Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

Form 10-K

(Mark One)ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended January 31, 2009o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from                                    to


Commission file number 000-20685

AMERICAN WAGERING, INC.(Exact name of registrant as specified in its charter)

Nevada(State or other jurisdiction of
incorporation or organization)

88-0344658(I.R.S. Employer
Identification No.)675 Grier Drive, Las Vegas, NV(Address of principal executive offices)

89119(Zip Code)


(702) 735-0101(Registrant's telephone number, including area code)

Securities
registered pursuant to Section 12(b) of the Act:None

Securities
registered pursuant to Section 12(g) of the Act:

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

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. o Yes    ý No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of
the Act. o Yes    ý No

NoteChecking the box above will not relieve any registrant required to file reports pursuant to Section 13
or 15(d) of the Exchange Act from their obligations under those Sections.

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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. ý Yes    o No

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company ý


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

The aggregate market value of the voting and non-voting common equity held by non-affiliates as of July 31, 2008, based on the
closing price of the Over-The-Counter Bulletin Board of $0.49 per share was $1,974,236.

NoteIf a determination as to whether a particular person or entity is an affiliate cannot be made without involving unreasonable effort and
expense, the aggregate market value of the common stock held by non-affiliates may be calculated on the basis of assumptions reasonable under the circumstances, provided that the
assumptions are set forth in this Form.

APPLICABLE
ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate
by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a
court. ý Yes    o No

As of April 30, 2009, the number of outstanding shares of the registrant's common stock was 8,129,879.

DOCUMENTS
INCORPORATED BY REFERENCE

None



---



Table of Contents

TABLE OF CONTENTS



PART I

1Item 1.

Business

1Item 1A.

Risk Factors

10Item 1B.

Unresolved Staff Comments

18Item 2.

Properties

18Item 3.

Legal Proceedings

18Item 4.

Submission of Matters to a Vote of Security Holders

18PART II

19Item 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

19Item 6.

Selected Financial Data

19Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

19Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

34Item 8.

Financial Statements and Supplementary Data

34Report of Independent Registered Public Accounting Firm

35Consolidated Balance Sheets January 31, 2009 and 2008

36Consolidated Statements of Operations for the Years Ended January 31, 2009 and 2008

37Consolidated Statements of Stockholders' Equity for the Years Ended January 31, 2009 and 2008

38Consolidated Statements of Cash Flows for the Years Ended January 31, 2009 and 2008

39Notes to Consolidated Financial Statements Years Ended January 31, 2009 and 2008

40Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

63Item 9A(T).

Controls and Procedures

63Item 9B.

Other Information

64PART III

65Item 10.

Directors, Executive Officers and Corporate Governance

65Item 11.

Executive Compensation

67Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

73Item 13.

Certain Relationships and Related Transactions, and Director Independence

75Item 14.

Principal Accountants' Fees and Services

77PART IV

79Item 15.

Exhibits, Financial Statement Schedules

79SIGNATURES

83


---





Table of Contents

PART I

Item 1.    Business

Company History

American Wagering, Inc. ("AWI" or the "Company") was incorporated in the state of Nevada in August 1995. AWI earns its
revenues through the consolidated operations of its wholly-owned subsidiaries, including Leroy's Horse & Sports Place, Inc. ("Leroy's"), Computerized Bookmaking Systems, Inc.
("CBS"), AWI Manufacturing, Inc. ("AWIM"), and AWI Gaming, Inc. ("AWIG").

Race and Sports Wagering Revenue Segment

Leroy's.Leroy's was incorporated in the state of Nevada in November 1977. Leroy's, through a central computer system
located at the Company's
Las Vegas headquarters, operates a network of race and sport wagering facilities on the premises of nonrestricted gaming locations throughout the state of Nevada. Leroy's offers a
"turn-key" race and sports wagering operation that allows casinos to satisfy their patron's desire for race and sports wagering, without the casino bearing the risk and overhead associated
with running the operation themselves. By combining volume from a large number of locations, the Company believes that Leroy's more effectively hedges risks and more efficiently covers fixed overhead.
Leroy's generates revenue from patron wagers less payouts.

Race and Sports Wagering Systems Segment

CBS.Founded in 1983, CBS designs, produces and services computerized wagering systems for the race and sports wagering
industry. CBS is the leading
race and sports equipment and software supplier in the State of Nevada. Accordingly, CBS services the majority of race and sports books in Nevada. The CBS Race and Sports System is the industry
standard for race and sports content wager processing, delivery, and accounting. CBS also is the distributor of self-service race and sports wager kiosks, designed by AWIM. CBS generates
revenue as it sells and maintains these sports wagering systems for the gaming industry.

AWI Manufacturing, Inc.AWIM designs self-service race and sports wagering kiosks. The kiosks interface seamlessly with our
customers' CBS Race and Sports Systems and they expand our customers' race and sports books' size and hours of operation without increasing the labor cost. The installation of kiosks in Leroy's
locations assists in controlling personnel costs, lengthening hours of operation, increasing Leroy's visibility, and enhancing the convenience of the patron. The AWIM upright kiosk was jointly
designed with a third-party vendor. Smaller self-service kiosks were placed in over 20 local bar locations during fiscal 2009.

Hotel/Casino Segment

AWI Gaming, Inc.AWIG is the sole member of Sturgeons, LLC, which owns and operates the Sturgeon's Inn &
Casino. AWIG's intended
purpose was to acquire hotel/casino properties, although due to the economy and other financial reasons, no other acquisitions have occurred to date and none are anticipated in the near future.

Sturgeons, LLC.Sturgeons, LLC d/b/a Sturgeon's Inn & Casino ("Sturgeon's") is a hotel, casino and restaurant
operation located
in Lovelock, Nevada that was acquired on March 1, 2006.

Chapter 11 Filing

On July 25, 2003, AWI and Leroy's filed voluntary petitions for relief ("Chapter 11 Petitions") under Chapter 11
of the United States Bankruptcy Code ("Chapter 11") in the United States Bankruptcy Court for the District of Nevada (the "Bankruptcy Court"). On February 28, 2005,
the

1

---



Table of Contents

Bankruptcy
Court confirmed the Restated Amended Joint Plan of Reorganization (the "Plan") of AWI and Leroy's. On March 11, 2005, AWI and Leroy's consummated the Plan and formally emerged
from Chapter 11 proceedings after completing all required actions and all remaining conditions.

On
September 26, 2005, the Bankruptcy Court issued an order closing the Chapter 11 cases of AWI and Leroy's. All required distributions have been made, except with respect
to the Racusin matter ("Racusin Claim"). For the fiscal years ended January 31, 2009 and 2008, the Company has paid $540,986 and $1,124,984, respectively, to the Bankruptcy Court and certain
other lienholders of Racusin, as directed. Payments from February 1 through March 31, 2009 totaled $89,653. As of January 31, 2009, $757,642 remained outstanding to Racusin on the
Racusin Claim. The Company and Racusin entered into the Settlement Agreement on September 3, 2004. On or about March 11, 2005, the Company consummated its Plan of Reorganization and
emerged from Bankruptcy. On or about July 27, 2005, the Bankruptcy Court approved an Interpleader Order, whereby pursuant to the Settlement Agreement, the Company agreed to place
250,000 shares of common stock with the clerk of the court as payment of the Racusin Claim while Racusin pursued its appeal of the Bankruptcy Appellate Panel's decision in our favor to the
9th Circuit Court of Appeals. The Interpleader Order further stated that the Company's stock would be substituted with cash payment in the event that the 9th Circuit reverses the
Bankruptcy Appellate Panel. The Company filed a Form 8-K on July 6, 2007, in response to the 9th Circuit's reversal of the Bankruptcy Appellate Panel. On
November 2, 2007, the Bankruptcy Court heard an argument to determine whether the Company could withdraw its 250,000 shares of common stock and whether it could begin depositing funds
pursuant to the Settlement Agreement attached to the Company's motion (the "Revised Payment Schedule"). Accordingly, we previously estimated post-judgment interest at 8% per annum,
compounded, from March 11, 2005, without taking into consideration the Interpleader Order of July 27, 2005, which was still in effect. That is, by calculating post-judgment
interest during the same time that our stock was held by the Court pursuant to the Settlement Agreement, we previously accrued interest over a period of time for which interest should not be accrued
because we were in compliance with the terms of the Settlement Agreement pursuant to the Interpleader Order. The extra estimated interest accrued pursuant to the Racusin claim was $394,021, which was
taken as an offset to the litigation expense in the fourth quarter of fiscal 2009. The adjustment was recorded in the fourth quarter of fiscal 2009 pursuant to the fourth quarter legal actions
described below.

