agreements, Racusin was entitled to receive from
the Company a commission, as adjusted, of $648,375, plus prejudgment interest of
$87,535 through September 5, 1997. The Court's holding indicated that Racusin
was entitled to the commission because he served as a finder to the Company for
the underwriter of the Company's initial public offering in May, 1996, which
enabled the Company to make a public sale of Leroy's assets. On September 5,
1997, the Company tendered the entire judgement of $735,910 which included
interest to Racusin. As the payment to Racusin represented a cost of the
Company's initial public offering, the entire amount paid to Racusin reduced its
paid-in capital. The declaratory judgement of the Court is not final. On
September 19, 1997, Racusin filed a Notice of Appeal with the Court. The
Company's Answering Brief has been submitted and the court is awaiting Racusin's
Reply Brief.

Ground Lease

                On March 31, 1997, James A. Rissler and Patricia R. Rissler
("Landlord") pursuant to the ground lease between the Hotel Operator and the
Landlord by which the Company leases the real property on which the Hotel/Casino
is located, filed a Complaint for Declaratory Relief in the District Court of
Clark County, Nevada, requesting that the amounts paid to Jackpot for its
operation of the slot machines in the Hotel/Casino is not deductible in
calculating the gross gaming revenues for purpose of determining the rent
payable by the Hotel Operator to the Landlord under the Lease. The specific

                                       17
<PAGE>

language of the Lease provides that the Hotel Operator (as the tenant under the
Lease) pay the Landlord additional monthly rent of 5% of (i) the rental paid by
a gaming entity (a subtenant, concessionaire or assignee of the Hotel Operator)
to the Hotel Operator, or (ii) the gross gaming revenue received in or on the
premises, whichever is applicable, or if both are applicable, whichever is
greater.

                The Landlord's position is that any payments made to Jackpot for
operation of the slot machines is not permitted to be deducted prior to
calculating the amount due as additional rent to the Landlord under the Lease.
Pursuant to the original complaint, the Landlord requested approximately $5,600
of additional rent that is due from July 1996 through December 1996 and future
additional rent as it may come due pursuant to the Landlord's calculation.

                The Company believes that the Landlord is only entitled to
receive 5% of the gross gaming revenues received by the Hotel Operator. The
Landlord has been paid 5% of the gross gaming revenues received by the Hotel
Operator and its predecessors without objection for the past 18 years under the
Lease. The Company believes that the Landlord waived any objection to the method
of calculation of the percentage rent by its inaction during the prior 18 years
and the execution of estoppel certificates at the time of the acquisition of the
Hotel/Casino by the Company in May 1996.

                The Landlord also seeks reimbursement of approximately $16,000
for the Landlord's attorney's fees and the Company disputes it is required to
reimburse the Landlord for such fees.

                On March 17, 1998 the court held that the Landlord is entitled
to be paid from the Hotel Operator 5% of the gross gaming revenues received by
all gaming operators at the Hotel/Casino. 

                On April 22, 1998 the Company determined to concentrate its
business efforts on its core competency, sports wagering, and is seeking a
qualified buyer for the hotel, food and beverage operations. In the Company's
accompanying consolidated financial statements for and as of the fiscal years
ended January 31, 1998 and 1997, the results of the hotel, food and beverage
operations has been accounted for as discontinued operations. (See "Strategy --
Discontinued Operations".)
  
Autotote Systems, Inc.

                On March 3, 1998, AWI and Computerized Bookmaking Systems
("CBS") filed a Motion for Preliminary Injunction in the United States District
Court for the District of Nevada, against Autotote Corporation and Autotote
Systems, Inc. (collectively "Autotote") seeking to enjoin Autotote from
reproducing or installing any part of the CBS Race and Sports Book Software
("CBS Software") in terminals used outside of Mexico; using or permitting the
use of the CBS software, including the source code therefore, and employing or
hiring James Connolly ("Connolly") for a period of five years from the date of
the closing in the Autotote/CBS stock transfer agreement. In addition AWI and
CBS asked for damages for the alleged breach by Autotote and ASI of certain
provisions of a Stock Purchase Agreement, a Technology Cross License Agreement,
a Distributorship Agreement, and the International Cooperation Agreement all of
which were executed by the parties on October 25, 1996 (collectively the
"Agreements") and for the infringment by Autotote and ASI of CBS' copyright
interest in, and the misappropriation and conversion of CBS' race and sports
book software. On March 3, 1998 Judge Howard McKibben entered a temporary
restraining order granting the requested relief until March 13, 1998. On March
13, 1998, a preliminary injunction hearing was held before Judge McKibben during
which the parties stipulated, and the court subsequently ordered the following:
there would be (1) no sale or transfer of the CBS Software by Autotote, (2) no
sale or transfer of a derivative work of such software by Autotote without ten
(10) days prior notice to AWI, in writing

                                       18
<PAGE>
identifying the transferee, the date of the transfer and the functionality of
the derivative work, (3) no transfer by Autotote of the CBS Software or source
code, nor would Autotote copy or modify the CBS Software or source code, except
to the extent permitted by contract, and (4) a diligent effort shall be made by
Autotote to retrieve any CBS software which has been transferred pursuant to the
terms of the contract. Based upon the foregoing, the judge denied the motion for
preliminary injunction without prejudice, and indicated that AWI could renew the
motion in the event Autotote attempted to copy or modify the CBS software.

                On April 15, 1998, Autotote and ASI filed a counterclaim against
AWI and CBS with the United State District Court for the District of Nevade,
asking that the Agreements be rescinded on the grounds that there was a failure
of consideration, failure of meeting of the minds, mutual mistake, lack of an
intent to perform and impossibility of performance. In addition, Autotote and
ASI asked the Court to award damages for AWI and CBS' alleged breach of certain
of the Agreements, and for fraud, international interference with contractual
relations, negligent interference with contractual relations, international
interference with propsective economic advantage, false light and liable.
Autotote and ASI requested the Court to award compensatory damages in excess of
$75,000 plus interest, and punitive damages. This lititgation will now proceed
to the discovery phase. 

                The Company is not a party to any other material pending legal
proceeding, nor, to the Company's knowledge, is any other material legal
proceeding threatened against it.


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

                None.



                                   PART II

Item 5.         Market for Common Equity and Related Stockholder Matters

                The Company's common stock is reported by the NASDAQ National
Market System under the symbol "BETM". The following table sets forth the range
of high and low bid quotations for the Company's common stock for each of the
periods indicated as reported by the NASDAQ National Market System. Bid
quotations reflect inter-dealer prices, without retail markup, markdown or
commission and may not necessarily represent actual transactions.


Quarter Ended                              High                       Low
-------------                              ----                       ---
July 31, 1996                              10 3/4                     6 3/4
October 31, 1996                           10 1/4                     6 5/8
January 31, 1997                           15 1/4                     9        
April 30, 1997                             11 3/4                     7 1/2
July 31, 1997                              12 5/8                     7 3/4
October 31, 1997                           11                         7 3/4
January 31, 1998                            9 3/8                     5


                The approximate number of record holders of shares of the common
stock of the Company outstanding as of April 7, 1998 was 45. No cash dividends
have been declared or paid on the Company's common stock.

                In November 1997, the Company entered into a stock purchase
agreement with Imagineering Systems, Inc. ("ISI") and its shareholders. The
agreement provides that upon receipt of regulatory approval and certain other
events, the shareholders of ISI will receive $500,000 in cash and common stock
of the company equal in value to $500,000 in exchange for all the common stock
of ISI. The Company believes the sale of its common stock to the ISI
shareholders will be exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended because the common stock will be sold to a
limited group of persons, each of whom are believed to be sophisticated
investors and will be purchasing for investment without a view to further
distribution.

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

                The Company was incorporated under the laws of the State of
Nevada on August 2, 1995 to serve as the holding company of Leroy's, the Hotel
Operator and the Casino Operator and through the Reorganization became such
holding company. The Company did not conduct operations prior to the
reorganization.

Results of Operations

Fiscal Year ended January 31, 1998 compared to the Fiscal Year ended January 31,
 1997.

                Revenues for the Fiscal Year ended January 31, 1998, were
$9,301,000, an increase of $2,831,000 or 43.8% from revenues of $6,470,000 for
the Fiscal Year ended January 31,1997. The overall increase in revenues between
fiscal years was primarily attributed to the acquisition of Computerized
Bookmaking Systems, Inc. On October 25, 1996, the Company acquired Computerized

                                       19
<PAGE>

Bookmaking Systems, Inc. ("CBS"), located in Las Vegas, Nevada. Revenues from
CBS for the Fiscal Year ended January 31, 1998 were approximately $2,962,000 an
increase of $2,047,000 from revenues of $915,000 for approximately three months
between October 25,1996 and January 31, 1997. CBS revenues consisted principally
of maintenance sales of $1,798,000 and equipment sales of $614,000 for the
Fiscal Year ended January 31, 1998.

                Revenues from horse and sports wagering were approximately
$5,767,000 for the Fiscal Year ended 1998, an increase $585,000 or 11.3% from
revenues of $5,182,000 for the Fiscal Year ended 1997. The increase in horse and
sports wagering revenues was principally due to favorable variances of sports
book locations operating during both fiscal years ("same store"). Revenues for
same store locations were $4,763,000 for the Fiscal Year ended January 31, 1998
an increase of $462,000 or 10.7% from revenues of $4,301,000 for the Fiscal Year
ended January 31, 1997. Revenues of $837,000 for the Fiscal Year ended 1998 at
locations that were not operating in both periods decreased $44,000 or 5.0% from
revenues of $881,000 for the Fiscal Year ended 1997. The Company was licensed
and operated a total of 43 sportsbook locations during the fiscal years ended
January 31, 1998 and 1997. Other revenues of $167,000 for the Fiscal Year ended
1998 were generated primarily from pari-mutuel race and sports wagering, the
early buyout of a sports book lease, the sale of an existing unused liquor
license and the collection of a bad debt. The Company believes the increase in
revenues between fiscal years was also due to the favorable results of college
football, professional basketball and boxing wagering which were positively
impacted by the lack of success of bettors in wagering selections. Handle (the
total amount wagered at the Company's sports and race books) for the Fiscal Year
ended 1998 was $93,621,000, an increase of $10,317,000 or 12.4% from the handle
of $83,304,000 for the Fiscal Year ended 1997. The Company believes the increase
in handle for the Fiscal Year ended 1998 compared to the Fiscal Year ended 1997
was principally related to the increased popularity of baseball wagering
throughout the state of Nevada in addition to the Company's increased marketing
effort to promote name recognition. The Company's baseball handle was
$23,174,000, an increase of $5,862,000 or 33.9% from handle of $17,312,000 for
the Fiscal Year ended 1997. The statewide baseball handle, including the
Company's handle, was $643,906,000 for the Fiscal Year ended 1998 an increase of
$33,300,000 or 5.5% from handle of $610,606,000 for the Fiscal Year ended 1997.
The Company was able to benefit from the statewide increase in baseball wagering
by offering more baseball simulcasting at many of the Company's sports books. In
addition to the statewide increase in baseball handle the Company initiated an
extensive marketing campaign promoting the name recognition of "Leroy's" to
attract more sports wagering customers to the Company's sports book locations.
The Company also installed a new state-of-the-art sports wagering system which
provides greater functionality and allows customers to cash winning tickets and
simultaneously place additional wagers at the same betting window. An increase
or decrease in handle is not necessarily indicative of an increase or decrease
in revenues or profits. The Company's net win percentage (revenues divided by
handle) for all race and sports wagering was 6.0% for the Fiscal Year ended
1998, a decrease of 3.2% compared to the Company's net win percentage for all
race and sports wagering of 6.2% for the Fiscal Year ended 1997. Net win
percentage fluctuates depending on the outcome of various sporting events within
the reporting period. The decrease in the Company's net win percentage between
the fiscal years was attributed to unfavorable results in hockey and parlay
cards offset by favorable results from football, basketball and boxing.

                Revenues from Casino operations of $572,000 increased $200,000
or 53.8% as compared to revenues of $372,000 for the Fiscal Year ended 1997. The
increase in revenues was principally due to the Company's completion of the
acquisition of the Casino on May 15, 1996.

                Direct costs were $6,810,000 for Fiscal Year ended 1998, an
increase of $2,464,000 or 56.7% from direct costs of $4,346,000 for the Fiscal
Year ended 1997. Direct costs include product and installation cost of sales,
labor costs, gaming taxes and supplies, rent, marketing and other costs. The
increase in direct costs was principally attributed to the horse and sports
wagering operations and the acquisition of CBS. Direct costs associated with

                                       20
<PAGE>

horse and sports wagering were $4,978,000 for the Fiscal Year ended 1998, an
increase of $1,337,000 or 36.7% as compared to direct costs of $3,641,000 for
the Fiscal Year ended 1997. The increase in direct costs associated with horse
and sports wagering was primarily due to marketing, rent, gaming taxes and
license fees. The Company increased its marketing expenses by $641,000 between
fiscal years in order to implement a strategic plan aimed at increasing Leroy's
name recognition. The increase in rent, gaming taxes and license fees of
$196,000 between fiscal years was principally related to the increase in horse
and sports wagering handle and revenues. The acquisition of CBS, which occurred
during the Third Quarter of Fiscal 1997, contributed to an increase in direct
costs of $897,000 for the Fiscal Year ended 1998. Direct costs associated with
Casino operations were $550,000 for the Fiscal Year ended 1998, an increase of
$235,000 or 74.6% as compared to direct costs of $315,000 for the Fiscal Year
ended 1997. The increase in direct costs for the Casino is principally
attributed to the acquisition which occurred during the Second Quarter of Fiscal
1997 in addition to increases in labor costs, slot expenses, entertainment,
taxes and licenses and rent. Direct costs as a percentage of revenues was 73.2%
for the Fiscal Year ended 1998 an increase of 8.9% as compared to direct costs
as a percentage of revenues of 67.2% for the Fiscal Year ended 1997. This
increase is principally attributed to the Casino and horse and sports wagering
segments.