The
Company filed its Corrected Amortization Schedule on March 17, 2008 ("Corrected Amortization Schedule"). The Company received a letter from Racusin stating that he considered
our filing of the Corrected Amortization Schedule to be a breach of the Settlement Agreement on April 2, 2008. On
October 10, 2008, Racusin moved the Court to file supplemental pleadings, and that motion was granted on December 23, 2008. Racusin filed his Adversarial Counterclaim for Breach of the
Settlement Agreement on January 14, 2009. We filed our Answer on January 29, 2009. Racusin filed his Motion for Summary Judgment on breach of the Settlement Agreement on
February 24, 2009. We filed our Opposition to the Motion for Summary Judgment on March 16, 2009. Racusin filed his Reply to our Opposition on March 30, 2009. The hearing on the
Motion for Summary Judgment is scheduled for May 8, 2009. Though we believe the legal analysis for our position is meritorious, there can be no assurance that the Company will prevail in
this matter.

For
a discussion of the Racusin Claim,seeItem 3. Legal Proceedings.

Sports Wagering

Wagering on sporting events is currently legal in the state of Nevada and in numerous foreign countries. Wagering on sporting events
has increased significantly with cable and satellite television, and technological improvements. When sporting events are televised, there is increased exposure and interest, which, we believe, leads
to increased sports betting.

2

---



Table of Contents

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. Generally, a patron's odds (or point spread or the "line") are fixed at the time he or she makes his or her bet, regardless of
any subsequent movement in the line. Under this system, a sports book operator attracts bets by changing or "moving" the line up or down to encourage wagering on a specific side or team. To the extent
that a book on a particular event is not balanced, the bookmaking operation takes a risk on the outcome of the event. This is the fundamental difference from other forms of organized gambling, where
profits result from patron play against a statistical advantage that the gambling operator (the "House") possesses; or in the case of pari-mutuel wagering, used by major North
American Horse Racing Tracks, Dog Race Tracks, and Jai-Alai establishments, where the House receives a guaranteed percentage for operating expenses, profit and taxes and the remainder is
distributed to the winners. The Nevada legislature recently passed a bill to legalize the acceptance of Dog Track pari-mutuel wagering.

This
fundamental difference is part of the appeal for many sports patrons, but it also creates risk for the sports book. A bookmaker operates in a system that is interrelated with
oddsmakers and patrons. Bookmakers collect bets, adjust odds to account for the preferences of their patrons, pay the winners, and if the book is balanced for each type of sports bet, the House then
has a "theoretical advantage." For example, for a straight football bet involving the outcome of one game, it is common practice that the patron wagers $11 to win $10. If the patron wins the wager, he
or she receives $21. If the patron loses, in this case, he has wagered $11. Accordingly, by maintaining a balanced book, the sports book would win $1 for each $22 wagered, or 4.55%.

Oddsmakers
initially set betting lines with the goal of splitting the bets evenly between each of the betting sides. Patrons have opinions concerning the odds and bet accordingly, which
requires initial lines to be adjusted. As a result, in practice, a sports book is rarely perfectly balanced. The sports books' profit depends upon the reliability of the oddsmaker and its own acumen
at adjusting the odds when required. Because patrons are betting on propositions of uncertain probability and are paid according to the line at which they make their bets rather than the closing odds
(as in a pari-mutuel system), the sports book is not assured of either a constant profit over time or for a single event.

A
sports book also attempts to limit the potential risk by setting game limits and line movement. For example, the opening line for a football game ideally would split the bets from the
time it was posted until kick-off. However, the opening line generally is unbalanced. Because a sports book does not want to take the risk of accepting unlimited bets on one side of a
game, it creates a game limit, the maximum amount of money that will be accepted at the posted line. When the game limit is reached, the line is changed, or "moved," to attract wagers on the "other"
side. We believe that using a conservative strategy of placing limits on games, mitigates a great portion of our risk of losing large sums of money in short time periods.

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 patron mix. For example, when the sports book anticipates that the majority of the
bets will come from sophisticated patrons who know as much as, or more than, the oddsmaker, the limit will be relatively low. We believe that events with the highest fan popularity and media coverage,
such as professional football, have a relatively small proportion of sophisticated patrons. Accordingly, the sports books' expected earn on such an event would be higher and would justify a higher
game limit.

In
order to effectively balance its books, a bookmaking operation must take a sufficient volume of wagers to offset large wagers on any given event. While many of the consolidated casino
operators have

3

---



Table of Contents

sufficient
patron traffic to underwrite the substantial risks inherent in a sports book, many single casino operators are typically more risk adverse. Through Leroy's, we offer casino operators the
amenity of
having sports wagering books with no risk of financial loss or substantial operating, labor, or administrative costs. Under Nevada gaming law, Leroy's is permitted to own and operate sports books
located on the premises of other nonrestricted gaming licensees.

When
Leroy's 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. The typical sports book location leased by Leroy's encompasses approximately 300 square feet, but can range from 100 to 10,000 square feet, contains a board
displaying the odds, television monitors showing sporting events, betting stations, ticket sellers and cashiers. Most leases are at fixed rates, are cancelable by either party with proper notice, and
some have revenue sharing or incentive (participation) clauses. As a bet is placed, the wagering data is entered into a computer terminal which is connected via a communications device to Leroy's
centralized computer system which confirms the line, determines that the bet is within the limits set for the particular event, records the information on a central database and issues a ticket
evidencing the bet. The ticket is then distributed to the patron with Leroy's simultaneously recording the wager. Personnel at Leroy's corporate office monitor all bets and adjust the odds as
necessary to reflect the various bets throughout all of Leroy's locations.

We
believe that Leroy's has lower maximum betting limits than many sports books operated by the larger casinos. We established these lower limits in an effort to limit bets from the more
sophisticated patrons who often place larger bets. In addition, in order to limit the more sophisticated bettors from utilizing strategies that would provide an advantage, we set even lower limits for
bets placed over the telephone, which are currently accepted only from within Nevada and are limited to $2,200 per day per patron, by regulation, (unless a higher limit for a specific patron is
approved by the Nevada State Gaming Control Board). We believe that geographical dispersion across Nevada is more likely to attract bets from patrons more evenly on both sides of a line, thereby
further limiting our risk.

Professional
and college football games currently are the most popular sports wagered on, followed by professional and college basketball games, and finally professional baseball games;
together comprising the majority of the total amount wagered at all of our Leroy's locations. Historically, our Leroy's business has been seasonal in nature, with more than half of its handle
occurring between the months of September and February.

We
do not offer horse race wagering at all of our Leroy's locations. We offer limited horse race wagering at most locations, and a full pari-mutuel race book at several of
our locations.SeePari-Mutuel Race Wagering below.

Leroy's
race books utilize the same personnel and facilities as its sports books, but Leroy's does not set its own odds for race wagering. Leroy's accepts wagers for races by offering
race patrons the same odds as the racetracks at which the races occur. At those locations with limited race wagering, Leroy's pays full track odds up to the predetermined limit. At those locations
with full pari-mutuel race wagering, there are no limits and Leroy's operates a daily race book with wagers merged into the on-track pari-mutuel pools.

Online
sports' betting (through use of personal computers) has existed for approximately 20 years, is currently very popular, and continues to become more popular each year. The
increased popularity may result in the continued growth of the sports betting industry in general, or could have an adverse impact upon our live wagering facilities in Nevada. At this time, we cannot
predict what impact, if any, the growth of online wagering may have on our overall handle (total amount wagered).SeeItem 1.A Risk
Factors below.

4

---



Table of Contents

Pari-Mutuel Race Wagering

In December 1997, Leroy's joined the Nevada Pari-mutuel Association to allow pari-mutuel race wagering
at one or more of its licensed locations. As of January 31, 2009, seven licensed Leroy's locations, in association with a disseminator, offer pari-mutuel wagering on numerous events
at racetracks throughout the country. The Nevada legislature recently passed a bill to legalize the acceptance of Dog Track pari-mutuel wagering.

Competition

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

Leroy's
faces competition from all other sports and race wagering operations throughout Nevada. Virtually all of the major casinos in Nevada have sports and race books, some of which are
larger and offer more amenities than our locations and some casinos operate their own sports books.

The
state of Delaware is in the process of legalizing sports wagering. The state of New Jersey is suing the federal government for the right to also accept sports wagering. These
potential new sports wagering jurisdictions and expanded internet sports wagering could potentially reduce the amount of wagers placed in Nevada. However, this expansion could also represent expansion
opportunities for our Company, but there can be no assurance that this will create a positive impact on our financial position.

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

AWIM
competes with other manufacturers of self-service wagering kiosks.

AWIG
faces competition from other hotel/casino operators. Sturgeon's is the only hotel/casino operation in Lovelock, Nevada and competes in the tourism market with casino facilities in
the nearby cities of Reno, Sparks, Fallon and Winnemucca. However, other hotel operations (without casino facilities) compete for the tourism market while other (smaller) casino facilities (without
hotel operations) compete for gaming patrons in this area.

Intellectual Property

We regard our technology as proprietary and attempt to protect it by relying on patents, trademarks, service marks, copyrights and
trade secret laws and restrictions on disclosure and transferring title and other methods. We generally enter into confidentiality and/or license agreements with our employees and consultants, and
generally control access to and distribution of our documentation and other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use
our proprietary information without authorization or to develop similar technology independently.

Research and Development

We incurred costs of $591,122 in research and development in the fiscal year ended January 31, 2009, as compared to $952,163 in
the fiscal year ended January 31, 2008, all of which was expensed as incurred. We intend to conduct continuing development and innovation of our products in accordance with changing consumer
preferences, demographics, and the evolution of new technologies. Our development strategy is to leverage our proprietary technology and regulatory approvals to integrate third party developed
solutions such as age verification, biometrics, identification, security, wireless, and

5

---



Table of Contents

hand-held
devices in order to provide fully-integrated applications that are competitive and innovative in the regulated gaming industry.

Proposed Government Regulation

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

Regulation and Licensing

The ownership and operation of gaming facilities in Nevada are subject to extensive state and local regulation. Our gaming operations
are subject to the Nevada Gaming Control Act and its regulations (hereinafter collectively referred to as the "Nevada Act") and various local regulations. Our gaming operations are also subject to the
licensing and regulatory control of the Nevada Gaming Commission (the "Commission"), the State Gaming Control Board (the "Board"), various county commissions (gaming, liquor, health,
etc.), and other local jurisdictions. These regulatory agencies are 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 our gaming operations.

We
have been found suitable as the publicly traded parent of entities holding Nevada gaming licenses. Leroy's is licensed by the Nevada Gaming Authorities as the owner/operator of
nonrestricted race and/or sports book operations; AWIM is licensed by the Nevada Gaming Authorities as a Manufacturer and a Distributor; AWIG is licensed by the Nevada Gaming Authorities as the sole
member of Sturgeon's; Sturgeon's is licensed by the Nevada Gaming Authorities as the operator of nonrestricted gaming operations at Sturgeon's Inn & Casino; CBS is not required to maintain any
gaming-related licenses. Gaming licenses require the periodic payment of fees and taxes and periodic reviews by the gaming authorities. Furthermore, gaming licenses are not transferable.

We
are registered in Nevada as a publicly traded corporation and, as such, are required to submit, on a periodic basis, detailed financial and operating reports to the Commission.
Additionally, we 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, AWIM, AWIG or
Sturgeon's (as non-public entities) without first obtaining licenses and approvals from the appropriate Nevada Gaming Authorities. We have received from the Nevada Gaming
Authorities the various registrations, approvals, permits and licenses required to engage in gaming activities in Nevada.

The
Nevada Gaming Authorities may investigate any individual who has a material relationship, or involvement with us in order to determine whether such individual is suitable or should
be licensed as a business associate of a gaming licensee. Officers, directors and certain key employees must file applications with the Nevada Gaming Authorities and may be required to be licensed or
found suitable by the Nevada Gaming Authorities. Our officers, directors and key employees who are actively and directly involved in the gaming activities may be required to be licensed or found
suitable by the

6

---



Table of Contents

Nevada
Gaming Authorities. The Nevada Gaming Authorities may deny an application of licensing for any cause deemed reasonable. A finding of suitability is comparable to licensing, and both require the
submission of detailed personal and financial information followed by a thorough investigation. An applicant for licensing or a finding of suitability must pay all of the costs of the investigation.
Changes in licensed positions must be reported to the Nevada Gaming Authorities. In addition to their authority to deny an application for a finding of suitability or licensure, the Nevada Gaming
Authorities also have jurisdiction to disapprove a change in a corporate position. Our current officers and directors and those of our 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 us, we would be required
to sever all relationships with such a person. Additionally, the Commission may require us 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 we or our subsidiaries violated the Nevada Act, the gaming licenses or registration held by us could be limited, conditioned, suspended or revoked. At the
discretion of the Commission, we 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 our gaming properties and, under certain circumstances, earnings generated during the supervisor's appointment (except for the reasonable rental value of our 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 results of our operations.

A
beneficial holder of our voting securities, regardless of the number of shares owned, may be required to file an application, be investigated, and have his or her suitability as a
beneficial holder of our voting securities 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. If the applicant is an Executive Officer or Director of the Company, it
is our policy to pay for these expenses. In addition, the Clark County Liquor Gaming Licensing Board has taken the position that it has the authority to approve all persons owning or controlling the
stock of any corporation controlling a gaming license.

The
Nevada Act requires any person who acquires more than 5% of our voting securities to report the acquisition to the Commission. The Nevada Act requires that beneficial owners of more
than 10% of our voting securities apply to the Commission for a finding of suitability within 30 days after the Chairman of the Board mails written notice requiring such a filing. Under certain
circumstances, an "institutional investor," as defined in the Nevada Act, which acquires more than 10%, but not more than 15%, of our voting securities may apply to the Commission for a waiver of such
a finding of suitability if such institutional investor holds the voting securities for investment purposes only. An institutional investor shall not be deemed to hold the voting securities for
investment purposes only unless the voting securities were acquired and are held in the ordinary course of business as an institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of our board of directors, any change in our corporate charter, bylaws, management, policies or operations, or any of our gaming affiliates, or
any other action which the Commission finds to be inconsistent with holding our voting securities for investment purposes only. Activities which are not deemed 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

7

---



Table of Contents

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 its beneficial owners. The applicant is required to pay
all costs of investigation. If the applicant is an Executive Officer or Director of the Company, our policy is to pay for those expenses.

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

We
are 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. We are also required to render maximum assistance in determining the identity of the beneficial owner. The Commission has the power to require our 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 us.

Changes
in control of AWI through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or any act or conduct by a person whereby he or she obtains
control, may not occur without the prior approval of the Commission. Entities seeking to acquire control of a registered corporation must satisfy the Board and the Commission under 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 that proposes 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 defensive tactics affecting Nevada gaming
licenses and registered corporations that are affiliated with those operations, may be injurious to stable and productive corporate gaming. The Commission has established a regulatory scheme to
ameliorate the potentially adverse effects of these business practices upon Nevada's gaming industry and to further Nevada's policy to: (i) assure the financial stability of corporate gaming
operators and their affiliates; (ii) preserve the beneficial aspects of conducting business in the corporate form; and (iii) promote a neutral environment for the orderly governance of
corporate affairs. Approvals are, in certain circumstances, required from the Commission before we can make exceptional repurchases of voting securities above the current market price thereof and
before a corporate acquisition opposed by our management can be consummated. The Nevada Act also requires prior approval of a plan of recapitalization proposed by a registered company's board of
directors in response to a tender offer made directly to the registered company's stockholders for the purposes of acquiring control of the registered company.

8

---





Table of Contents

License fees and taxes, computed in various ways depending upon the type of gaming activity involved, are payable to the State of Nevada and to the counties and
cities in which the Nevada licensees' respective operations are conducted. Depending upon the particular fee or tax involved, these fees and taxes are payable either monthly, quarterly,
semi-annually or annually and are based upon either: (i) a percentage of gross revenues received; (ii) the number of gaming devices operated; or (iii) the number of
games operated. Nevada licensees that hold a license as an operator of a slot route, or a 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 proposes to become involved in a gaming venture outside the State of Nevada is required to deposit with the Board, and thereafter maintain, a revolving fund to pay the expenses of
investigation by the Board of his or her participation in such foreign gaming. We have filed the appropriate foreign gaming reports and have established the required revolving fund, if required. The
revolving fund is subject to increase or decrease at the discretion of the Commission. Thereafter, such licensees are required to comply with certain reporting requirements imposed by the Nevada Act.
Licensees are also subject to disciplinary action by the Commission if they knowingly violate any laws of the foreign jurisdiction pertaining to the foreign gaming operations, 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 us to seek a determination of suitability of any associate or activity associated with the foreign gaming opportunity prior to engaging in
that activity.