                Research and Development expenses were $594,000 for the Fiscal
Year ended 1998 and increase of $470,000 or 379.0% from $124,000 for the Fiscal
Year ended 1997. The increase in expenses relate exclusively to CBS and is
principally attributed to software and hardware development of new products and
the acquisition which occurred during the Third Quarter of Fiscal 1997. CBS has
incurred approximately $237,000 during the Fiscal Year ended 1998 for the
development of a self-service wagering terminal.

                Selling, general and administrative expenses were $2,582,000 for
the Fiscal Year ended 1998, an increase of $1,415,000 or 121.3% from selling,
general and administrative expenses of $1,167,000 for the Fiscal Year ended
1997. The increase in selling, general and administrative expenses was
principally due to increased expenditures at the corporate level. Corporate
level selling, general and administrative expenses were $1,540,000 for the
Fiscal Year ended 1998, an increase of $1,408,000 or 1066.7% compared to
$132,000 for the Fiscal Year ended 1997. The increase in expenses is attributed
to labor costs, legal, accounting, other professional services, and travel
expenses. These expenditures were incurred to hire additional personnel for the
Company's consolidation of accounting, compliance, marketing, human resources
and treasury functions at the corporate level to support increased regulatory
and public disclosure burdens as a publicly owned company, litigation services
and to review potential acquisitions. Labor costs for the fiscal year ended
January 31, 1998 increased by approximatley $675,000. The acquisition of CBS,
which occurred during the Third Quarter of Fiscal 1997, contributed to an
increase in the selling, general and administrative expenses of $288,000 for the
Fiscal Year ended 1998. Selling, general and administrative expenses associated
with horse and sports wagering were $471,000 for the Fiscal Year ended 1998, a
decrease of $295,000 or 38.5% as compared to selling, general and administrative
expenses of $766,000 for the Fiscal Year ended 1997. The decrease between the
fiscal years was principally due to a reduction in labor costs associated with
the transfer of personnel to the corporate level. Selling, general and
administrative costs associated with the Casino were $26,000 for the Fiscal Year
ended 1998, an increase of $16,000 or 1.6% as compared to $10,000 for the Fiscal
Year ended 1997. The increase is principally due to increased legal costs
associated with the ground lease litigation. Selling, general and administrative
expenses were 27.8% of revenues for the Fiscal Year ended 1998 an increase of
54.4% compared to 18.0% for the Fiscal Year ended 1997. The increase in selling,
general and administrative expenses as a percentage of revenue between the
fiscal years was principally due to increased expenses at the corporate level.

                Restructuring expenses were $489,000 for the Fiscal Year ended
1998, an increase of $486,000 from restructuring expenses of $3,000 for the
Fiscal Year ended 1997. The increase was principally attributed to a writeoff of
the Maga$ports(R) investment balance of $461,000 and severance payments related
to the reduction of personnel of $25,000. 

                The impairment loss for long-lived assets of $3,354,000 for the
Fiscal year ended 1998 relates to the hotel, food and beverage operations which
are being held for sale. In Fiscal 1998, the Company adopted the provisions of

                                       21
<PAGE>

Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles, including goodwill, to be held and used by an entity, be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset(s) may not be recoverable. The continued negative
cashflow from the Hotel, food and beverage operations was an indicator of
potential impairment under SFAS 121. This write down resulted in a charge to
income from continuing operations which is included in the Statement of
Operations as Impairment of long-lived assets. The estimated fair value of the
hotel facility was established based upon a multiple of its earnings before
interest, taxes, depreciation and amortization as well as the undiscounted cash
flows anticipated from operating the Hotel.

                Depreciation and amortization was $658,000 for the Fiscal Year
ended 1998, an increase of $402,000 or 157.0% from depreciation and amortization
of $256,000 for the Fiscal Year ended 1997. An increase of approximately $93,000
relates to amortization expense attributed to intangible assets associated with
the acquisition of CBS. The remaining increase of $309,000 relates to
depreciation expense and was principally due to capital equipment associated
with the acquisition of CBS and new capital equipment purchases by horse and
sports wagering operations to support a new sports wagering system.

                Other expense of $1,822,000 for Fiscal Year ended 1998, varied
unfavorably by $1,968,000 or 1,347.9% from other income of $146,000 in the
Fiscal Year ended 1998. The unfavorable variance between fiscal years was
principally due to the equity in loss from the Mega$ports joint venture of
$1,762,000. The unfavorable variance is also attributed to an increase in
interest expense of $246,000, principally due to the increase in the long-term
debt of CBS offset by an increase in interest and other income of $40,000..

                Net loss from continuing operations for the Fiscal Year ended
1998 of $6,979,000 varied unfavorably by $7,667,000 compared to the net income
from continuing operations of $688,000 for Fiscal Year ended 1997. The
unfavorable variance between fiscal years was primarily the result of the
impairment of long-lived assets charge of $3,354,000 and the equity of loss in
the joint venture Mega$ports of $1,792,000 for the fiscal year ended January 31,
1998. Net loss from horse and sports wagering operations of $162,000 for the
Fiscal Year ended 1998 varied unfavorably by approximately $685,000 as compared
to the net income of $523,000 for the Fiscal Year ended 1997. The net loss from
CBS operations for the Fiscal Year ended 1998 was approximately $2,164,000 which
includes the equity in loss from the Mega$port(R) joint venture of $1,792,000 
and the write down of the investment account of $461,000. The net loss at the
corporate level of $1,279,000 for the Fiscal Year ended 1998 varied unfavorably
by $1,426,000 as compared to net income of $147,000 for the Fiscal Year ended
1997. The net loss from the Casino operations of $20,000 for the Fiscal Year
ended 1998 varied unfavorably by $53,000 as compared to the net income of
$33,000 for the Fiscal Year ended 1997.
    

                                       22
<PAGE>
Discontinued Operations

                On April 22, 1998 the Company determined to concentrate its
business efforts on its core competency, sports wagering, and is seeking a
qualified buyer for the hotel, food and beverage operations. In the Company's
accompanying consolidated financial statements for and as of the fiscal years
ended January 31, 1998 and 1997, the results of the hotel, food and beverage
operations has been accounted for as discontinued operations. Revenues from
hotel, food and beverage operations of $3,308,000 for the Fiscal Year 1998 an
increase $748,000 or 29.2% as compared to revenues of $2,560,000 for the Fiscal
Year 1997. The increase in revenues was principally due to the Company's
completion of the acquisition of the Hotel/Casino on May 15, 1996. The Hotel's
average occupancy rate was 72.6% for the Fiscal Year ended January 31, 1998 a
decrease of 11.1% compared to the Hotel's average occupancy rate of 81.7% for
the Fiscal Year ended of 1997. The decrease in average occupancy is primarily
due to increased competition by new and expanded hotels in the Las Vegas area.
Direct costs associated with hotel, food and beverage operations were $2,739,000
for the Fiscal Year ended 1998, an increase of $740,000 or 37.0% as compared to
direct costs of $1,999,000 for the Fiscal Year ended 1997. The increase in
direct costs is principally attributed to the acquisition which occurred during
the Second Quarter of Fiscal 1997, in addition to increases in labor costs, food
and beverage costs, housekeeping expenses, marketing, reservation fees,
franchise fees and repairs and maintenance expenses. Selling, general, and
administrative costs associated with the hotel, food and beverage operations
were $930,000 for the Fiscal Year ended 1998, and increase of $354,000 or 61.5%
as compared to $576,000 for the Fiscal Year ended 1997. The increase was
principally due to a write off of $234,000 of capitalized construction and
remodeling expenses related to the renovation of the Hotel/Casino, in addition
to, an increase in labor-related costs, insurance, property taxes and utilities
expenses. Net loss from discontinued operations for the Fiscal Year ended 1998
of $1,005,000 varied unfavorably by $439,000 compared to the net loss from
discontinued operations of $566,000 for the Fiscal Year ended 1997. The Company
estimates that operating losses to be incurred during the phase out period and
estimated costs of disposal to approximate $862,000.

Liquidity and Capital Resources

                As of January 31, 1998, working capital was $1,289,000.
               
                Cash used in operating activities was $439,000 for the Fiscal
Year ended 1998 compared to cash provided by operating activities of $1,222,000
for the Fiscal Year ended 1997. Net cash provided by investing activities was
$196,658 for the Fiscal Year ended 1998 compared to cash used in investing
activities of $14,377,981 for the Fiscal Year ended 1997. The variance is
principally attributed to the acquisition of subsidiaries and the investments
made with the proceeds from the initial public offering of common stock. Net
cash used in financing activities amounted to $941,000 for the Fiscal Year ended
January 31, 1998 compared to cash provided by financing activities of
$12,494,000 for the Fiscal Year ended 1997. The variance related to the use of
cash in financing activities is principally due to the proceeds provided by the
initial public offering of common stock during Fiscal 1997.

                In March 1995 Leroy's borrowed approximately $1,200,000 from
Pioneer Citizen's Bank of Nevada, which was loaned to the Hotel Operator to
acquire the initial 50% in the Hotel/Casino. As of January 31,1998 the
outstanding principal on the loan was $501,000. The loan was repaid on March
31, 1998.


<PAGE>

                The Hotel Operator, reported as part of the discontinued
operations, is a debtor under a loan (outstanding principal of $2,426,000 as of
January 31,1998) from American Bank of Commerce ("Bank") secured by a deed of
trust, assignment of rents and security agreement with respect to the
Hotel/Casino. The loan bears a variable annual interest rate and matures on
April 5, 2001. The current and annual interest rate on the loan is 10.25%.
Leroy's has guaranteed the Bank all indebtedness under the loan.

                CBS is a debtor under a loan (outstanding principal of
$1,991,000 as of January 31,1998) from Standard Life and Accident Insurance
Company secured by a deed of trust and assignment of rents and leases with
respect to the Company's corporate office building. The loan bears an annual
interest rate of 8% and is due September 2015. The Company has guaranteed CBS'
obligations under the loan.

                Leroy's, was an S Corporation under the Internal Revenue Code.
From inception through February 29, 1996, Leroy's made cash distributions of
approximately $4,400,000 in aggregate to its stockholders. On March 21, 1996,
Leroy's made cash distributions to its stockholders in the aggregate amount of
$3,000,000 representing undistributed earnings as of January 31, 1996, on which
the stockholders had previously paid federal income taxes. Of the $3,000,000
distributed, approximately $2,400,000 was loaned back to Leroy's by the
stockholders and $558,000 was contributed as capital to Leroy's by the
stockholders. On January 31, 1998, the outstanding aggregate principle balance
of the shareholder notes was $2,433,124. Of the $2,433,124 outstanding, $540,700
in the aggregate is repayable to Michael Merillat, Robert Ciunci, Robert
Barengo, and Michael Roxborough pursuant to restated stockholder notes maturing
on May 1, 1998 and bearing interest at a current annual rate of prime plus 1/2%.
Of the remaining balance, $946,212 is due and payable to Victor Salerno on
November 1, 1998 and $946,212 to Judith Salerno on May 1, 1999 pursuant to
restated stockholder notes bearing interest at a current annual rate of prime
plus 1/2%.

                On May 15, 1996, the Company completed an initial public
offering of 2,250,000 shares (337,500 shares were sold on June 28, 1996 at $6.00
a share upon the exercise of the underwriters option) of its common stock at
$6.00 per share. Simultaneous with the completion of the initial public
offering, the Company completed the purchase of the remaining fifty percent
interest in the 150 room hotel/casino complex located at 3111 W. Tropicana Ave.

                                       23
<PAGE>

in Las Vegas, Nevada. The balance of the proceeds are planned to be used to
support the Company's growth and expansion strategy and for general corporate
purposes. On April 22, 1998 management announced its strategic decision to seek
a qualified buyer for Leroy's Hotel Corporation and B-P Food, commonly referred
to as the Hotel, food and beverage segment of American Wagering, Inc. The
segments have been accounted for as a discontinued operation in accordance with
APB 30, which among other provisions requires the plan of disposal to be carried
out within one year. The results of the Hotel, food and beverage segment have
been reported separately as discontinued operations See "Legal Proceedings."

                The Company's Board of Directors approved a program to
repurchase up to 250,000 shares of the Company's common stock from time to time
in the open market. As at April 22, 1998, 34,200 shares had been
repurchased pursuant to this program. The timing and amount of future share
repurchases, if any, will depend on various factors, including market
conditions, available alternative investments and the Company's financial
position.

                Management believes that the Company will be able to satisfy its
cash requirements for at least the next twelve months without having to raise
additional funds.


Gaming Study Commission

                Congress has created a national gaming study commission
comprised of nine individuals appointed by the President. The general duty of
the commission is to conduct a comprehensive legal and factual study of the
gambling industry in the United States, to review existing Federal, State and
local policy and practices with respect to the legalization or prohibition of
gambling activities, to formulate and propose changes in such policies and
practices and to recommend legislation and administrative actions for such
changes. It is not possible to predict the future impact of the Commission on
the Company and its operations as the Commission could propose legislation and
actions that may materially adversely affect the Company's business.


Recently Issued Accounting Standards

                In June 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," and No. 131, "Disclosures About Segments of an Enterprise and Related
Information." The Company will adopt the provisions of these new accounting
statements in 1999. Management believes that adoption of these provisions will
not have a material impact on the Company's reported financial position or
results of operations.

Year 2000 Compliance

                Many computer systems experience problems handling dates beyhond
the year 1999. Therefore, some computer hardware and sofware will need to be
modified prior to the year 2000 in order to remain functional. The Company is
assessing both the internal readiness of its computer systems and the compliance
of its computer products and software sold to customers for handling the year
2000. The Company expects to implement successfully the systems and programming
changes necessary to address year 2000 issues, and does not believe that the
cost of such actions will have a material effect on the Company's results of
operations or financial condition. There can be no assurance, however, that
there will not be a delay in, or increased costs associated with, the
implementation of such changes, and the Company's inability to implement such
changes could have an adverse effect on future results of operations.