Pursuant
to the Professional and Amateur Sports Protection Act (the "Sports Protection Act"), which became effective January 1, 1993, the proliferation of legalized sports
books and wagering was significantly curtailed. The Sports Protection Act effectively outlawed sports betting nationwide, excluding Nevada and sports lotteries in Oregon and Delaware. Thus, sports
books and wagering are permitted to continue to operate in Nevada, provided the wager originates in Nevada and is received by a licensed sports book in Nevada. Moreover, the Interstate Wire Act also
prohibits those in the business of betting and wagering from utilizing a wire communication facility for the transmission in interstate or foreign commerce of 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.

On
October 13, 2006, the United States Unlawful Internet Gambling Enforcement Act of 2006 ("UIGEA") was enacted. UIGEA prohibits any person engaged in the business of
betting or wagering from knowingly accepting payments related to unlawful bets or wagers transmitted over the Internet. UIGEA instructs the U.S. Treasury Department and Federal Reserve to
impose new obligations upon financial institutions and other payment processors to establish procedures designed to block online gaming-related financial transactions. It also expressly requires
Internet bets and wagers to comply with the law of the jurisdiction where the wagers are initiated and received.

Leroy's
may not accept pari-mutuel bets received by use of wire communications facilities, including telephones and computers, unless such bets originated in jurisdictions
where 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
(but not other sports betting) from other jurisdictions in which pari-mutuel wagering is legal.

9

---



Table of Contents

Employees

We had 200 full-time and 51 part-time employees at January 31, 2009, at all of our
locations and subsidiaries, including our Sturgeon's property, of which 41 employees were full-time and 24 were part-time. None of our employees are represented
by a labor union. We do not know whether or to what extent, if any, our employees will, in the future, be governed by collective bargaining agreements. At this time, we believe our employee relations
are good.

Item 1A.    Risk Factors

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

Throughout this report we make statements regarding our business, expectations and prospects, such as projections of future
performance, statements of our plans and objectives, forecasts of market trends, and other matters that are "forward-looking statements" as defined in Section 27A of the Securities Act of 1933,
as amended, (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Statements containing words or phrases such as "will
likely result," "are expected to," "will continue," "is anticipated," "estimates," "projects," "believes," "expects," "anticipates," "intends," "target," "goal," "plans," "objective," "might," "may,"
"could," "will," "should," or similar expressions, or the negative thereof, constitute forward-looking statements. Although we believe that our plans, objectives and expectations reflected in, or
suggested by, such forward-looking statements are reasonable at the present time, we might not achieve them or we may modify them from time to time. You should read this report thoroughly and with the
understanding that actual future results may be materially different from what we expect. We do not plan to update forward-looking statements even though our situation or plans may change in the
future, unless applicable law requires us to do so.

In
addition to other matters identified or described by us from time to time in this report or in our other filings with the Securities and Exchange Commission (the "SEC"), there
are several important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned, or results that are reflected from time to
time in any forward-looking statement that may be made by us or on our behalf. Some of these important factors, but not necessarily all important factors, include the following:

Current Economic Recession Will Likely Adversely Affect Our Results of Operations

Our business is vulnerable to downturns in national and local economic conditions, including, without limitation, downturns in the
economy related to threatened or actual terrorist attacks; pandemic outbreaks or similar widespread health epidemics; natural disasters; tightening of available credit; increasing government
regulation, spending and taxes; increasing energy costs; increasing interest rates; declining consumer confidence; and declines in the stock market. The demand for entertainment and leisure activities
tends to be highly sensitive to consumers' disposable incomes, and thus a decline in general economic conditions or an increase in transportation or other costs will likely lead to our customers
having less discretionary income with which to travel to Nevada and wager. We face the risk that the effects of higher unemployment rates, higher transportation costs, foreclosures and continued
pressure on housing prices, as well as business failures and stock market volatility will place added strain on consumers' ability to make purchases, repay their loans and thus, leave less funds
available for travel and leisure activities. Consumer demand for gambling, due to decreased disposable income, has declined and could continue to decline as a result of the current economic recession.
We have also experienced a change in gambling patterns of our patrons, including a trend towards more conservative bets, which tend to be less profitable to the Company. Additionally, our current
casino customers who purchase equipment and wagering software have experienced a decline in growth and financial

10

---



Table of Contents

performance,
which will likely lead to a decrease in maintenance revenues and installation revenues. In addition, because Sturgeon's Hotel and Casino is heavily dependent on the drive-through market,
especially travelers on Interstate 80, the foregoing factors have and could continue to have an adverse affect on our business. Accordingly, if the economic recession continues, it will likely
continue to hurt our financial performance.

LiquidityIf we are Unable to Raise Additional Capital in the Near Term, we may be Unable to Satisfy our Obligations as they
Become Due

At January 31, 2009, we had approximately $3.4 million in cash and equivalents, a majority of which cash is held to fund
winning tickets and future bets. Based upon our anticipated operations, we believe that cash on hand and operating cash flows will be adequate to meet our anticipated working capital requirements,
capital expenditures, and scheduled payments for indebtedness for the remainder of fiscal 2010. No assurance can be given however, that our cash flow will be sufficient, that our estimates for
anticipated operational cash needs will be accurate, that new business development or unforeseen events will occur, that the outcome of litigation will be positive, resulting in the need to raise
additional funds sooner, or that we will be able to raise additional funds. We anticipate that we may require additional funds to meet our cash requirements sometime in fiscal 2010. To raise capital,
we may seek to sell additional securities, issue debt or convertible securities, obtain additional credit facilities through financial institutions or third parties, or sell assets of the Company. No
assurance can be given, however, that we will be able to raise any additional capital or
that such capital will be available to us on acceptable terms. Given the current financial market disruption, credit crisis and state of the economy, including the current recession, it may be
particularly difficult at this time to raise any capital on acceptable terms. In the event we cannot raise additional capital or operations continue to decline, we may be unable to satisfy our
obligations as they become due.

Risk of Loss due to Racusin Litigation

The Company and Racusin entered into the Settlement Agreement on September 3, 2004. On or about March 11, 2005, the
Company consummated its Plan of Reorganization and emerged from Bankruptcy. On or about July 27, 2005, the Bankruptcy Court approved an Interpleader Order, whereby pursuant to the Settlement
Agreement, the Company agreed to place 250,000 shares of common stock with the clerk of the court as payment of the Racusin Claim while Racusin pursued its appeal of the Bankruptcy Appellate
Panel's decision in our favor to the 9th Circuit Court of Appeals. The Interpleader Order further stated that the Company's stock would be substituted with cash payment in the event that the
9th Circuit reverses the Bankruptcy Appellate Panel. The Company filed a Form 8-K on July 6, 2007, in response to the 9th Circuit's reversal of the Bankruptcy
Appellate Panel. On November 2, 2007, the Bankruptcy Court heard an argument to determine whether the Company could withdraw its 250,000 shares of common stock and whether it could begin
depositing funds pursuant to the Settlement Agreement attached to the Company's motion (the "Revised Payment Schedule"). Accordingly, we previously estimated post-judgment interest at 8%
per annum, compounded, from March 11, 2005, without taking into consideration the Interpleader Order of July 27, 2005, which was still in effect. That is, by calculating
post-judgment interest during the same time that our stock was held by the Court pursuant to the Settlement Agreement, we previously accrued interest over a period of time for which
interest should not be accrued because we were in compliance with the terms of the Settlement Agreement pursuant to the Interpleader Order. The extra estimated interest accrued pursuant to the Racusin
claim was $394,021, which was taken as an offset to the litigation expense in the fourth quarter of fiscal 2009. The adjustment was recorded in the fourth quarter of fiscal 2009 pursuant to the fourth
quarter legal actions described below.

The
Company filed its Corrected Amortization Schedule on March 17, 2008 ("Corrected Amortization Schedule"). The Company received a letter from Racusin stating that he considered
our

11

---



Table of Contents

filing
of the Corrected Amortization Schedule to be a breach of the Settlement Agreement on April 2, 2008. On October 10, 2008, Racusin moved the Court to file supplemental pleadings,
and that motion was granted on December 23, 2008. Racusin filed his Adversarial Counterclaim for Breach of the Settlement Agreement on January 14, 2009. We filed our Answer on
January 29, 2009. Racusin filed his Motion for Summary Judgment on breach of the Settlement Agreement on February 24, 2009. We filed our Opposition to the Motion for Summary Judgment on
March 16, 2009. Racusin filed his Reply to our Opposition on March 30, 2009. The hearing on the Motion for Summary Judgment is scheduled for May 8, 2009. Though we believe the
legal analysis for our position is meritorious, there can be no assurance that the Company will prevail in this matter.