                Cautionary Statements for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of 1995
<PAGE>

                The Statements contained in this document which are not
historical facts contain forward looking information with respect to plans,
projections or future performance of the Company, the occurrence of which
involve certain risks and uncertainties, including that Leroy's takes financial
risks on the outcome of sporting events as a principal betting against its
patrons and uncertainties detailed in the Company's filings with the Securities
and Exchange Commission.

Item 7.   Financial Statements.

          Report of Independent Public Accountants.                        30

          Consolidated Balance Sheets as of January 31, 1998 and 1997.     31 

          Consolidated Statements of Operations for the years ended
          January 31, 1998, and 1997.                                      32

          Consolidated Statements of Stockholders' Equity for the years
          ended January 31, 1998, and 1997.                                33

          Consolidated Statements of Cash Flows for the years ended
          January 31, 1998, and 1997.                                      34

          Notes to Consolidated Financial Statements.                      35-51

Item 8.   Changes in and Disagreements with Accountants on Accounting
          and Financial Disclosure

          None.



                                       24
<PAGE>

                                    Part III

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

                The directors and executive officers of the Company are as 
                follows:


Name     *                     Age    Position
----                           ---    --------
Victor J. Salerno...........   54     President, Chief Executive Officer and
                                      Director
Robert D. Ciunci............   51     Chief Operating Officer, Chief Financial
                                      Officer, Executive Vice President and
                                      Director
Michael Merillat............   47     Vice President, Secretary and Director
Robert R. Barengo...........   56     Director

* Michael Roxborough was a director of the Company from its inception to March
11, 1998. At which time, Mr. Roxborough has resigned as a Director to
concentrate on other business endeavors.

                Victor J. Salerno has been President, Chief Executive Officer
and a Director of the Company since its inception. Mr. Salerno has been the
President, Chief Executive Officer and a Director of Leroy's since September
1979. Mr. Salerno served as an Executive Vice President and Director of Autotote
CBS Corporation, a company that designs and installs computer systems for the
sports betting business, from April 1989 until March 1, 1996. He is a past
president of the Nevada Association of Race and Sports Operators. Mr. Salerno is
the former brother in-law of Mr. Merillat.

                Robert D. Ciunci has been Executive Vice President, Chief
Financial Officer and a Director of the Company since its inception and became
the Chief Operating Officer of the Company on March 7, 1997. Mr. Ciunci has been
the Chief Financial Officer of Leroy's since August 1, 1995. From 1981 to June
1995 he was employed by Autotote Corporation, a company that provides
computerized wagering systems to racetracks and off track race wagering
establishments, as its Vice President Finance, Secretary and Treasurer. He holds
a master's degree in business administration and has been a certified public
accountant since 1971.

                Michael Merillat has been Vice President, Secretary and a
Director of the Company since its inception. Mr. Merillat has been employed by
Leroy's since September 1978, currently as Vice President, Secretary, and a
Director. Mr. Merillat is the former brother-in-law of Mr. Salerno.

                Robert R. Barengo has been a Director of the Company since its
inception. Mr. Barengo has been a Director of Leroy's since February 1992. He
has been an attorney in private practice since 1972. Mr. Barengo was Speaker Pro
Tempore and Speaker of Nevada's Assembly from 1978 to 1983. Mr. Barengo has been
a director of the Riviera Holdings Corporation and the Riviera Hotel and Casino
since 1992. Since 1993, Mr. Barengo has also been and continues to be at present
President and the sole shareholder of Silver State Disseminators Company, a
company licensed by Nevada gaming authorities to disseminate racing information
in the State of Nevada. Mr. Barengo has also been since 1993 and continues to be
at present Chairman of the Nevada Dairy Commission. Mr. Barengo is a member of
the Audit Committee of the Company's Board of Directors.

                                       25
<PAGE>
Item 10.          Executive Compensation

                The following table sets forth certain information covering the
compensation paid or accrued by the Company during the fiscal year indicated to
its Chief Executive Officer and to its most highly compensated executive officer
whose annual salary and bonus exceeded $100,000 during the fiscal year ended
January 31, 1998 ("named executive officer"):


                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                          Annual Compensation          Long term
                                            ----------------           Compensation
                                                                       Awards

Name and                   Fiscal Year Ended                            Number of Securities
Principal Position           January 31      Salary        Bonus ($)    Underlying Options(1)
------------------           ----------      ------        ---------    ---------------------
<S>                             <C>             <C>            <C>               <C>
Victor J. Salerno             1998          $200,000          9,391                 0
President and Chief           1997          $208,000         39,604                 0      
Executive Officer

Robert D. Ciunci              1998          $110,000          6,261                 0
Chief Operating Officer,      1997          $110,000         31,262            50,000            
Chief Financial Officer &
Executive Vice President
</TABLE>


1. Represents options granted under the Company's 1995 Stock Option Plan.
   Mr. Salerno and Mr. Ciunci were not granted options during the fiscal       
   year ended January 31,1998.



                  The following table sets forth the number of exercisable and
unexercisable options as of January 31,1998, and the value of such options for
the Chief Executive Officer and the named executive officer.


                 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                     AND FISCAL YEAR END OPTIONS VALUES
<TABLE>
<CAPTION>
(a)               (b)               (c)              (d)                                (e)
------------------------------------------------------------------------------------------------------------
                                                     Number of Securities                Value of
                                                     Underlying                          Unexercised
                                                     Unexercised Options                 In-The-Money
                  Shares                             At Fiscal Year end (#)              Options at FY End ($)
                  Acquired or       Value
Name              Exercised (#)     Realized         Exercisable/Unexercisable        Exercisable/Unexercisable
----              -------------     --------         -------------------------          ----------------------
<S>                   <C>               <C>                <C>                              <C>
Victor J.              0              0                     0/0                                  0/0
Salerno

Robert D.              0              0                     0/50,000(1)                          0/$157,600
Ciunci
</TABLE>

(1)      Options become exercisable on August 22, 1999 and expire on
         August 22, 2004.

Director's Compensation

                Directors who are not employees or consultants of the Company
receive a fee of $200 plus traveling expenses for each Board meeting they
attend.

                                       26
<PAGE>


                During the fiscal year ended January 31,1998, pursuant to the
Company's Directors' Stock Option Plan, options to purchase, respectively, 400
and 300 shares of the Company's common stock at an exercise price of $6.69 per
share were granted to Messrs. Barengo and Roxborough. These options are fully
exercisable on January 31, 1999 and expire on January 31, 2008.

                In the year ended January 31,1998, the Company paid $21,429 to
Las Vegas Sports Consultants, Inc. for certain consulting services and
Mega$ports(R) paid $74,750 to Las Vegas Sports Consultants. Mr. Roxborough is
the President of Las Vegas Sports Consultants, Inc.

Employment Agreements

                On May 10, 1996, the Company entered into employment agreements
with Victor Salerno and Robert Ciunci. Each agreement has a five-year initial
term and shall automatically renew for one-year periods unless either party
gives the other sixty (60) days written notice to terminate prior to the
expiration of the current term.

                Pursuant to his employment agreement, Mr. Salerno is employed as
the President and Chief Executive Officer of the Company for a base salary of
$200,000 per year ("Base Salary"). In addition, Mr. Salerno will be entitled to
receive a performance bonus each calendar year ("Performance Bonus") equal to 5%
of the Company's Pre-Tax Earnings (as defined in the agreement) for the prior
fiscal year. In the event the agreement is terminated by the Company in
violation thereof, the Company has agreed to pay as termination benefits to Mr.
Salerno a continuation of his Base Salary, Performance Bonus and all other
benefits under the agreement for the remainder of the then outstanding term. In
the event Mr. Salerno dies or becomes disabled (as defined in the agreement),
the Company has agreed to pay the termination benefits for up to one year. Mr.
Salerno is entitled to participate in the Company's benefit plans available to
the Company's officers and employees generally.

                Pursuant to his employment agreement, Mr. Ciunci is employed as
the Chief Financial Officer and Executive Vice President of the Company for a
base salary ("Base Salary") of $110,000 per year plus a performance bonus
("Performance Bonus") each calendar year equal to 3% of the Company's Pre-Tax
Earnings (as defined in the agreement) for the prior fiscal year. In the event
the agreement is terminated by the Company in violation thereof or there is a
"Change of Control" or "Constructive Termination," the Company has agreed to pay
to Mr. Ciunci, as termination benefits, a continuation of his Base Salary,
Performance Bonus and all other benefits under the agreement for the remainder
of the then outstanding term. A Change of Control occurs when a substantial
portion of the assets of the Company is transferred, exchanged or sold to a
non-affiliated third party or any person other than Mr. Salerno becomes the
owner of securities of the Company representing 35% or more of the combined
voting power of the Company's securities then outstanding. A Constructive
Termination occurs when Mr. Ciunci is not re-appointed or re-elected to the
position of Executive Vice President and Chief Financial Officer or if there is
a change of his duties inconsistent with such offices. In the event Mr. Ciunci
dies or becomes disabled (as defined in the agreement), the Company has agreed
to pay the termination benefits for up to one year. Mr. Ciunci is entitled to
participate in the Company's benefit plans available to the Company's officers
and employees generally.

Item 11.         Security Ownership of Certain Beneficial Owners and Management

                The following table sets forth, at April 7, 1998, the number
and percentage of shares of Common Stock which, according to information
supplied to the Company, are beneficially owned by: (i) each person who is a
beneficial owner of more than 5% of the Common Stock; (ii) each of the
directors, and named executive officers of the Company individually; and (iii)
all current directors and executive officers of the Company as a group. Under
rules adopted by the Securities and Exchange Commission, a person is deemed to

                                       27
<PAGE>

be a beneficial owner of Common Stock with respect to which he has or shares
voting power (which includes the power to vote or to direct the voting of the
security), or investment power (which includes the power to dispose of, or to
direct the disposition of, the security). A person is also deemed to be the
beneficial owner of shares with respect to which he could obtain voting or
investment power within 60 days of April 7,1998, such as upon the exercise of
options or warrants.

<TABLE>
<CAPTION>
Name and Address                                           Number of Shares                         Percentage
----------------                                           ----------------                         ----------
<S>                                                              <C>                                    <C>
Robert Barengo                                                 525,400(1)                                 6.70%
675 Grier Drive
Las Vegas, Nevada 89119

Robert D. Ciunci                                               108,000(2)                                 1.38%
675 Grier Drive
Las Vegas, Nevada 89119

Michael Merillat                                               210,000(2)                                 2.68%
675 Grier Drive
Las Vegas, Nevada 89119

Michael Roxborough                                             520,100(3)                                 6.64%
675 Grier Drive
Las Vegas, Nevada 89119

Victor J. Salerno                                            1,942,500                                   24.77%
675 Grier Drive
Las Vegas, Nevada 89119

Judy Salerno                                                 1,942,500                                   24.77%
675 Grier Drive
Las Vegas, Nevada 89119

All directors and executive officers                         2,785,900                                   35.55%
as a group (4 persons)
</TABLE>

(1)      Includes 525,000 shares held jointly with Mr. Barengo's wife. Includes
         400 shares which may only be issued upon the exercise of stock options
         after January 31, 1998 but does not include 400 shares which may only
         be issued upon the exercise of stock options after January 31, 1999.

(2)      Does not include 50,000 shares which may only be issued upon exercise
         of stock options after August 22, 1999.

(3)      Includes 300 shares which may only be issued upon exercise of stock
         options after January 31, 1998 but does not include 300 shares which
         may only be issued upon the exercise of stock options after January 31,
         1999.
 
Item 12.        Certain Transactions

                Prior to the Reorganization, Leroy's, the Hotel Operator and B-P
were S Corporations under the Internal Revenue Code. From inception through
February 29, 1996 Leroy's made cash distributions of approximately $4.4 million
in the aggregate to the Original Stockholders. On March 21, 1996 Leroy's made
cash distributions to the Original Stockholders in the aggregate amount of $3.0
million representing undistributed income through January 31, 1996 on which such
stockholders had previously paid federal income taxes. Of the $3.0 million
distributed approximately $2.4 million was loaned back to Leroy's by the
Original Stockholders and $558,000 was contributed as capital to Leroy's by such
stockholders. On January 31, 1998, the outstanding principal balance of the
shareholder notes was $2,433,124. On January 31, 1998, the outstanding aggregate
principle balance of the shareholder notes was $2,433,124. Of the $2,433,124
outstanding, $540,700 in the aggregate is repayable to Michael Merillat, Robert
Ciunci, Robert Barengo, and Michael Roxborough pursuant to restated stockholder
notes maturing on May 1, 1998 and bearing interest at a current annual rate of
prime plus 1/2%. Of the remaining balance, $946,212 is due and payable to Victor
Salerno on November 1, 1998 and $946,212 to Judith Salerno on May 1, 1999
pursuant to restated stockholder notes bearing interest at a current annual rate
of prime plus 1/2%.


                                       28
<PAGE>

to its stockholders for the year ended December 31, 1995 and Leroy's, the Hotel
Operator and B-P made cash distributions for the short tax year ended May 10,
1996 for the taxable income of such companies for such periods. Such
distributions eliminate Leroy's, the Hotel Operator's and B-P's accumulated
earnings through the date of termination of the S Corporation status of such
corporations.

                In conjunction with the Reorganization, Leroy's, the Hotel
Operator and B-P and the Original Stockholders entered into an agreement on May
10, 1996 which provides that if Leroy's, the Hotel Operator or B-P obtain a tax
benefit to the detriment of such stockholders for any tax period, on or prior to
the effective date of the Reorganization, the affected company shall pay to the
stockholders the tax benefit actually derived up to the amount of the tax
detriment actually incurred. In addition, for up to $200,000 in the aggregate,
such companies have agreed to pay to such stockholders any increased tax
liability of such stockholders attributable to a determination by a court of
competent jurisdiction or a federal taxing authority that with respect to the
federal tax returns of such companies for taxable years prior to May 10, 1996,
the tax liability of such companies shall be increased.

                The Company provides managerial and related services to Leroy's,
CBS and the Hotel Operator ("Operating Companies"). The Company provides
executive and administrative services in exchange for a management fee equal to
9.5% of each Operating Company's gross operating revenues (including promotional
allowances). During the year ended January 31,1998, the Operating Companies paid
the Company an aggregate of $541,282.