Regulation Regarding Reserves

Nevada Gaming Commission Regulation 22.040 ("Regulation 22.040") requires us to maintain reserves (cash, surety bonds,
irrevocable standby letter of credit, etc.) sufficient to cover any outstanding wagering liability including unpaid winning tickets, future tickets and telephone account deposits. Since
November 16, 2007, we have maintained a Regulation 22.040 reserve in the amount of $3.4 million in the form of a surety bond issued by Fidelity and Deposit Company of Maryland
(a subsidiary of Zurich American Insurance) ("Fidelity") secured by $1.2 million in cash deposits. The cash deposits, in the form of two certificates of deposit, are held at Great Basin
Bank of Nevada (now Nevada State Bank) along with an irrevocable letter of credit, also with Great Basin Bank of Nevada (now Nevada State Bank). On February 22, 2008, the bond
amount was decreased to $2.8 million, due to decreased handle, and still secured by $1.2 million in deposits.

In
March 2009, the Company was notified that Fidelity will cancel its surety bond effective May 8, 2009. While we are searching for a replacement bond company, we have been
unable to secure a replacement bond with acceptable terms at this time. Therefore, the Company formalized a request to the Nevada Gaming Commission, requesting a lower reserve amount of
$1.2 million with an additional $600,000 float, which was granted in April 2009. This makes our reserve amount $1.8 million until August 15, 2009, which is collateralized
by the $1.2 million in certificates of deposit held at Great Basin Bank (now Nevada State Bank). We believe that such amount will provide an adequate reserve until football season, at
which time; we may need to increase the reserve amount. If the Company is unable to locate an alternate bond with acceptable terms or if we are required to increase the Regulation 22.040
reserve and are unable to do so, it would have an adverse impact on us including, but not limited to, requiring a significant reduction in the number of race/sports locations operated by Leroy's,
and/or an elimination or reduction of telephone wagering accounts, resulting in an adverse change in our operating results.

We Have Had a History of Significant Losses and We May Incur Additional Losses in the Future

For the fiscal years ended January 31, 2009 and 2008, we have incurred net losses of $1.0 million and
$0.8 million, respectively. From our inception of revenue producing operations through the current fiscal year, we have incurred an accumulated deficit of $13.0 million. For the fiscal
years ended 2001 though 2009, the Company recorded net income for five of those years and net losses for four of those nine years. While we have implemented strategies to improve future operations
including, but not limited to the following: increasing financial analysis and focusing on cost reductions; eliminating unprofitable sports book locations; investing in newer, more profitable sports
book locations; investing in additional research and development aimed at new markets and technologies; and settling litigation matters; there is no assurance that such strategies will be successful.
Higher than expected administrative, research and development, and/or distribution costs, could also negatively impact our financial results. The timing of the sales of equipment compared to the
timing of expenses incurred may also negatively affect our financial results. Changes in our business systems, competition, or technologies affecting our products could also negatively impact our
financial results. In order for us to

12

---



Table of Contents

again
achieve profitability, we need to generate and sustain additional revenues while maintaining reasonable cost and expense levels.

We Are Subject to Potential Fluctuations in Results

Our quarterly results have fluctuated primarily due to outside factors such as professional and college sports seasons and timing of
sales and installations for CBS equipment. All of the Company's wagering revenue comes from its Nevada race and sports books and more than one-fourth of that is derived from professional
football events. If the professional football season were to be interrupted, this could have significant adverse impact on future operations. Management also estimates that a significant amount of the
Company's Nevada non-casino wagering relates to college sports and, therefore, the passage of amateur sports anti-wagering legislation could have a material adverse impact upon
future operations. In addition, because the Company generates substantial revenue from system sales and maintenance to a relatively small population of potential customers, a decline in the size,
demand or number of these contracts could also adversely affect future operations.

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

We Are Subject to Intense Competition

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

The
state of Delaware is in the process of legalizing sports wagering. The state of New Jersey is suing the federal government for the right to also accept sports wagering. These
potential new sports wagering jurisdictions and expanded internet sports wagering could potentially reduce the amount of wagers placed in Nevada. However, this expansion could also represent expansion
opportunities for our Company, but there can be no assurance that this will create a positive impact on our financial position.

Demand for Our Products and Services is Subject to Continued Acceptance of our Products and Services

We believe our ability to increase revenues, cash flow, and to become profitable will depend, in part, upon continued market acceptance
of our products and services. There can be no assurance that the market acceptance of our products and services will continue. Changes in market conditions in the gaming industry, the general and
gaming industry economic conditions, and the financial condition of host locations or patrons could limit or diminish market acceptance of these products and services.

We Are Subject to Strict Regulation by Gaming Authorities

The ownership and operation of gaming licenses in Nevada are subject to strict regulation under various state, county and municipal
laws. In particular, the Leroy's, AWIM, AWIG and Sturgeon's subsidiaries are licensed by the Nevada Gaming Commission and are subject to extensive regulation. Together with key personnel, we undergo
extensive investigation before each new gaming license is

13

---



Table of Contents

issued,
and the products of CBS and AWIM are subjected to testing and evaluation prior to approval and use. Generally, gaming authorities have broad discretion when granting, renewing or revoking
these approvals and licenses. If we fail or any of our key personnel fail to obtain or retain a required license or approval, it would decrease our share in the marketplace and put us at a
disadvantage with our competitors. Consequently, the market price of our common stock may suffer.

Expansion
of our activities could be hindered by delays in obtaining requisite state licenses or the inability to obtain such licenses. No assurance can be given as to the term for which
our licenses will be renewed in a particular jurisdiction or as to what license conditions, if any, may be imposed by such jurisdiction in connection with any future renewals. We cannot predict the
effects that adoption of and changes in gaming laws, rules and regulations might have on our future operations.

The Gaming Industry may be Adversely Affected by Federal Legislation and Tax Laws

The U.S. Congress passed UIGEA in late 2006, which prohibits any person engaged in the business of betting or wagering from
knowingly accepting payments related to unlawful bets or wagers transmitted over the Internet. UIGEA prohibits financial institutions and other payment processors from processing online gaming-related
financial transactions. It also expressly requires Internet bets and wagers to comply with the law of the jurisdiction where the wagers are initiated and received. In addition, the
U.S. Congress has proposed several bills that would prohibit any person from accepting wagers on amateur sporting events including high school, college and Olympic events.

Pursuant
to the Sports Protection Act, which became effective January 1, 1993, the proliferation of legalized sports books and wagering was significantly curtailed. The Sports
Protection Act effectively outlawed sports betting nationwide, excluding Nevada and sports lotteries in Oregon and Delaware. Thus, sports books and wagering are permitted to continue to operate in
Nevada, provided the wager originates in Nevada and is received by a licensed sports book in Nevada. Moreover, the Interstate Wire Act also prohibits those in the business of betting and wagering from
utilizing a wire communication facility for the transmission in interstate or foreign commerce of 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.

There
is no guarantee that the U.S. Congress will not pass a bill which would adversely affect our operations. Additionally, federal and state tax legislation matters, including
changes to current law, or new assessments by taxing authorities could also negatively impact our results of operations or financial position.

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

Our ability to grow and operate profitably is substantially dependent upon the expansion of the Nevada gaming industry and other
factors that are beyond our control. These factors include, among others, the pace of development and expansion, changes in gaming regulations, the continued popularity of casino gaming, particularly
those casinos with race and sports wagering, as a leisure activity, etc. An adverse change in any of these economic, political, legal or other factors may negatively impact our results of operations.
Additionally, consolidation of existing gaming operations could negatively impact our pricing structure and revenue. Due to the economic recession, the number of visitors to Las Vegas declined 4.4%
for the year ended December 31, 2008, and gaming revenues fell in fiscal 2008 compared with 2007. Daily drive-in traffic also declined 5.3% for the year ended December 31,
2008 compared with 2007, according to the Las Vegas Convention and Visitors Authority.

14

---



Table of Contents

Staffing Reductions and Internal ControlsDue to our Staff Reductions and reduced Hours Worked, Particularly in the Accounting
Department, we may Experience Deficiencies in Disclosure Controls and Internal Controls Over Financial Reporting, Leading to a Material Weakness and Non-Compliance with the Sarbanes-Oxley
Act of 2002

Subsequent to October 31, 2008, we have reduced staffing hours worked in the accounting and revenue auditing areas and may have
additional layoffs in the future. The lack of sufficient staffing may cause existing controls to erode, possibly leading to a deficiency in disclosure controls and internal controls over financial
reporting. While every effort will be made to monitor and retain these controls, there can be no assurance that we will have effective internal controls over financial reporting.