                The Company and the Operating Companies entered into a
consolidated income tax return tax sharing agreement on May 10, 1996. In
general, the agreement provides that in conjunction with the filing of a
consolidated federal income tax return with the Internal Revenue Service each of
the Operating Companies will pay to the Company an amount equal to the federal
income tax liability that such company would have paid if it were filing its own
separate federal income tax return.

                Mr. Barengo is a director of the Riviera Hotel and Casino (the
"Riviera"), at which the Company maintains one of its satellite sports book
operations pursuant to a renewable one month lease for which the Company leases
200 square feet. The Company paid the Riviera rent of $158,654 and $141,883 for
the years ended January 31,1998 and 1997.

                CBS leases 2,000 square feet of office space to MEGA$PORTS, Inc.
in the building owned by CBS. Lease payments made were $59,100 and $14,775
for the year ended January 31,1998 and 1997.

                CBS leases 3,735 square feet of office space to Las Vegas Sports
Consultants, Inc., a company of which Mr. Roxborough is President, in the
building owned by CBS. Lease payments made to CBS were $97,640 and $16,470 for
the years ended January 31, 1998 and 1997, respectively.

                Mega$ports paid fees for odds-making services to a company where
a shareholder and former board member is an employee. Odds-making fees paid by
Mega$ports were $74,750 for the fiscal year ended January 31, 1998.

                As at January 31, 1998, LHSP had a receivable balance of $18,920
related to transactions in the normal course of business with a company where a
shareholder and former board member is an employee.





                                       29
<PAGE>




                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To The Board of Directors and Stockholders of American Wagering, Inc.:

           We have audited the accompanying consolidated balance sheets of
AMERICAN WAGERING, INC. (a Nevada corporation) and subsidiaries as of January
31, 1998 and 1997 and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

           We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

           In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of American Wagering,
Inc. and subsidiaries as of January 31,1998 and 1997 and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.








                                                       ARTHUR ANDERSEN LLP
Las Vegas, Nevada
April 22, 1998

                                       30
<PAGE>

                             AMERICAN WAGERING, INC.

                           CONSOLIDATED BALANCE SHEETS

                         As of January 31, 1998 and 1997

<TABLE>
<CAPTION>


                           ASSETS
                                                                                     1998            1997
                                                                                 ------------    ------------
<S>                                                                                  <C>            <C>
CURRENT ASSETS:
    Cash                                                                         $  2,092,894    $  3,276,642
    Short-term investments                                                          5,409,723       7,154,007
    Accounts receivable, net of allowance for doubtful accounts
     of $69,736 and $142,445                                                          333,660         279,262
    Inventories, net of obsolescense reserve of $188,225 and $136,337                 557,439         284,598
    Prepaid expenses and other current assets                                         451,347         314,436
                                                                                  -----------      ----------
TOTAL CURRENT ASSETS                                                                8,845,063      11,308,945

PROPERTY AND EQUIPMENT, net                                                         3,885,390       3,569,832

INTANGIBLE ASSETS, net                                                                628,184       1,479,956

DEPOSITS AND OTHER ASSETS                                                             280,157         609,581
 
NET LONG-TERM ASSETS OF DISCONTINUED OPERATIONS                                     1,153,146       4,864,532
                                                                                  -----------      ----------
TOTAL ASSETS                                                                     $ 14,791,940    $ 21,832,846
                                                                                 ============    ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
    Current portion of long-term debt                                            $    549,254    $    306,872
    Accounts payable                                                                1,476,892         599,369
    Accrued expenses                                                                  860,710         552,990
    Unpaid winning tickets                                                          1,441,041         927,866
    Shareholder notes payable                                                       1,486,912            ---
    Other current liabilities                                                         583,090         524,101
    Net current liabilities of discontinued operations                              1,158,649         170,094
                                                                                   ----------      ----------
TOTAL CURRENT LIABILITIERS                                                          7,556,548       3,081,292
                                                                                   ----------      ----------
LONG-TERM DEBT:
    Shareholder notes payable                                                         946,212       2,433,124
    Long-term debt, less current portion                                            1,942,239       2,487,126
                                                                                   ----------      ----------
TOTAL LONG-TERM DEBT                                                                2,888,451       4,920,250
                                                                                   ----------      ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
    Preferred stock -- $.01 par value; authorized
     25,000,000 shares; issued and outstanding: none                                      --              ---
    Common stock -- $.01 par value; authorized
     25,000,000 shares; issued and outstanding: 7,840,833 and 7,837,500                78,408          78,375
    Additional paid-in capital                                                     14,047,296      14,686,208
    Accumulated deficit                                                            (9,778,763)       (933,279)
                                                                                 ------------     -----------
TOTAL STOCKHOLDERS' EQUITY                                                          4,346,941      13,831,304
                                                                                 ------------     -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                       $ 14,791,940    $ 21,832,846
                                                                                 ============    ============
</TABLE>
              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                       31
<PAGE>


                             AMERICAN WAGERING, INC

                      CONSOLIDATED STATEMENTS OF OPERATIONS

               FOR THE FISCAL YEAR ENDED JANUARY 31, 1998 AND 1997
<TABLE>
<CAPTION>

                                                                 1998                      1997
                                                                ------                    ------
<S>                                                           <C>                       <C>
REVENUES                                                      $ 9,300,503               $ 6,470,116

OPERATING COSTS AND EXPENSES:
         Direct costs                                           6,810,336                 4,346,198
         Research and development                                 594,314                   124,459
         Selling, general and administrative                    2,582,411                 1,166,769
         Restructuring Expenses                                   489,232                     3,200
         Impairment of long-lived assets                        3,353,614                      ---
         Depreciation and amortization                            658,216                   255,855                
                                                              -------------             -------------
TOTAL OPERATING COSTS AND EXPENSES                             14,488,123                 5,896,481
                                                              -------------             -------------
OPERATING INCOME (LOSS)                                        (5,187,620)                  573,635

OTHER INCOME (EXPENSE): 
         Interest income                                          408,333                   373,024
         Other income                                              12,301                   (22,777)
         Equity in loss from joint venture                     (1,791,828)                     ---
         Interest expense                                        (450,841)                 (204,627)
                                                              ------------              -------------
TOTAL OTHER INCOME (EXPENSE)                                   (1,822,035)                  145,620
                                                              ------------              -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
      BEFORE PROVISION (BENEFIT) FOR INCOME TAXES              (7,009,655)                  719,255

PROVISION (BENEFIT) FOR INCOME TAXES                              (30,773)                   30,773
                                                               ------------              -------------

INCOME (LOSS) FROM CONTINUING OPERATIONS                       (6,978,882)                  688,482

DISCONTINUED OPERATIONS:

    Loss from discontinued operations                          (1,004,996)                 (565,581)
    Loss on disposal of discontinued operations                  (861,606)                     ---
                                                               ------------               -------------
                                                               (1,866,602)                 (565,581)
                                                               ------------               -------------
NET INCOME (LOSS)                                             $(8,845,484)               $  122,901
                                                              =============               =============
INCOME (LOSS) PER SHARE OF COMMON STOCK

    Income (loss) from continuing operations
      Basic                                                   $     (0.89)               $      .10    
      Diluted                                                 $     (0.89)               $      .10

    Loss from discontinued operations
      Basic                                                   $     (0.24)               $    (0.08)
      Diluted                                                 $     (0.24)               $    (0.08)

    Net income (loss)
      Basic                                                   $     (1.13)               $      .02
      Diluted                                                 $     (1.13)               $      .02
</TABLE>




       The accompanying notes are an integral part of these consolidated
                              financial statements.


                                       32
<PAGE>
                             AMERICAN WAGERING, INC.

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

               FOR THE FISCAL YEAR ENDED JANUARY 31, 1998 AND 1997

<TABLE>
<CAPTION>
                                               Common Stock
                                               ------------

                        Leroy's Horse         Leroy's Hotel              American
                        & Sports Place         Corporation             Wagering Inc.
                        --------------         -----------             -------------
                                                                                                             Retained
                                                                                              Additional     Earnings
                       No. of                No. of                 No. of                     Paid-in     (Accumulated      Total
                       Shares    Balance     Shares     Balance     Shares      Balance        Capital       Deficit)        Equity
                      --------------------------------------------------------------------------------------------------------------
<S>                      <C>       <C>         <C>       <C>       <C>            <C>             <C>           <C>            <C>
Balance, January
31, 1996               1,800    $50,000     25,000     $   250           100      $     1      $  445,006    $2,592,842  $3,088,099

Contributions            --       --         --         --           --           --              558,000       --          558,000

Distributions            --       --         --         --           --           --              --         (3,649,021) (3,649,021)

Reorganization        (1,800)   (50,000)   (25,000)       (250)    5,249,900       52,499          (2,249)      --           --

Proceeds from
initial Public
Offering                 --       --         --         --         2,587,500       25,875      13,685,451       --       13,711,326

Net Income               --       --         --         --           --           --              --            122,900     122,900
-----------------------------------------------------------------------------------------------------------------------------------
Balance, January
31, 1997                 --       --         --         --         7,837,500       78,375      14,686,208      (933,279) 13,831,304

Stock options
Exercised                --       --         --         --             3,333           33          27,463       --           27,496

Cost of Initial
public offering          --       --         --         --           --           --             (666,375)      --         (666,375)

Net Loss                 --       --         --         --           --           --               --        (8,845,484) (8,845,484)
                      --------------------------------------------------------------------------------------------------------------

Balance, January
31, 1998                 --       --         --         --         7,840,833      $78,408     $14,047,296   $(9,778,763) $4,346,941
                      ==============================================================================================================


                                                         The accompanying notes are an integral part of these
                                                                  consolidated financial statements.
</TABLE>


                                       33
<PAGE>

                             AMERICAN WAGERING, INC.
                             -----------------------

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      -------------------------------------

               FOR THE FISCAL YEAR ENDED JANUARY 31, 1998 AND 1997
               ---------------------------------------------------
<TABLE>
<CAPTION>

                                                                                            1998              1997
                                                                                         ---------         ---------
<S>                                                                                       <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:                  
     Net Income (loss)                                                                $(8,845,484)         $122,900
     Adjustments to reconcile net income (loss) to cash
          provided by (used in) operating activities:
     Depreciation and amortization                                                        972,662           464,933
     Equity in (earnings) loss from investment in
       joint venture                                                                    1,791,828           (68,041)
     Impairment of long-lived assets                                                    3,353,614              ---
     Discontinued operations                                                              861,606              ---
     Valuation/Restructuring reserve                                                      461,043              ---
     Interest earned from short-term investments                                         (327,547)             ---
     Provision for doubtful accounts                                                      (60,461)          139,917
     Decrease (increase) in assets:
           Accounts receivable                                                              6,063          (534,141)
           Inventories                                                                   (272,841)         (142,784)
           Prepaid expenses and other current assets                                     (136,911)          948,995
     Increase (decrease) in liabilities:
           Accounts payable                                                               877,523           601,140
           Accrued expenses                                                               307,720          (178,988)
           Unpaid winning tickets                                                         513,174           (78,190)
           Other current liabilities                                                       58,989           (53,498)
                                                                                      -----------       -----------
Total adjustments                                                                       8,406,462         1,099,343
                                                                                      -----------       -----------

         Net cash provided by (used in) operating activities                             (439,022)        1,222,243
                                                                                      -----------       -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Capital expenditures                                                              (1,055,831)         (754,537)
     Deposits and other assets                                                            325,021          (294,899)
     Contributions to joint venture                                                    (2,630,860)             ---
     Proceeds from joint venture partner                                                1,401,387              ---
     (Increase) decrease in short-term investments                                      2,071,830        (7,154,007)
     Purchase of remaining 50% interest in partnership,
                   net of cash acquired                                                       ---        (3,041,592)
     Purchase of CBS, net of cash acquired                                                    ---        (2,993,176)
     Other                                                                                 85,111          (139,770)
                                                                                      -----------       -----------
   Net cash provided by (used in) investing activities                                    196,658       (14,377,981)
                                                                                      -----------       -----------
 CASH FLOWS FROM FINANCING ACTIVITIES:
     Increase(decrease) in long-term debt                                                (302,505)         (559,631)
     Proceeds from shareholder notes payable                                                 ---          2,433,124
     Net proceeds from issuance of common stock                                            27,496        13,711,326
     Initial public offering cost                                                        (666,375)             ---
     Contributions from stockholders                                                          ---           558,000
     Distributions to stockholders                                                            ---        (3,649,021)
                                                                                      -----------       -----------
         Net cash provided by (used in) financing activities                             (941,384)       12,493,798
                                                                                      -----------       -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS                                              (1,183,748)        (661,940)

CASH AND CASH EQUIVALENTS, beginning of period                                          3,276,642         3,938,582
                                                                                      -----------       -----------
CASH AND CASH EQUIVALENTS, end of period                                              $ 2,092,894       $ 3,276,642
                                                                                      ===========       ===========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest                                                                $   768,321       $   444,251
                                                                                      ===========       ===========
Cash paid for income taxes                                                            $   136,000       $    --
                                                                                      ===========       ===========

                                                  (Continued)

            The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

<PAGE>

                            AMERICAN WAGERING, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

              FOR THE FISCAL YEARS ENDED JANUARY 31, 1998 AND 1996

                                  (Continued)

SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES:
Fiscal Year ended January 31, 1998 Transactions--None
Fiscal Year ended January 31, 1997 Transactions--

         In May, 1996 LHC purchased the remaining 50% of BSRB Resort Hotels. The
elimination of the investment in partnership, the assets acquired and the
assumption of debt is as follows:
   
        Cash                                             $   617,276
        Other current assets                                 311,695
        Property and equipment                             4,740,000
        Deposits and other assets                             48,503
        Excess of cost over fair market value of net
          assets acquired                                  2,227,883
        Accrued expenses                                    (342,803)
        Note Payable                                      (2,543,801)
        Elimination of investment in partnership          (1,399,885)
                                                         -----------
                                                         $ 3,658,868
                                                         ===========

         In October, 1996 the Company purchased all of the capital stock of
Autotote CBS for $3 million and incurred $155,707 in Legal and accounting fees
associated with the purchase. In conjunction with the acquisition, assets and
liabilities were as follows:

        Cash                                             $   162,531
        Inventory                                            157,550
        Other current assets                                 585,482
        Property and equipment                             3,115,802
        Investments                                          134,599
        Deposits and other assets                            208,045
        Intangible assets                                  1,478,281
        Accrued expenses                                    (349,990)
        Note Payable                                      (2,336,593)
                                                         -----------
                                                         $ 3,155,707
                                                         ===========

Purchase of vehicles financed with debt ($41,564)

Payment of insurance premiums financed with debt ($32,586)

The accompanying notes are an integral part of these consolidated financial
statements.

                                       34
<PAGE>

                             AMERICAN WAGERING, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                JANUARY 31, 1998



1.       Summary of Business and Significant Accounting Policies

         Summary of Business

         In August, 1995, American Wagering Inc., a Nevada corporation, (the
         "Company") was formed to be a holding company, for Leroy's Horse and
         Sports Place ("LHSP") and Leroy's Hotel Corporation ("LHC").
         Immediately prior to the closing of the initial public offering by
         American Wagering, Inc., the stockholders of LHSP and LHC exchanged
         their shares in those companies for shares of American Wagering, Inc.
         These transactions are referred to as the "Reorganization."

         LHSP was incorporated under the laws of the State of Nevada on November
         14, 1977. The Company operates its main race and sportsbook located on
         the premises of LHC in Las Vegas, Nevada. In addition, LHSP operates
         sports books throughout the state of Nevada in licensed gaming
         establishments not owned by LHSP. The Company leases the square footage
         necessary to conduct its operations at the non-Company owned gaming
         establishments. As of January 31,1998 and 1997 the Company had 41 and
         38 locations, respectively.

         LHC owns and operates a 150 room Howard Johnson's hotel (the "Hotel")
         and, through its wholly owned subsidiary B-P Food Corporation, an
         International House of Pancakes restaurant located in Las Vegas,
         Nevada. Additionally, LHSP operates a 5,600 square foot casino
         containing approximately 71 electronic gaming devices including slot
         machines, video poker machines and multi-game video machines adjacent
         to the Hotel and restaurant (collectively the "Hotel/Casino").

         In March 1995, LHC purchased fifty-percent interests in certain
         entities which owned and operated the Hotel/casino located in Las
         Vegas, Nevada. The related entities were BSRB Resort Hotels (a Nevada
         general partnership) and B-P Food Corporation (a Nevada corporation
         which was wholly owned by BSRB Resort Hotels). The purchase was
         financed by a bank note executed by LHSP for approximately $1.1
         million.


         In February 1996, the stockholders of LHSP purchased a fifty-percent
         interest in the stock of B-P Gaming Corporation (a Nevada corporation),
         which was contributed to the Company in connection with the
         Reorganization.

                                       35
<PAGE>

         On May 15, 1996, the Company completed an initial public offering of
         common stock. The initial public offering price was $6.00 per share,
         with 2,250,000 common shares being offered. In June, 1996 the
         underwriter exercised its over-allotment option to purchase an
         additional 337,500 shares at $6.00 per share.

         On May 15, 1996, the Company purchased the remaining fifty percent
         interest in BSRB Resort Hotels and B-P-Gaming Corporation ("B-P") for
         $3,601,000 in cash and the assumption of certain liabilities and B-P 
         Gaming was subsequently dissolved.

         On October 25, 1996, the Company acquired from Autotote Corporation
         ("AC"), all of the shares of capital stock of Autotote CBS, Inc.
         (subsequently renamed Computerized Bookmaking Systems, Inc.("CBS"),
         along with certain software and licensing rights) pursuant to a Stock
         Transfer Agreement between the Company and AC. In consideration the
         Company paid $3 million in cash to AC and agreed to guarantee, pursuant
         to a Guaranty Agreement, CBS's obligation under its current mortgage of
         approximately $2 million on the real estate and building in Las Vegas,
         Nevada where the Company currently maintains its corporate offices.

         CBS, designs, installs and maintains sports and race book equipment,
         software and computer systems for the sports betting industry. CBS is
         also 50% partner in a joint venture that owns and operates Mega$ports,
         Inc. ("Mega$ports") which offers a pari-mutuel sports wagering system.
         The Mega$ports(R) joint venture began full operations in July 1997. CBS
         recorded an equity in loss in joint venture of $1,791,828 for the
         fiscal year ended January 31, 1998.

         On April 22, 1998, the Company determined it would concentrate its
         business efforts on its core competency, sports wagering, and is
         currently seeking a qualified buyer for the hotel, food and beverage
         segment of American Wagering, Inc. In the accompanying consolidated
         financial statements as of, and for the years ended January 31, 1998 
         and 1997 the results of the hotel, food and beverage operations have 
         been accounted for as discontinued operations. (See Note 6)

         Short Term Investments

         Short-term investments consist of liquid investments, such as treasury
         bills, with a maturity of six months or less and are carried at cost
         adjusted for discount amortization.

         Inventories

         Inventories are stated at the lower of cost (based on the first-in,
         first-out method) or market. 

         Depreciation and Amortization

         Property and equipment are depreciated by use of both the straight line
         and accelerated methods.

         Intangible Assets

         Intangible assets include the excess of the cost over the fair market
         value of net assets of acquired companies. Such costs are being 
         amortized over the periods expected to be benefited or approximately
         25 years. Other intangible assets acquired including software and 
         rights for manufacturing and distribution are being amortized over 
         7 years. Accumulated amortization was $195,050 and $55,049 at 
         January 31, 1998 and 1997, respectively.

         The realizability of intangible assets is evaluated periodically as
         events or circumstances warrant. Such evaluations are based on various
         analyses, including cash flow and profitability projections that
         incorporate, as applicable, the impact on existing Company business.
         The analyses necessarily involve significant management judgment to
         evaluate the capacity of an acquired business to perform within
         projections.

                                       36
<PAGE>
         Impairment of Long-Lived Assets

         Statement of Financial Accounting Standards No. 121, "Accounting for 
         the Impairment of Long- Lived Assets and for Long-Lived Assets to be 
         Disposed Of.("SFAS No. 121") SFAS No. 121 requires that long-lived 
         assets and certain identifiable intangibles, including goodwill, to be 
         held and used by an entity, be reviewed for impairment whenever events 
         or changes in circumstances indicate that the carrying amount of the
         asset(s) may not be recoverable. The continued negative cashflow from
         the hotel, food and beverage operations resulted in an impairment loss
         of $3,354,000 (See Note No. 6) which is included in the Statement of 
         Operations as Impairment of long-lived assets.

         Revenue Recognition

         With respect to the casino segment, in accordance with industry
         practice, the Company recognizes race and sports wagering revenues as
         the net win from such wagering activities, which is the difference
         between gaming wins and losses. Wagers received on future race and
         sporting events are reflected as a liability and are not recognized as
         revenues until the event has taken place. Sports wagering revenues are
         recognized based on the results of a completed sporting event. With
         respect to the Systems segment, the Company recognizes revenue when the
         software and hardware are installed at the customer location.
         Maintenance fee revenue is recognized as the services are provided.


         Research and Development

         The Company expenses all costs associated with the research and 
         development of computerized software as incurred.

         Advertising

         The Company expenses all costs associated with advertising as incurred.

 
         Earnings Per Share and Pro Forma Earnings Per Share

         Earnings per Share         

         The Financial Accounting Standards Board issued Statement of Financial
         Accounting Standards No. 128 -"Earnings Per Share" ("SFAS No. 128")
         which became effective for periods ending after December 15, 1997 and
         replaces historically reported earnings per share with "basic", or
         undiluted, earnings per share and "diluted" earnings per share. Basic
         earnings per share is computed by dividing net income by the weighted
         average number of shares outstanding during the period, while diluted
         earnings per share reflects the additional dilution for all potentially
         dilutive securities, such as stock options.


         In accordance with SFAS No. 128, if potential shares outstanding would 
         have an anti-dilutive effect on the diluted earnings per share 
         calculation then the shares are not included in the diluted earnings 
         per share calculation. Options outstanding during the fiscal year 
         ending January 31, 1998 under the Company's Employee stock option plan 
         and its Directors stock option plan were not included in the 
         computation of diluted earnings per share because they were 
         anti-dilutive with regard to the loss incurred by the Company in 1998. 
         Had the Company shown the effects of dilution, the options would have 
         added an additional 215,000 shares to the weighted average shares 
         outstanding for the year ended January 31, 1998.

                                       37
<PAGE>

         The weighted-average number of common and common equivalent shares used
         in the calculation of basic and diluted earnings per share consisted of
         the following:

                                                    Year ended January 31,
                                                    ----------------------
                                                    1998             1997
                                                    ----             ----
         Weighted-average common shares
          outstanding (used in the computation
          of basic earnings per share)..........  7,840,833        7,059,555
         Potential dilution from the assumed
          exercise of common stock options......         --           88,375
                                                  ---------        ---------
         Weighted-average common and common
          stock equivalent shares (used in the
          computation of diluted earnings per
          share)................................  7,840,833        7,147,930
                                                  =========        =========
         Proforma Earnings per Share

         The proforma income taxes presented for Fiscal Year ended January 31,
         1997 assumes that the Company would have incurred federal income taxes
         as a C corporation for the entire year at a 34 percent statutory rate.

                                                              1997  
                                                              ----
         Income before provision for income taxes           $153,673
         Provision for income taxes                           30,773
         Proforma provision for income taxes                  21,476
                                                            --------
         Proforma net income                                $101,424
                                                            ========
         Proforma weighted average
          (Common Shares Outstanding)                      7,147,930
                                                           =========
         Proforma earnings per share                       $    0.01
                                                           =========

         Use of Estimates

         Financial statements prepared in accordance with generally accepted
         accounting principles require the use of management estimates. The most
         significant estimates with regard to these financial statements relate
         to setting and adjusting lines on sporting events. The sportsbook
         operator is betting as a principal against its patrons. Therefore, if
         the "book" of wagers placed on an event is not balanced, the sportsbook
         operator is significantly at risk for the outcome of a sporting event.
         Although sportsbook operators attempt to keep the book in balance by
         adjusting the betting line, the risk of a non-balanced book is inherent
         in the operation of a sportsbook. To the extent that a book on a
         particular event is not balanced, the book-making operation, like its
         patrons, is gambling on the outcome of an event.

         Principles of Consolidation

         The consolidated financial statements include the accounts of the
         Company and its wholly owned subsidiaries. All significant intercompany
         balances and transactions have been eliminated. The financial results
         for acquisitions are included in the consolidated financial statements
         from the date of acquisition. Investments in 50% or less owned joint
         ventures are accounted for under the equity method.

         Reclassifications

         Certain amounts in the 1997 consolidated financial statements have been
         reclassified to conform with the 1998 presentation. These
         reclassifications had no effect on the Company's net income (loss).

         Income Taxes

         In connection with the Reorganization, the S corporation status of LHSP
         and LHC terminated. The Company records income taxes in accordance with
         Statement of Financial Accounting Standards No. 109, "Accounting for
         Income Taxes." ("SFAS No. 109") Under SFAS No. 109, deferred income
         taxes are calculated using the asset and liability method. Under the
         asset and liability method, deferred income taxes are measured using

                                       38
<PAGE>

         enacted statutory tax rates expected to apply to taxable income in the
         years in which these temporary differences are expected to be recovered
         or settled.

         Concentration of Risk

         The Company derives a substantial portion of its revenues from a
         limited number of licensed race and sports books in the State of
         Nevada. Limitations on the scope of operations at such licensed race
         and sports books due to statutory or regulatory changes or
         deterioration in the general economic conditions which impact the
         gaming industry in Nevada could adversely affect the Company's
         operating results.

         Approximately 36% and 26% of total handle (total amount wagered in race
         and sports events) and 37% and 29% of LHSP total revenues is related to
         professional football for the years ending January 31,1998 and 1997,
         respectively. If the professional football season was interrupted due
         to strikes or other factors this may have a significant impact on the
         financial results of the Company.



2.       Inventories

         Inventories consisted of the following as of January 31,1998 and 1997:

                                                         1998          1997
                                                        ------        ------
                    Raw materials and spare parts    $  143,924    $  15,801
                    Work in process                     158,610        4,267
                    Finished goods                      443,130      400,867
                                                       --------     --------
                                                        745,664      420,935

                    Less:  Obsolescensce reserve       (188,225)    (136,337)
                                                       --------     --------
                                                     $  557,439    $ 284,598
                                                      =========    =========

3.       Property and Equipment

         Property and equipment are stated at cost and consist of the
         following as of January 31, 1998 and 1997:
<TABLE>
<CAPTION>
                                                                               Estimated
                                                        1998        1997       Useful Life
                                                      -------     --------     ------------
                   <S>                                   <C>        <C>           <C>
                  Land                            $   575,000   $   575,000
                  Building/Improvements             2,138,569     2,123,000       39 years
                  Furniture/Fixtures                  372,569       279,613     5-10 years
                  Equipment                         1,957,846     1,254,691     5-20 years
                  Other                               138,102       203,704     5-10 years
                                                 ------------  ------------
                                                    5,182,086     4,436,008
                  Less: Accumulated depreciation   (1,296,696)     (866,176)
                                                  -----------  ------------
                                                  $ 3,885,390   $ 3,569,832
                                                  ===========  ============
</TABLE>

4.       Investment in Joint Venture

             

                                       39
<PAGE>


         The Company, through the acquisition of Computerized Bookmaking
         Systems, Inc. ("CBS") on October 25, 1996, is involved in a joint
         venture with IGT-North America ("IGT"). CBS and IGT each own a fifty
         percent interest in the joint venture company named Mega$ports, Inc., a
         Nevada corporation ("Mega$ports"). Mega$ports, an enterprise which
         began operations in July 1997, is engaged in the design, manufacture
         and distribution of a pari-mutuel sport wagering system. The Company's
         investment in joint venture balance consisted of contributions of
         property and equipment, programming services and cash contributions for
         operations, net of the equity in loss from the joint venture. The
         equity in loss in joint venture for the fiscal year ended January 31,
         1998 was $1,792,000. The remaining investment in joint venture balance
         of $461,000 has been written off based on a valuation determination by
         management.