We Are Largely Dependent on Current Management

Our success is largely dependent on the efforts of Victor Salerno, our Chief Executive Officer and Chief Operating Officer. Although we
maintain a "key person" life insurance policy and have an employment agreement with Mr. Salerno, the loss of Mr. Salerno's services could have a materially adverse effect on our
business. Changes in the remainder of key management, or other key personnel or their compensation also contribute to this risk factor.

Future Revenue Growth Depends on Our Ability to Improve the Effectiveness and Breadth of Our Sales Organization

In order to achieve our goals for growth, and increase market awareness and sales, particularly with the AWIG and AWIM subsidiaries, we
need to improve the effectiveness and breadth of our sales operations. Our gaming products require sophisticated sales efforts targeted at selected people within the gaming industry. Also, our ability
to develop and refine products and technologies in a timely manner that have market acceptance, through effective marketing techniques is essential for financial success. Competition for qualified
sales personnel is intense, and we may not be able to hire the kind and number of sales personnel required. In addition, we will need to effectively train and educate the sales force in order to be
successful in selling into the market. We rely upon certain strategic relationships with our customers and our vendors. If we are unable to maintain these relationships or create new relationships,
our results of operations and financial condition will be adversely affected.

We Have the Authority to Issue Additional Equity Securities, Which Would Lead to Dilution of Our Issued and Outstanding Common Stock

The issuance of additional equity securities or securities convertible into equity securities would result in dilution of our existing
stockholders' equity interests in us. Our Board of Directors has the authority to issue, without vote or action of stockholders, preferred stock in one or more series, and has the ability to fix the
rights, preferences, privileges and restrictions of any such series. We currently have Redeemable Series A Preferred Stock outstanding, of which 3,238 shares, representing $323,800, are
subject to redemption at any time, without prior approval from the Board of Directors. Any redemption of the remainder of the preferred stock is subject to prior approval from the Board of Directors.
Any such series of preferred stock could contain dividend rights, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences or other rights superior to the
rights of holders of our common stock. If we issue convertible preferred stock, a subsequent conversion may dilute the current common stockholders' interest. In addition, as of January 31,
2009, we were authorized to issue, without stockholder approval, up to 16,870,121 shares of common stock. Of that amount, 579,300 shares of our common stock were reserved for issuance
upon the exercise of vested options.

15

---



Table of Contents

We May Not be Able to Protect Our Proprietary Rights and May Incur Significant Costs Attempting to do So

Our success and ability to compete are dependent to a significant degree on our proprietary technology. We rely on a combination of
patent, copyright, trade secret and trademark laws, as well as confidentiality and licensing agreements to protect these proprietary rights. However, it may be possible for a third party to copy or
otherwise obtain and use our software or other proprietary information without authorization or to develop similar software independently. In addition, litigation may be necessary in the future to
enforce our intellectual property rights, to protect trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity.
Such litigation, whether successful or not, could result in substantial costs and diversions of resources, either of which could have a material adverse affect on our financial condition or operating
results.

The Market for Our Common Stock is Limited

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

Our Common Stock is Considered a "Penny Stock" and, as such, the Market for Our Common Stock May be Further Limited by Certain SEC Rules

As long as the price of our common stock remains below $5.00 per share, the stock is likely to be subject to certain "penny stock"
rules promulgated by the SEC. Those rules impose certain sales practice requirements on brokers who sell penny stock to persons other than established customers and accredited investors
(as defined in Rule 501(a) of Regulation D promulgated under the Securities Act). For transactions covered by the penny stock rules, the broker must make a special suitability
determination for the purchaser and receive the purchaser's written consent to the transaction prior to the sale. Furthermore, the penny stock rules generally require, among other things, that brokers
engaged in secondary trading of penny stocks provide customers with written disclosure documents, monthly statements of the market value of penny stocks, disclosure of the bid and ask prices,
disclosure of the compensation to the brokerage firm, and disclosure of the sales person working for the brokerage firm. These rules and regulations adversely affect the ability of brokers to sell our
common stock and limit the liquidity of our securities.

The Trading Price of Our Common Stock is Volatile and Could Decline Substantially

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



16

---



Table of Contents



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

We have never paid a cash dividend on our common stock, and we do not plan to pay any cash dividends on our common stock in the
foreseeable future. We currently intend to retain any future earnings to finance our operations and further expand and grow our business, including growth through acquisitions. As a result, the
success of an investment in our common stock will depend upon any future appreciation in its value. We cannot assure you that our common stock will appreciate in value or even maintain the price at
which stockholders have purchased their shares.

We May Not Receive an Unqualified Opinion From Our Auditors With Respect to the Assessment of Our Internal Controls Over Financial Reporting That is
Required by Section 404 of the Sarbanes-Oxley Act Of 2002, and We Will Incur Additional Costs in That Process

We believe that effective internal controls are necessary for us to provide reasonable assurance with respect to our financial reports.
We have and will continue to incur a substantial amount of management time and resources and significant expenses in order to comply with laws, regulations and standards relating to corporate
governance and public disclosure, including the Sarbanes-Oxley Act of 2002. In particular, Section 404 of the Sarbanes-Oxley Act of 2002 requires our management's annual review and evaluation
of our internal control systems. Under current temporary
rules, commencing with our Annual Report on Form 10-K for the fiscal year ended January 31, 2010 and thereafter, attestations as to the effectiveness of these systems by our
registered independent public accounting firm will be required.

We
have and will continue to incur significant increased costs in implementing and responding to these requirements due to the complexities of Section 404 that require significant
documentation, testing and, if necessary, remediation. Our process of reviewing, documenting and testing our internal controls over financial reporting may cause a significant strain on our
management, diverting them from their daily business focus and strain on our information systems and other resources. We likely will be required to hire additional temporary or part-time
personnel and to use outside legal, accounting and advisory services and software to assist us in compliance efforts. In addition, we will incur additional fees from our auditors as they perform the
added review work necessary for them to provide their attestation. Even with those expenditures, we may not be able to successfully complete our assessment or we may not be able to obtain an
unqualified attestation report on such assessment.

Further,
we or our auditors may identify significant deficiencies or material weaknesses in our internal control over financial reporting. If we fail to maintain the adequacy of our
internal controls, we may not be able to conclude on an ongoing basis that we have effective internal controls over financial reporting. Additionally, internal control over financial reporting may not
prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Therefore, even effective internal
controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. In addition, projections of any evaluation of effectiveness of internal
control over financial reporting to future periods are subject to the risk that the control may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.

17

---



Table of Contents

Litigation May Subject Us to Significant Expenses and Liability

From time to time in the course of our business, we may be subject to litigation claims or other legal disputes, which may not be
covered under our insurance policies or as to which our insurance carriers may seek to deny coverage. Consequently, due to actions from third parties, we might incur adverse judgments, costly
settlements or significant legal fees, any or all of which might have a material adverse effect on us.SeeItem 3. Legal Proceedings.

Item 1B.    Unresolved Staff Comments

Not required.

Item 2.    Properties

Our corporate office is located in a 25,861 square foot building at 675 Grier Drive, Las Vegas, Nevada. On
January 7, 2005, we completed a sale and leaseback of the property. Prior to the sale, the building was owned by our CBS subsidiary. We realized a gain of $1,638,000 on the sale of the
building. However, pursuant to Statement of Financial Accounting Standards ("SFAS") No. 28,Accounting for Sales with Lease-backs, only a portion
of the gain has been recognized. The gain has been deferred and is amortized against the lease payments over the initial lease term (5 years). CBS leases the building from the new owner for
rent in the amount of $32,339 per month (triple net). The lease has an initial term expiring February 1, 2010 with options for two additional five-year terms. CBS, in turn, sublets
a portion of the building to AWI (2,830 square feet; $5,236 per month), to Leroy's (6,769 square feet; $11,014 per month) and the remainder of the space that is not
utilized by CBS, is rented to an unaffiliated party at $8,760 per month. In addition, CBS leases 1,847 square feet of office and warehouse space in Reno, Nevada to provide 24 hour
maintenance service to our Northern Nevada customers. This space is located at 960 Matley Lane, Suite 21, Reno, Nevada. CBS pays $1,716 per month plus utilities, for a twelve month
period ending September 30, 2009, the lease expiration date.