5. Deposits and Other Assets

         Deposits and other assets consisted of the following at January 31,
         1998 and 1997:

                                                             1998         1997
                                                             ----         ----

                  Loan fees                              $ 85,705     $ 90,543
                  Gaming license fees                      72,552       70,082
                  Deferred tax benefit                       -0-       100,205
                  Due from affiliate                       46,355        6,788
                  Investment in Corporation/
                    Joint venture                          12,220      134,599 
                  Note receivable, long-term                 -0-        84,380
                  Deposits                                 39,179       45,726
                  Other                                    24,146       77,258
                                                         --------     --------
                                                         $280,157     $609,581
                                                         ========     ========

         Loan fees associated with the building mortgages have been capitalized
         and are being amortized over the related term of the mortgages and are
         net of accumulated amortization of $11,411 and $6,573 at January 31,
         1998 and 1997. Gaming license fees relate to investigation fees. These
         fees are being amortized over 5 years.


6.    Discontinued Operations

         On April 22, 1998, the Company determined it would concentrate its
         business efforts on its core competency, sports wagering, and is
         currently seeking a qualified buyer for the hotel, food and beverage
         segment of American Wagering, Inc. In the accompanying consolidated 
         financial statements as of, and for the years ended January 31, 1998 
         and 1997 the results of the hotel, food and beverage operations have 
         been accounted for as discontinued operations.

                                       40
<PAGE>


         The estimated loss on the disposal of this segment is $862,000
         consisting of an estimated loss on disposal of the business of $246,000
         and a provision of $616,000 for anticipated operating losses during the
         phase out period.

         These operations had operating revenues of $3.3 million and $2.6
         million for the years ended January 31, 1998 and 1997, respectively,
         with operating losses for the same periods of $675,000 and $224,000
         respectively. Identifiable assets of the hotel, food and beverage
         operations were $3.7 million and $ 7.7 million as of January 31, 1998
         and 1997, respectively.

         The components of assets and liabilities of discontinued operations
         included in the accompanying consolidated balance sheets are as
         follows:

                                                             January, 31
                                                          1998          1997
                                                          ----          ----
         Current assets                               $   162,878    $  363,627
         Accounts payable, accrued expenses and other  (1,321,527)     (533,721)
                                                      -----------    ----------
         Net current liabilities                      $(1,158,649)   $ (170,094)
                                                      ===========    ==========
         Property, plant and equipment, net           $ 3,546,725    $5,140,570
         Other non-current assets                           --       2,168,247
         Non-current liabilities                       (2,393,579)   (2,444,285)
                                                      -----------    ---------- 
         Net long term assets                         $ 1,153,146    $4,864,532
                                                      ===========    ==========







         The condensed statements of operations relating to the discontinued
         operations are presented below:
<TABLE>
<CAPTION>
                                                             For the years ended January 31,

                                                                1998                1997
                                                                ----                ----
        <S>                                                  <C>                  <C>
            Revenues                                        $ 3,307,676         $ 2,560,115
            Costs and expenses                                4,312,673           3,125,696
                                                            -----------         -----------
            Loss before income taxes                         (1,004,997)           (565,581)
                                                            -----------         -----------
            Provision (benefit) for income taxes                  --                   --       
            Net (loss)                                      $(1,004,997)        $  (565,581)
                                                            ===========         ===========
</TABLE>
         In conjunction with the proposed sale of the hotel facility, the
         Company intends to negotiate a leaseback of, and continue to operate,
         the casino which will serve as the Company's principal gaming location.


7.       Accrued Expenses

         Accrued expenses consisted of the following at January 31, 1998 and
         1997:


                                                        1998      1997
                                                     --------   --------
         Payroll and vacation                        $359,839   $403,179
         Royalty                                       67,072     14,000
         Restructuring charges                         65,696       -0-
         Legal and accounting                         158,013     62,521
         Other                                        210,090     73,290
                                                     --------   --------
                                                     $860,710   $552,990
                                                     ========   ========
 
         Restructuring charges are attributed to costs associated with the
         reduction of personnel. 

8.       Shareholder Notes Payable

         On March 21, 1996 LHSP made cash distributions to the original

                                       41
<PAGE>

         shareholders in the aggregate amount of $3 million representing
         undistributed earnings through January 31, 1996 on which the
         shareholders had previously paid federal income taxes. Of the $3
         million distributed, $2,433,124 was loaned back to LHSP by the original
         shareholders. On January 31, 1998, the outstanding aggregate principal
         balance of the shareholder notes was $2,433,124. Of the $2,433,124
         outstanding, $540,700 in the aggregate matures on May 1, 1998 and bears
         interest at a current annual rate of prime plus 1/2%. Of the remaining
         balance, $946,212 is due and payable on November 1, 1998 and $946,212
         is due and payable on May 1,1999 pursuant to restated shareholder notes
         bearing interest at a current annual rate of prime plus 1/2%.

9.       Long-term Debt

         Long term debt consist of the following at January 31, 1998 and 1997:
<TABLE>
<CAPTION>
                                                                                     1998          1997
                                                                                     ----          ----
                   <S>                                                               <C>           <C>
             Mortgage payable, monthly payments of principal and interest of
             $17,565, interest is at 8%, secured by land and building            $ 1,990,641   $ 2,036,042

             Note payable to a bank, monthly payments of principal and
             interest of $26,272, interest is at prime (8.25% at January 31,
             1997) plus 0.5%, unsecured, maturing March 1998.                        500,852       757,956
                                                                                 -----------   -----------
                                                                                   2,491,493     2,793,998

                                    Less current portion                            (549,254)     (306,872)
                                                                                 -----------   -----------
                                                                                 $ 1,942,239   $ 2,487,126
                                                                                 ===========   ===========
</TABLE>

             As of January 31, 1998, annual maturities of total long-term debt 
             are as follows:

                  Year Ending
                  January 31,
                  -----------
                    1999                            549,254
                    2000                             57,901
                    2001                             62,706
                    2002                             67,911
                    2003                             73,548
                    Thereafter                    1,680,173
                                              -------------
                                              $   2,491,493
                                              =============


10.      Income Taxes

         The provision (benefit) for federal income taxes consisted of the
         following:
                                          January 31,         January 31,
                                             1998                1997
                                          -----------         ----------

                   Current                $(130,978)          $130,978
                   Deferred                 100,205           (100,205)
                                          ---------           --------
                                          $ (30,773)          $ 30,773
                                          =========           ========
                                       42
<PAGE>
         The tax effect of significant temporary differences representing
         deferred tax assets and liabilities for the Company is as follows:

                                                     January 31,    January 31,
                                                        1998           1997
                                                     -----------    -----------
         Deferred Tax Assets
               Current:
                  Net operating loss carried forward $  689,905     $   --
                  Write down of investment            1,749,450         --
                  Restructuring charges                 467,507       59,647
                  Bad debt reserve                       28,955       45,900
                  Amortization                           29,019        8,295
                  Other                                  61,628         --
                                                     ----------     --------
                        Total Current                 3,026,464      113,842


         Deferred Tax Liabilities - Long-term:
                   Depreciation                         (17,619)     (13,637)
                                                     ----------     --------
                                                     $3,008,845      100,205

                   Valuation allowance               (3,008,845)        --
                                                     ----------     --------
                                                     $    -0-       $100,205
                                                     ==========     ========

         The Company did not record a valuation allowance at January 31, 1997
         relating to recorded tax benefits because all benefits were likely to
         be realized. At January 31, 1998, the Company recorded a valuation
         allowance of $3,008,845. The provisions for income taxes differs from 
         that computed at the federal statutory corporate tax rate as follows:
<TABLE>
<CAPTION>
                                                            January 31,       January 31,
                                                               1998              1997
                                                               ----              ----
                    <S>                                        <C>                <C>
                  Federal Statutory rate                       (34%)              34%
                  Tax benefit of S Corporation earnings         ---              (16)
                  Valuation allowance                           33                ---
                  Other                                         ---                2
                                                          -------------     -------------
                  Effective tax rate                            (1%)              20%
                                                          =============     =============
</TABLE>
         At January 31, 1998 the Company had tax net operating loss carry
forwards of $2,029,132 which will expire in 2013.
<PAGE>


11.     Commitments and Contingencies

        Leases

        As of January 31, 1998 Leroy's had operating leases at various
        non-Company owned locations. Total rental expense for these leases was
        approximately $544,000 and $479,000 for the years ended January 31, 1998
        and 1997, respectively. These lease terms vary from one to six years
        depending on the location.

        Under leases for three of the Leroy's operating locations rent is
        based on a percentage of income above specified thresholds. Rent expense
        for these locations, which is included in the total rent expense above,
        was $293,000 and $188,000 for the years ended January 31, 1998 and 1997,
        respectively.

        At January 31, 1998, future minimum rental payments under non-cancelable
        leases are as follows:


                              January 31,
                              -----------
                                1999                   240,860
                                2000                   152,701
                                2001                    69,945
                                2002                      -0-
                                2003                      -0-
                                Thereafter                -0-
                                                      --------
                                                      $463,506
                                                      ========

         The above disclosure of future minimum lease payments under
         non-cancelable leases exclude payments of approximately $7,000 per
         month owed under the ground lease associated with the discontinued
         operations. (See Note #6).

     Litigation

         Racusin

              On August 23, 1995, Leroy's filed a Complaint for Declaratory

                                       43
<PAGE>

      Relief in the District Court of Clark County, Nevada, requesting that
      the Court declare that two written agreements between Leroy's and Michael
      Racusin, d.b.a. M. Racusin & Company, ("Racusin") are vague, ambiguous and
      unenforceable contracts. Racusin had introduced certain underwriters,
      including Equity Securities Trading Co., Inc. (one of the underwriters of
      the Company's initial public offering) to Leroy's and provided Leroy's
      certain advisory services. The specific language of the alleged
      unenforceable agreements provides that Leroy's will pay to Racusin (i) a
      commission equal to 5% of the purchase price of Leroy's in the event
      Racusin brings in a buyer for Leroy's and (ii) compensation equal to 4.5%
      of the "final evaluation in the form of Leroy's common stock plus $150,000
      in cash upon completion of common offering or IPO."

         Racusin's position was that Racusin is entitled to either 4.5% of the
      stock of Leroy's or 4.5% of the Company's common stock and $150,000 in
      cash as a result of the completion of the Company's initial public
      offering of its common stock in May 1996. The Company believed that the
      agreements were unenforceable contracts.

         On September 27, 1995, Racusin answered the complaint asserting that
      the two agreements are clear and speak for themselves. The case was
      removed to the Nevada Federal District Court on September 30, 1995. On
      October 8, 1996 the Nevada Federal District Court granted Racusin's motion
      to join the Company as a party to the litigation. On January 25, 1997,
      Racusin filed a motion for summary judgment requesting the Court find that
      Leroy's is an alter ego of the Company. It was the Company's position that
      Racusin cannot evidence that there has been a defacto merger between the
      Company and Leroy's.

         On August 1, 1997, the Court orally issued a declaratory judgement
      with respect to a lawsuit.

         The Court held that pursuant to the terms of the agreements, Racusin
      was entitled to receive from the Company a commission, as adjusted, of
      $648,375, plus prejudgment interest of $87,535 through September 5, 1997.
      The Court's holding indicated that Racusin was entitled to the commission
      because he served as a finder to the Company for the underwriter of the
      Company's initial public offering in May, 1996, which enabled the Company
      to make a public sale of Leroy's assets. On September 5, 1997, the Company
      tendered the entire judgement plus interest of $735,910 to Racusin. As the
      payment to Racusin represented a cost of the Company's initial public
      offering, the entire amount paid to Racusin reduced its paid-in capital.
      The declaratory judgement of the Court is not final. On September 19,
      1997, Racusin filed a Notice of Appeal with the Court. The Company's
      Answering Brief has been submitted and we are awaiting Mr. Racusin's Reply
      Brief. The Company believes the previous judgement was well reasoned and
      supported by competent evidence and is optimistic that the Court will 
      affirm the previous decision.


      Ground Lease

         On March 31, 1997, James A. Rissler and Patricia R. Rissler
      ("Landlord") pursuant to the ground lease between the Hotel Operator and
      the Landlord by which the Company leases the real property on which the
      Hotel/Casino is located, filed a Complaint for Declaratory Relief in the
      District Court of Clark County, Nevada, requesting that the amounts paid
      to Jackpot for its operation of the slot machines in the Hotel/Casino is
      not deductible in calculating the gross gaming revenues for purpose of

                                       44
<PAGE>

      determining the rent payable by the Hotel Operator to the Landlord under
      the Lease. The specific language of the Lease provides that the Hotel
      Operator (as the tenant under the Lease) pay the Landlord additional
      monthly rent of 5% of (i) the rental paid by a gaming entity (a subtenant,
      concessionaire or assignee of the Hotel Operator) to the Hotel Operator,
      or (ii) the gross gaming revenue received in or on the premises, whichever
      is applicable, or if both are applicable, whichever is greater.

         The Landlord's position is that any payments made to Jackpot for
      operation of the slot machines is not permitted to be deducted prior to
      calculating the amount due as additional rent to the Landlord under the
      Lease. Pursuant to the original complaint, the Landlord requested
      approximately $5,600 of additional rent that is due from July 1996 through
      December 1996 and future additional rent as it may come due pursuant to
      the Landlord's calculation.

         The Company believes that the Landlord is only entitled to receive 5%
      of the gross gaming revenues received by the Hotel Operator. The Landlord
      has been paid 5% of the gross gaming revenues received by the Hotel
      Operator and its predecessors without objection for the past 18 years
      under the Lease. The Company believes that the Landlord waived any
      objection to the method of calculation of the percentage rent by its
      inaction during the prior 18 years and the execution of estoppel
      certificates at the time of the acquisition of the Hotel/Casino by the
      Company in May 1996.

         The Landlord also seeks reimbursement of approximately $16,000 for the
      Landlord's attorney's fees and the Company disputes it is required to
      reimburse the Landlord for such fees.

         On March 17, 1998 the court held that the Landlord is entitled to be 
      paid from the Hotel Operator 5% of the gross gaming revenues received by
      all gaming operators at the Hotel/Casino. 

      Autotote Systems, Inc.

         On March 3, 1998, AWI and Computerized Bookmaking Systems ("CBS") filed
      a Motion for Preliminary Injunction in the United States District Court
      for the District of Nevada, against Autotote Corporation and Autotote
      Systems, Inc. (collectively "Autotote") seeking to enjoin Autotote from
      reproducing or installing any part of the CBS Race and Sports Book
      Software ("CBS Software") in terminals used outside of Mexico; using or
      permitting the use of the CBS software, including the source code
      therefore, and employing or hiring James Connolly ("Connolly") for a
      period of five years from the date of the closing in the Autotote/CBS
      stock transfer agreement. On March 3,1998, Judge Howard McKibben entered a

                                       45
<PAGE>

      temporary restraining order granting the requested relief until March 13,
      1998. On March 13,1998, a preliminary injunction hearing was held before
      Judge McKibben during which the parties stipulated, and the court
      subsequently ordered the following: there would be (1) no sale or transfer
      of the CBS Software by Autotote, (2) no sale or transfer of a derivative
      work of such software by Autotote without ten (10) days prior notice to
      AWI, in writing identifying the transferee, the date of the transfer and
      the functionality of the derivative work, (3) no transfer by Autotote of
      the CBS Software or source code, nor would Autotote copy or modify the CBS
      Software or source code, except to the extent permitted by contract, and
      (4) a diligent effort shall be made by to retrieve any CBS software which
      has been transferred pursuant to the terms of the contract. Based upon the
      foregoing, the judge denied the motion for preliminary injunction without
      prejudice, and indicated that AWI could renew the motion in the event
      Autotote attempted to copy or modify the CBS software.

         On April 15, 1998, Autotote and ASI filed a counterclaim against AWI
      and CBS with the United States District Court for the District of Nevada, 
      asking that the Agreements be rescinded on the grounds that there was a 
      failure of consideration, failure of meeting of the minds, mutual mistake,
      lack of an intent to perform and impossibility of performance. In 
      addition, Autotote and ASI asked the Court to award damages for AWI and 
      CBS' alleged breach of certain of the Agreements, and for fraud, 
      international interference with contractual relations, negligent 
      interference with contractual relations, intentional interference with 
      prospective economic advantage, false light and liable. Autotote and ASI 
      requested the Court to award compensatory damages in excess of $75,000 
      plus interest, and punitive damages. This litigation will now proceed to 
      the discovery phase.

         This litigation will now proceed to the discovery phase. 

         The Company is also party to other legal proceedings, most of which
      relate to routine matters incidental to its business. Management does not
      believe the outcome of such proceedings will have a material adverse
      effect on the Company's financial position or results of operations.


12.   Capital Stock and Stock Options

         The Company's Board of Directors approved a program to repurchase up to
      250,000 shares of the Company's common stock from time to time in the open
      market. As at April 22, 1998, 34,200 shares had been repurchased
      pursuant to this program. The timing and amount of future share
      repurchases, if any, will depend on various factors, including market
      conditions, available alternative investments and the Company's financial
      position.

         At January 31, 1998, the Company had in effect stock option plans under
      which options may be granted to employees and directors of the Company.
      Options granted under the plans have an exercise price equal to the market
      price of the Company's common stock on the date of grant and a term of 5
      years for the employees plan and 10 years for the directors plan. Options
      granted under the plans generally become exercisable on a single date from
      three to five years from the date of grant.

      Summarized information for the stock option plans is as follows:
<TABLE>
<CAPTION>

                                                                Employee                                Director
                                                                --------                                --------
                                                    1998                     1997               1998               1997
                                                    ----                     ----               ----               ----
                                                          Wtd Avg                Wtd Avg            Wtd Avg           Wtd Avg
                                                         Exercise                Exercise           Exercise          Exercise
                                           Number         Price       Number      Price     Number   Price    Number   Price  
                                           ------         -----       ------      -----     ------  --------  ------  --------
<S>                                         <C>            <C>           <C>         <C>     <C>    <C>       <C>       <C>
Outstanding at the Beginning of the year   174,900     $   7.58     $  -----     $  ----      700    $10.75    ----     $ ---
                    Granted                 48,900         9.25      174,900       7.58       700      6.69     700     $10.75
                    Exercised               (3,333)        8.25                    -----     ----      ----    ----       ----
                    Forfeited               (1,500)        6.88                    -----     ----      ----    ----       ----
                    Expired                   ----        -----         ----       -----     ----      ----    ----       ----
Outstanding at the end of the year         218,967     $   7.95      174,900     $  7.58    1,400     $ 8.72    700     $10.75
                                           =======     ========      =======     =======     ====     ======    ===     ======   
                                                                                                                     
Exercisable at the end of the year          54,467     $   7.54        -----        ----      700     $10.75    ----      ----
                                           =======     ========      =======     =======     ====      =====    ====      ====
Weighted average fair value of options                                           $  7.58                                $10.75
granted on grant date                                  $   4.31                  =======              $ 4.00             =====   
                                                       ========                                       ======         
Options available for grant at the end                                                                               
of the year                                352,700                   200,100                18,600            19,300
                                           =======                   =======                ======            ======
</TABLE>                                                                        

                                       46
<PAGE>
         The following table summarizes information about stock options
outstanding at January 31,1998:
<TABLE>
<CAPTION>

                                                Detail composition of options outstanding
                                                             January 31, 1998

                                                                            
                                                                             Average       
                                                                           Contractual     
                                            Options           Exercise   Life Remaining              Options
                                          Outstanding          Price           YRS)                Exercisable
                                     ------------------- ---------------- ----------------- --------------------
                                       <S>               <C>             <C>                   <C>
                                              6,667           $ 8.25              2.24                  ---
                                             24,000             9.88              3.42                8,000
                                             30,000             8.13              3.50               10,000
                                            109,400             6.88              3.56               36,467
                                             48,900             9.25              4.15                   --
                                                700            10.75              9.13                  700
                                                700             6.69             10.14                   --
                                           ========                                                 =======
                                            220,367                                                  55,167
                                           ========                                                 =======

</TABLE>


         In October 1995, the Financial Accounting Standards Board issued
         Statement of Financial Accounting Standards No. 123 - Accounting for
         Stock-Based Compensation ("SFAS No. 123"). SFAS No. 123 is effective
         for fiscal years beginning after December 15, 1995 and provides, among
         other things, that companies may elect to account for employee stock
         options using a fair value-based method or continue to apply the
         intrinsic value-based method prescribed by Accounting Principal Board
         Opinion No. 25 ("APB 25").

         Under SFAS No. 123, all employee stock option grants are considered
         compensatory. Compensation cost is measured at the date of grant based
         on the estimated fair value of the options determined using an option
         pricing model. The model takes into account the stock price at the
         grant date, the exercise price, the expected life of the option, the
         volatility of the stock, expected dividends on the stock and the
         risk-free interest rate over the expected life of the option. Under APB
         25, generally only stock options that have intrinsic value at the date
         of grant are considered compensatory. Intrinsic value represents the
         excess, if any, of the market price of the stock at the grant date over
         the exercise price of the options. Under both methods, compensation
         cost is charged to earnings over the period the options become
         exercisable.

         The Company has elected to continue to account for employee stock
         options under APB 25. Accordingly, no material compensation cost has
         been recognized.

         The following table discloses the Company's pro forma net income (loss)
         and net income (loss) per share assuming compensation cost for employee
         stock options had been determined consistent with SFAS No. 123. The
         table also discloses the weighted-average assumptions used in
         estimating the fair value of each option grant on the date of grant
         using the Black-Scholes option pricing model, and the estimated
         weighted-average fair value of the options granted. The model assumes
         no expected future dividend payments on the Company's common stock for
         the options granted

                                       47
<PAGE>

         during the fiscal year ended January 31, 1998.

<TABLE>
<CAPTION>


                                                                                     Year ended             Year ended
                                                                                  January 31, 1998       January 31, 1997
                                                                                 -----------------       ----------------
           <S>                                                                            <C>                  <C>
          Net income (loss)
          As reported                                                                  $(8,845,484)            $   122,900
          Pro forma                                                                     (9,160,790)                 35,920
          Net income (loss) per share
          Basic
            As reported                                                                      (1.13)                    .02
            Pro forma                                                                        (1.17)                    .01

          Diluted
            As reported                                                                      (1.13)                    .02
            Pro forma                                                                        (1.17)                    .01
          Weighted-average assumptions
          Expected stock price volatility                                                    40.94%                 60.00%
          Risk-free interest rate                                                             6.50%                  6.50%
          Expected option lives                                                           3.6 years              4.6 years
          Estimated fair value of options granted                                      $     3.62              $     4.38
</TABLE>




13.      Business Segments

         The Company's primary operations are reported in the following three
         segments: Horse and Sports Wagering, Casino and Computerized Bookmaking
         Systems ("Systems"). The Hotel, Food and Beverage business segment has
         been presented as discontinued operations in the accompanying
         consolidated financial statements (See Note #6).

         The Horse and Sports Wagering segment consists of licensed bookmaking
         operations with the largest number of sportsbooks in the state of
         Nevada. In addition to its main location, the Company operates 39 race
         and sports books located within licensed gaming establishments owned by
         other companies throughout the state of Nevada. The Horse and Sports
         wagering segment leases the square footage necessary to conduct its
         operations at these non-company owned establishments.

         The Casino segment includes a 5,600 square foot casino within the
         Howard Johnson Hotel containing approximately 71 electronic gaming
         devices including slot machines, video poker machines and multi-game
         video machines.

         The Computerized Bookmaking Systems segment designs, installs and
         maintains race and sports book equipment, software and computer systems
         to the sports betting industry and is a 50% partner in the joint
         venture, Mega$ports (R). Mega$ports (R) offers a pari-mutuel sports
         wagering system.

                                       48
<PAGE>


         The following summarizes the segment information for the Company:
<TABLE>
<CAPTION>


                                      Years       Horse and
                                      Ended         Sports
                                   January 31,     Wagering      Casino      Systems      Corporate       Total
                                   -----------     --------      ------      -------      ---------       -----
                                        
                    <S>                   <C>       <C>          <C>           <C>            <C>           <C>
                  Revenues              1998       $5,766,549   $571,702    $2,962,252           ---    $ 9,300,503
                                        1997        5,182,035    372,008       914,677         1,396      6,470,116

                  Operating             1998           11,479    (20,205)     (244,408)   (1,580,872)    (1,834,006)
                  Income (Loss)*        1997          629,465     32,334        51,386      (139,550)       573,635

                  Capital               1998          647,228        ---        43,423       141,834        832,485
                  Expenditures          1997          221,623     51,735         3,570             -        276,928

                  Depreciation and      1998          278,946     16,005       327,045        36,220        658,216
                  Amortization          1997          145,305     11,050        99,500             -        255,855

                  Identifiable          1998        2,974,576    336,910     4,564,546     5,762,762     13,638,794
                  Assets                1997        3,633,668    350,153     5,701,742     7,282,751     16,968,314

         * Operating income (loss) does not include the allocation of corporate management fees. The management fees are equal 
           to 9.5% of each operating Company's gross operating revenues.

</TABLE>

         Comparative financial data for the hotel, food and beverage operations,
         reported as discontinued operations, comparative financial data is as 
         follows:

         Revenues were $3,308,000 and $2,560,000 for the fiscal years ended
         January 31, 1998 and 1997, respectively. Operating losses were $675,000
         and $224,000, for the fiscal years ended January 31, 1998 and 1997,
         respectively. Capital Expenditures were $223,000 and $478,000 for the
         fiscal years ended January 31, 1998 and 1997, respectively.
         Depreciation and Amortization was $314,000 and $209,000 for the fiscal
         years ended January 31, 1998 and 1997, respectively. Identifiable
         assets were $3,710,000 and $7,672,000 for the fiscal years ended
         January 31, 1998 and 1997, respectively.

14.      Related Party Transactions

         CBS leases space to MegaSports, Inc. for its corporate offices in the
         building owned by CBS. Lease payments invoiced were $59,100 and $14,775
         for the years ended January 31, 1998 and 1997 respectively.

         CBS leases space in the building it owns to a company where a
         shareholder and former board member is an employee. Lease payments
         invoiced by CBS were $97,640 and $16,470 for the years ended January
         31, 1998 and 1997 respectively.

         A shareholder and board member of the Company is also a board member of
         a company which owns a gaming establishment in which LHSP leases space
         for a sports book operation. Lease payments made to this establishment
         were $193,888 and $158,654 for the years ended January 31, 1998 and
         1997, respectively.

         LHSP paid fees for odds-making services to a company where a
         shareholder and former board member is an employee. These fees,
         included in direct costs, were $21,429 and $16,800 for the years ended
         January 31, 1998 and 1997, respectively.

         Mega$ports paid fees for odds-making services to a company where a 
         shareholder and former board member is an employee. Odds-making fees 
         paid by Mega$ports were $74,750 for the fiscal year ended January 31, 
         1998.

         As at January 31, 1998, LHSP had a receivable balance of $18,920 
         related to transactions in the normal course of business with a company
         where a shareholder and former board member is an employee.
<PAGE>

         In conjunction with the Reorganization, Leroy's, LHC and B-P and the 
         Original Stockholders entered into an agreement on May 10, 1996 which
         provides that if Leroy's, LHC or B-P obtain a tax benefit to the
         detriment of such stockholders for any tax period, on or prior to the
         effective date of the Reorganization, the affected company shall pay to
         the stockholders the tax benefit actually derived up to the amount of
         the tax detriment actually incurred. In addition, for up to $200,000 in
         the aggregate, such companies have agreed to pay to such stockholders
         any increased tax liability of such stockholders attributable to a
         determination by a court of competent jurisdiction or a federal taxing
         authority that with respect to the federal tax returns of such
         companies for taxable years prior to May 10, 1996, the tax liability of
         such companies shall be increased.