Leroy's
operates race and/or sports books subject to lease agreements primarily with the host casino operators. The average book occupies approximately 300 square feet,
with individual books ranging from 100 to 10,000 square feet.

Sturgeon's
is located at 1420 Cornell Avenue in Lovelock, Nevada. The facility contains over 65,000 square feet and is the security for a $1.6 million loan
with Great Basin Bank (now Nevada State Bank), having a 20-year amortization with a 5-year maturity at a fixed interest rate of 8.0% per annum.

We
believe that the existing facilities in Las Vegas, Reno and Lovelock satisfy our present and foreseeable needs and we do not anticipate any changes.

Item 3.    Legal Proceedings

See Part II-Item 8. Financial Statements and Supplementary Data-Notes to Consolidated Financial
Statements, Note 6, for information regarding legal proceedings and contingencies.

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

None.

18

---





Table of Contents

PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

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

BETMFiscal Year Ending January 31, 2009
Quarter Ended

High $

Low $April 30, 2008


0.82


0.63July 31, 2008


0.63


0.40October 31, 2008


0.49


0.18January 31, 2009


0.27


0.15


BETMFiscal Year Ending January 31, 2008
Quarter Ended

High $

Low $April 30, 2007


1.29


0.95July 31, 2007


1.25


0.85October 31, 2007


1.00


0.79January 31, 2008


1.10


0.79


We
consider our common stock to be thinly traded and, accordingly, reported sales prices or quotations may not be a true market-based valuation of our common stock.

(b)Holders.    As of January 31, 2009, there were 57 record holders of our common stock. We believe
there are more owners of our common stock whose shares are held by nominees or in street name.

(c)Dividends.    Holders of our common stock are entitled to receive dividends, as and when declared by our Board
of Directors, out of funds legally available therefore, subject to the dividend and liquidation rights of preferred stock issued and outstanding. We have never declared or paid any dividends on our
common stock, nor do we anticipate paying any cash dividends on our common stock in the foreseeable future.

Item 6.    Selected Financial Data

Not required.

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

Our primary operating strategies for the foreseeable future are to focus on our core businesses relating to the race and sports
industry, and the operation of Sturgeon's. Regarding CBS, we intend to continue developing, selling and maintaining computerized race and sports wagering systems for the gaming industry. As to AWIM,
we intend to continue developing the self-service wagering kiosk, installing kiosks in Leroy's locations to assist in controlling escalating personnel costs, and marketing the kiosk to
non-Leroy's locations to seek strategic international alliances with third party gaming suppliers and/or gaming operators, if economically feasible, that desire to utilize our expertise in
the race and sports industry. These strategies should enable us to gain a competitive advantage by offering the gaming operator and/or the betting patron a well-rounded gaming experience,
both in the United States and abroad. Regarding the Sturgeon's facility, we intend to continue to monitor and

19

---



Table of Contents

make
additional changes in the slot mix at Sturgeon's where and when appropriate, and continue to increase efficiency by possible personnel and other administrative cost reductions, where appropriate.

Concerning
Leroy's, we intend to continue operating existing sports books, adding new books where and when appropriate, based on our business model, and we intend to continue to increase
efficiency by possible personnel and other administrative cost reductions, where appropriate. We are closely reviewing and analyzing the existing Leroy's locations in order to close those locations
that are not operating efficiently. Based on our strategy, the number of race and sports books operated by Leroy's may increase or decrease in the future, due to the closure of unprofitable locations
or host properties, closures due to other factors beyond our control and/or the possible opening of new locations with greater potential for profitability. We intend to submit a request for proposal
to the state of Delaware to operate and/or supply equipment for the State Lottery to use for sports wagering. We are also evaluating intrastate expansion. Additionally, we will be adding additional
sports bars and taverns for the purpose of sports account wagering. There is no assurance that Leroy's will be able to add new locations and/or that any new locations added will be profitable.

We
have implemented, and are continuing to initiate cost cutting measures throughout the Company. During fiscal 2009, the Company began reducing its workforce by means of a
lay-off for a total of 114 employees (or 31.2%) as of January 31, 2009. The lay-offs were in each of our subsidiaries and we began to focus more on
cost controls.

During
fiscal 2009, AWI's corporate expenses that were allocated to Leroy's and CBS were reduced by approximately $443,000 primarily due to the following: reductions in outside services
(accounting temporary help) of approximately $158,000; administrative salaries and benefits of approximately $73,000; general supplies and meals of approximately $47,000; accounting audit and legal
fees of approximately $21,000; and directors fees of approximately $16,000. These reductions of corporate expenses were partially offset by increased interest expense primarily due to the increased
Salerno loan of approximately $53,000, contributed services expense of approximately $52,000, increases in insurance expense of approximately $21,000 and other miscellaneous legal and consulting
expenses of approximately $53,000. Additionally, the one-time adjustment for an increased valuation allowance against the deferred tax asset of approximately $71,500 increased the
corporate expenses, while the Racusin interest one-time adjustment of approximately $394,000 reduced corporate expenses. We will continue to evaluate and closely monitor costs, looking for
additional efficiencies and improvements. Subject to our cost constraints, where appropriate, we will continue to explore possible new locations for our products, including foreign jurisdictions.

During
the latter part of fiscal 2008, and continuing through fiscal 2009, our local, regional and national economy has been negatively impacted due to a number of factors, including the
nationwide economic recession and the subprime mortgage crisis and higher gasoline and transportation costs during much of the year. Confidence in the credit market has also eroded, which resulted in
a tightening of credit availability. The economy is also subject to events such as threatened or actual terrorist attacks; pandemic outbreaks or similar widespread health epidemics; natural disasters;
and declines in the stock market. During fiscal 2009, Las Vegas has experienced higher foreclosure and unemployment rates and reduced passenger traffic at McCarran International airport and higher
transportation costs for much of the year. We face the risk that the effects of higher unemployment rates, foreclosures and continued pressure on housing prices, as well as business failures and stock
market volatility will place added strain on consumers' ability to make purchases, repay their loans and thus, leave less funds available for travel and leisure activities. Consumer demand for
gambling, due to decreased disposable income, has declined as a result of the current economic recession. We have also experienced a change in gambling patterns of our patrons, including a trend
towards more conservative bets, which tend to be less profitable to the Company. In addition, because Sturgeon's Hotel and Casino is heavily dependent on the drive-through market, especially travelers
on Interstate 80; the factors listed above have and will continue to have an adverse affect on our business. Accordingly, if the economic recession in the United States continues, it will
likely continue to hurt our financial

20

---



Table of Contents

performance,
due to, among other things, decreased wagering activity and a change in the types of wagers made.

Liquidity and Capital Resources

The United States is currently experiencing a recession accompanied by, among other things, weakness in the commercial and investment
banking systems resulting in reduced credit and capital financing availability, and highly curtailed gaming, other recreational activities and general discretionary consumer spending, and is also
engaged in war, all of which are likely to continue to have far-reaching effects on economic conditions in the country for an indeterminate period. The effects and duration of these developments and
related risks and uncertainties on our future operations and cash flows, including, the principal officer's ability to continue to provide financial support for the Company, as in the past, and other
access to capital or credit financing, cannot be estimated at this time but may likely be significant.

Cash Flow

As of January 31, 2009, we had a working capital deficit of $(456,055), compared to working capital of $87,244 at
January 31, 2008. The decrease in working capital is primarily due to the one-time adjustment to increase our valuation allowance against our deferred income tax asset for $71,481;
the decrease in hold amounts due to decreased types of wagers due to the poor economic environment; the result of the ongoing pay-down of the Racusin obligation; and the timing of and
increases in future bets and unpaid winning tickets. The third and fourth quarters have historically been the best two quarters regarding cash flow and earnings for us; however, for fiscal 2009, this
was not the case due to a lower handle and win percentage.

The
United States has been experiencing a severe economic recession that has curtailed casino gaming development, activity and profitability. This is a local and nationwide
problem, resulting in highly reduced availability of credit and capital financing. The current economic recession has had an adverse effect on our cash flows and earnings for fiscal 2009. The effects
and the duration of these negative developments and related uncertainties on the Company's future operations and cash flows cannot be estimated at this time, but may likely be significant.