15.      Acquisitions

         Computerized Bookmaking Systems, Inc.

                  On October 25, 1996, the Company purchased Autotote CBS, Inc.
         for $3,000,000 in cash and agreed to guarantee, pursuant to a Guarantee
         Agreement, Autotote CBS, Inc.'s obligation under its current mortgage

                                       49
<PAGE>
        
         of approximately $2,000,000 on the real estate and building in Las
         Vegas, Nevada where the Company currently maintains its corporate
         offices. In addition, the Company has incurred costs of $156,000 in
         connection with the acquisition. Autotote CBS, Inc. is the dominant
         provider of sports and race book equipment and software in the state of
         Nevada, including all major casinos along the Las Vegas strip. The
         accompanying statements of operations include the operations of
         Autotote CBS, Inc. from the date of acquisition. The acquisition of
         Autotote CBS, Inc. has been accounted for as a purchase. Unaudited
         proforma condensed consolidated financial information for the Company
         assuming the acquisition of Autotote CBS, Inc. had occurred as of
         February 1, 1996 is as follows:

                  Statement of Operations Data               Year Ended 1997
                                                             ---------------    
                    Revenues                                     $12,113,000
                    Operating income                                 424,000
                    Net income before Income taxes                   333,000
                    Net income                                       302,000


         In February 1997, the Company received a reimbursement of $500,000 from
         IGT for previous start-up costs incurred by CBS related to the
         Mega$ports investment in joint venture. The contribution by IGT was
         treated as a "contingent asset" as defined by SFAS No. 38 "Accounting
         for Business Combinations" which was resolved within a short period of
         time after the consummation of the acquisition of CBS and was accounted
         for as a purchase price allocation adjustment. Accordingly, the
         investment in joint venture balance and intangibles arising from the
         CBS acquisition were revalued to reflect the increase in the total
         contribution to the joint venture by CBS. For the twelve months ended
         January 31, 1998 the Company has recognized a loss from the joint
         venture of approximately $1,792,000.

         The unaudited proforma amounts reflect the Company's actual results
         combined with Autotote CBS, Inc.'s actual results for the periods
         presented, adjusted to reflect additional depreciation and amortization
         expense arising from the purchase and associated income tax impacts at
         the federal statutory rate of 34 percent.

         Imagineering Systems, Inc.

         In November 1997, the Company entered into a stock purchase agreement
         with Imagineering Systems, Inc. ("ISI"). At the same time, the Company
         also entered into a stock purchase agreement with Keno International,
         Inc ("KI") an affiliate of ISI. The acquisition will be accounted for
         as a purchase. The transaction has been approved by the Boards of
         Directors of each of the companies. The closing of the acquisition is
         contingent upon regulatory approvals and certain other events. The
         agreement with ISI provides that American Wagering, Inc. will give ISI
         shareholders $500,000 in cash and $500,000 in shares of unregistered
         American Wagering, Inc. common stock in exchange for all of the
         outstanding common stock of ISI. These shares will include "piggyback"
         registration rights in the AWI stock being delivered. The agreement
         with KI provides that American Wagering, Inc. will give KI shareholders
         $29,000 and a portion of KI earnings over the next ten years in
         exchange for all of the outstanding shares of KI stock. Imagineering
         Systems, Inc. develops, manufactures and sells keno systems to licensed
         casinos in many jurisdictions. KI was created to act as the
         international marketing company for ISI; it has not yet become
         operational.

         The Company's consolidated results of operations will incorporate
         Imagineering Systems, Inc. and Keno International, Inc. commencing on
         the date of acquisition. The unaudited pro forma combined information
         below presents combined results of operations as if the acquisition had
         occurred February 1, 1997 and balance sheet information as if the
         acquisition had occurred as of January 31, 1998. The unaudited proforma

                                       50
<PAGE>

         combined information, based upon the historical consolidated financial
         statements of the Company, Imagineering Systems, Inc., and Keno
         International, Inc. assumes an acquisition cost of $1,029,000 and
         further assumes that an estimated excess of acquisition cost over the
         net tangible book value of ISI and KI is allocated to intangible assets
         with a useful life of 25 years.

         The unaudited pro forma consolidated information is not necessarily
         indicative of the results of operations of the consolidated companies
         had the acquisition occurred February 1, 1997, or the financial
         position had the acquisition occurred January 31, 1998, nor is it
         necessarily indicative of future results or financial position.

                  Statement of Operations Data                 Year Ended 1997
               Revenues                                          $  12,263,000
               Loss from Continuing Operations                       7,417,000
               Loss from Discontinued Operations                     1,866,000
               Net loss                                              9,283,000
               Loss per share                                             1.18


                  Balance Sheet Data                    as of January 31, 1998
               Net Assets                                        $  14,717,000
               Net Liabilities                                      11,709,000
               Stockholders Equity                                   3,008,000


                                       51
<PAGE>



Item 13.          Exhibits and Reports on Form 8-K

                  (a)      Exhibits

                           The Exhibits are listed in the Index to Exhibits on
         pages 54 through 56.

                  (b)      Reports on Form 8-K

                           None.




                                       52
<PAGE>


                                   SIGNATURES

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


                                    AMERICAN WAGERING, INC.



                                    By:   /s/ Victor Salerno
                                          -------------------------------------
                                          Victor Salerno, President and Chief
                                          Executive Officer


                  In accordance with the requirements of the Exchange Act, this
report has been signed by the following persons in the capacities and on the
dates indicated.

      Signature                       Title                         Date    
      ---------                       -----                         ----
     /s/ Victor Salerno         President; Chief Executive      April 30, 1998
------------------------------  Officer; Director
         Victor Salerno


/s/ Robert D. Ciunci            Chief Financial Office          April 30, 1998
------------------------------  (Principal Financial and
         Robert D. Ciunci       Accounting Officer);
                                Director


    /s/ Robert R. Barengo       Director                        April 30, 1998
------------------------------
         Robert R. Barengo



     /s/ Michael S. Merillat    Director                        April 30, 1998
------------------------------
         Michael S. Merillat



                                       53

<PAGE>

                                INDEX TO EXHIBITS



<TABLE>
<CAPTION>

Exhibit                                     Description                              Incorporated by Reference to
-------                                     -----------                              ----------------------------
Number
------
<S>               <C>                                                               <C>                
3.1               Amended and Restated Articles of Incorporation of the              Exhibit 3.1 to Registration
                  Registrant                                                         Statement on Form SB-2, File No.
                                                                                     33-80431

3.2               By-Laws of the Registrant                                          Exhibit 3.2 to Registration Form
                                                                                     10-KSB for Fiscal Year Ended 
                                                                                     January 31, 1997

4.1               Form of Common Stock Certificate                                   Exhibit 4.1 to Registration
                                                                                     Statement on Form SB-2, File No.
                                                                                     33-80431

4.2               Form of Underwriters' Warrant to Purchase Shares                   Exhibit 4.2 to Registration
                                                                                     Statement on Form SB-2, File No.
                                                                                     33-80431

10.1              Employment Agreement between the Registrant and Victor             Exhibit 10.1 to Registration
                  Salerno dated as of August 1, 1995                                 Statement on Form SB-2, File No.
                                                                                     33-80431

10.2              Employment Agreement between the Registrant and Robert             Exhibit 10.2 to Registration
                  Ciunci dated as of August 1, 1995                                  Statement on Form SB-2, File No.
                                                                                     33-80431

10.3              Registrant's 1995 Stock Option Plan                                Exhibit 10.3 to Registration
                                                                                     Statement on Form SB-2, File No.
                                                                                     33-80431

10.4              Directors' Stock Option Plan                                       Exhibit 10.4 to Registration
                                                                                     Statement on Form SB-2, File No.
                                                                                     33-80431

10.5              Purchase Agreement between R. Paul Bruyea, Painted Desert          Exhibit 10.5 to Registration
                  Associates LLP  and Leroy's Hotel Corporation dated                Statement on Form SB-2, File No.
                  November 3, 1995                                                   33-80431

10.5.1            Amendment No. 1 to Purchase Agreement among R. Paul                Exhibit 10.5.1 to Registration
                  Bruyea, Painted Desert Limited Partnership and Leroy's Hotel       Statement on Form SB-2, File No.
                  Corporation dated February 1, 1996                                 33-80431

10.6              Form of Agreement and Plan of Reorganization among                 Exhibit 10.6 to Registration
                  Registrant and Subsidiaries                                        Statement on Form SB-2, File No.
                                                                                     33-80431
</TABLE>
                                       54

<PAGE>
<TABLE>
<CAPTION>

Exhibit                                     Description                              Incorporated by Reference to
-------                                     -----------                              ----------------------------
Number
------
<S>               <C>                                                               <C>                
10.7              Form of Promissory Note made by Leroy's Horse and Sports           Exhibit 10.7 to Registration
                  Place ("Leroy's") in favor of each Original Stockholder            Statement on Form SB-2, File No.
                                                                                     33-80431

10.7.1            Restated Promissory Note by Leroy's in favor of Victor Salerno     Filed herewith

10.7.2            Restated Promissory Note by Leroy's in favor of Judith Salerno     Filed herewith

10.7.3            Restated Promissory Note by Leroy's in favor of Michael Merillat   Filed herewith

10.7.4            Restated Promissory Note by Leroy's in favor of Michael Roxborough Filed herewith

10.7.5            Restated Promissory Note by Leroy's in favor of Robert Ciunci      Filed herewith

10.7.6            Restated Promissory Note by Leroy's in favor of Robert Barengo     Filed herewith

10.8              Form of Management Agreement between Registrant and each           Exhibit 10.8 to Registration
                  Subsidiary                                                         Statement on Form SB-2, File No.
                                                                                     33-80431

10.9              Form of Tax Indemnity Agreement among Leroy's Horse and            Exhibit 10.9 to Registration
                  Sports Place, Inc., Leroy's Hotel Corporation, B-P Gaming          Statement on Form SB-2, File No.
                  Corporation and the Original Stockholders                          33-80431

10.10             Form of Consolidated Income Tax Return Tax Sharing                 Exhibit 10.10 to Registration
                  Agreement among Registrant and its Subsidiaries                    Statement on Form SB-2, File No.
                                                                                     33-80431

10.11             License Agreement between Howard Johnson International,            Exhibit 10.11 to Registrant's
                  Inc. And Leroy's Hotel Corporation, dated May 9, 1996              Form 10-KSB for Fiscal Year Ended 
                                                                                     January 31, 1997

10.12             International House of Pancakes Franchise Agreement between        Exhibit 10.12 to Registration
                  B-P Food Corporation and International House of Pancakes,          Statement on Form SB-2, File No.
                  Inc. dated February 19, 1980                                       33-80431

10.13             Indenture of Lease between Bruyea Pond Las Vegas and               Exhibit 10.13 to Registration
                  James A. Rissler, Florence Theis, and O.J. Tomson, dated           Statement on Form SB-2, File No.
                  February 1, 1978, as amended, for ground lease of 3111 West        33-80431
                  Tropicana Avenue, Las Vegas, Nevada

10.14             Deed of Trust, Assignment of Rents and Security Agreement          Exhibit 10.14 to Registration
                  of Bruyea Pond Las Vegas ("BPLV") to Crocker National              Statement on Form SB-2, File No.
                  Bank dated June 27, 1979                                           33-80431

10.15             Tri-Party Agreement between Crocker National Bank, Eastern         Exhibit 10.15 to Registration
                  Savings Bank and BPLV dated July 2, 1979                           Statement on Form SB-2, File No.
                                                                                     33-80431

10.16             Assignment of BPLV's Interest in Ground Lease to Eastern           Exhibit 10.16 to Registration
                  Savings Bank, predecessor to Apple Bank For Savings, dated         Statement on Form SB-2, File No.
                  May 21, 1981                                                       33-80431

10.17             Business Loan Agreement between Leroy's Horse and Sports           Exhibit 10.17 to Registration
                  Place, Inc. and Pioneer Citizens Bank of Nevada, dated             Statement on Form SB-2, File No.
                  March 30, 1995.                                                    33-80431

</TABLE>
                                       55


<PAGE>

<TABLE>
<CAPTION>

Exhibit                                     Description                              Incorporated by Reference to
-------                                     -----------                              ----------------------------
Number
------
<S>               <C>                                                               <C>                
10.18.1           Stock Transfer Agreement between the Registrant and                Exhibit 2.1 to Registrant's Form 8-K
                  Autotote Corporation dated October 25, 1996                        filed November 8, 1996

10.18.2           Technology Cross-License Agreement among Autotote CBS Inc.,        Exhibit 2.2 to Registrant's Form 8-K
                  Autotote Corporation and Autotote Systems, Inc. dated              filed November 8, 1996
                  October 25, 1996

10.19             Stock Purchase Agreement between Messrs. Salerno and               Exhibit 10.19 to Registration
                  Ciunci dated December 12, 1994                                     Statement on Form SB-2, File No.
                                                                                     33-80431

10.24             Form of Indemnification Agreement between the Registrant           Exhibit 10.24 to Registration
                  and each of its directors                                          Statement on Form SB-2, File No.
                                                                                     33-80431

10.25             Absolute Assignment of Leases and Rents between Autotote           Exhibit 10.25 to Registrant's Form 10-KSB
                  CBS, Inc. and Standard Life and Accident Insurance Company         for Fiscal Year 1997
                  dated August 31, 1995

10.26             Deed of Trust, Security Agreement and Financing Statement          Exhibit 10.26 to Registrant's Form 10-KSB
                  between Autotote CBS, Inc. and Jerry L. Adams, Trustee, as         for Fiscal Year 1997                     
                  Trustee, for the benefit of Standard Life and Accident             
                  Insurance Company dated August 31, 1995


21.1              Subsidiaries                                                       Filed herewith
23.1              Consent of Arthur Andersen LLP, the Registrant's Independent       Filed herewith
                  Certified Public Accountants                                       
                                                                                     

27                Financial Data Schedule                                            Filed herewith
</TABLE>
                                       56