Additionally,
due to the current negative economic environment, the Company has taken additional measures to increase cash flow after October 31, 2008. Effective January 1,
2009, the Company no longer matches the employees' 401(k) contributions. The salaries of the President of AWIG and the controller of Sturgeon's Hotel and Casino were reduced by 20%, effective
October 3, 2008. On December 2, 2008, the CEO and the in-house general counsel each agreed to reduce their annual base salaries to the amount sufficient to cover payroll
deductions for benefits, effective November 24, 2008. Pursuant to the original terms of Mr. Salerno's employment agreement, Mr. Salerno is entitled to an annual base salary of
$240,000. Melody J. Sullivan, the Company's Chief Financial Officer and Treasurer, agreed to reduce her annual base salary by 20% effective January 3, 2009. Pursuant to the original terms of
her employment agreement, Ms. Sullivan is entitled to an annual base salary of $180,000. Additionally, several higher salaried employees each agreed to reduce their salaries by 20%
effective January 3, 2009. Certain higher paid hourly employees agreed to a 32 hour work week, effective January 4, 2009, resulting in a 20% pay reduction. The salary reductions
are intended to be temporary pending an improvement in the Company's cash flow.

Victor
Salerno, the Company's President, Chief Executive Officer and Chief Operating Officer, loaned the Company an additional $500,000 on December 1, 2008 due to the cash flow
needs of the Company. Due to the urgency, the funds were advanced on an expedited basis without formal board approval, as reported in the Company's Form 10-Q for the quarter ended
October 31, 2008. Mr. Salerno had previously loaned the Company $500,000 pursuant to a loan agreement dated April 21, 2008. The independent directors of the Company evaluated and
approved the fairness of the loan agreement to cover the total $1,000,000, at the same terms of the April 21, 2008 loan agreement.

21

---



Table of Contents

Additionally,
the Company's outside directors elected not to receive their directors' fees for the last three months of 2008 and renounced their stock option grants for fiscal 2009
effective January 31, 2009.

On
December 11, 2008, U.S. Bank gave the Company verbal approval to extend the maturity date of the Company's $500,000 revolving line of credit for 90 days after the
original maturity date of December 31, 2008 and further negotiated the terms of the line of credit, converting it to a term loan, maturing in January 2010.

We
believe our working capital position will improve in fiscal 2010 due to: (a) an anticipated reduction in costs resulting from our rigorous expense reduction plan implemented by
management in fiscal 2009; (b) the nonrecurrence of the increased valuation allowance against our deferred income tax asset; (c) an increased demand in fiscal 2010 of our CBS equipment
due to certain customers' desire to obtain new equipment; (d) an improvement in the timeliness and analysis of financial reporting, leading to a shorter reaction time by management to make
strategic changes; (e) the favorable payment schedule resulting from the conversion of the U.S. Bank overdraft protection credit line to a term loan and extension of the maturity date to
January 31, 2010; (f) reduced cash obligations in fiscal 2010 related to paydowns and reduced payments to Racusin and an equipment lessor; and (g) additional or expanded sports
book locations in fiscal 2009, resulting in increased wagering revenues in fiscal 2010, and the potential for increased locations in fiscal 2010. In addition, payments to Racusin will be substantially
less in the future years as compared to fiscal 2008 and fiscal 2009 and we have reduced our general and administrative budget for fiscal 2010 as compared to fiscal 2009. Based on the foregoing and
subject to the severity of the economic downturn, we believe that we will be able to satisfy our operating cash requirements for at least the remainder of fiscal 2010 from existing cash balances and
anticipated cash flows. Some of the above statements are forward-looking in nature. No assurance can be given that our working capital position will improve in fiscal 2010 or that we will be
successful in achieving the items listed above, including, but not limited to, a reduction in costs, increased demand for our CBS equipment, and additional or expanded sports book locations.

If
our cash flow from operations and available credit is not sufficient to meet our capital requirements, we will be required to raise additional funds. If we cannot locate additional
sources of capital, we may not be able to fund operations, take advantage of future opportunities, or respond to competitors or changing demands of customers. In the event we are required to raise
additional funds to support our operations, we cannot assure you that the additional funds will be available on terms favorable to us, or at all. If adequate funds are not available or are not
available on acceptable terms, it would likely have a material adverse effect on our financial condition and operating results and we may be unable to satisfy our obligations as they
become due.

Subject
to uncertainties resulting from the current economic conditions, we plan to improve our cash liquidity during the current fiscal year (ending January 31, 2010), as
described above, to help us fund the following: payroll and benefits; sports book supplies and improvements; required cash reserves; business insurance; real estate and equipment leases; Racusin
obligation; legal expenses; telecommunications; costs related to inventory and to assemble race/sports systems for our CBS customers; compliance costs associated with gaming regulations and
Section 404 of the Sarbanes-Oxley Act of 2002; and debt service. However, there can be no assurance that we will be profitable in the future.

Our
principal cash requirements consist of cash used in operations for fiscal 2009 of $0.2 million as compared to cash provided by operations of $0.2 million for fiscal
2008, primarily due to decreased systems sales and installations and unpaid winning tickets, as a result of the timing of bets placed on the big football game of the year, which occurred on
February 1, 2009.

Net
cash used in investing activities for fiscal 2009 was approximately $0.4 million as compared to approximately $1.2 million for fiscal 2008, primarily as a result of the
decrease in purchases of

22

---



Table of Contents

upgraded
computers and networks, leasehold improvements, new kiosk locations and other furniture and equipment from the prior fiscal year, due to cost controls.

Net
cash provided by financing activities for fiscal year ended January 31, 2009 was approximately $0.6 million compared to approximately $0.3 million in cash used
in financing activities for fiscal 2009 primarily due to increased borrowings in our line of credit and from Victor Salerno.

Regulation Regarding Reserves

Nevada Gaming Commission Regulation 22.040 ("Regulation 22.040") requires us to maintain reserves (cash, surety bonds,
irrevocable standby letter of credit, etc.) sufficient to cover any outstanding wagering liability including unpaid winning tickets, future tickets and telephone account deposits. Since
November 16, 2007, we have maintained a Regulation 22.040 reserve in the amount of $3.4 million in the form of a surety bond issued by Fidelity and Deposit Company of Maryland
(a subsidiary of Zurich American Insurance) ("Fidelity") secured by $1.2 million in cash deposits. The cash deposits, in the form of two certificates of deposit, are held at Great Basin
Bank of Nevada (now Nevada State Bank) along with an irrevocable letter of credit, also with Great Basin Bank of Nevada (now Nevada State Bank). On February 22, 2008, the bond
amount was decreased to $2.8 million, due to decreased handle, and still secured by $1.2 million in deposits.

In
March 2009, the Company was notified that Fidelity will cancel its surety bond effective May 8, 2009. While we are searching for a replacement bond company, we have been
unable to secure a replacement bond with acceptable terms at this time. Therefore, the Company formalized a request to the Nevada Gaming Commission, requesting a lower reserve amount of
$1.2 million with an additional $600,000 float, which was granted in April 2009. This makes our reserve amount $1.8 million until August 15, 2009, which is collateralized
by the $1.2 million in certificates of deposit held at Great Basin Bank (now Nevada State Bank). We believe that such amount will provide an adequate reserve until football season, at
which time; we may need to increase the reserve amount. If the Company is unable to locate an alternate bond with acceptable terms or if we are required to increase the Regulation 22.040
reserve and are unable to do so, it would have an adverse impact on us including, but not limited to, requiring a significant reduction in the number of race/sports locations operated by Leroy's, an
elimination or reduction of telephone wagering accounts, resulting in an adverse change in our operating results.

Outlook

Our liquidity has been adversely impacted by a number of factors, including economic conditions and those summarized under "Overview"
above.

At
January 31, 2009, we had approximately $3.4 million in cash and equivalents, a majority of which cash is held to fund winning tickets and future bets. Based upon our
anticipated operations, we believe that cash on hand and operating cash flows will be adequate to meet our anticipated working capital requirements, capital expenditures, and scheduled payments for
indebtedness for the remainder of fiscal 2010. No assurance can be given, however, that our cash flow will be sufficient, that our estimates for anticipated operational cash needs will be accurate,
that new business development or unforeseen events will not occur, that the outcome of litigation will be positive, including any amounts that may be accelerated under the Racusin settlement
agreement, resulting in the need to raise additional funds sooner, or that we will be able to raise additional funds. We anticipate that we may require additional funds to meet our cash requirements
sometime in fiscal 2010. To raise capital, we may seek to sell additional securities, issue debt or convertible securities, obtain additional credit facilities through financial institutions or third
parties, or sell assets of the Company. No assurance can be given, however, that we will be able to raise any additional capital, or that such capital will be available to us on acceptable terms.
Given the current financial market disruption, credit crisis and state of the economy, including the current recession, it may be particularly difficult at this time to raise any capital on acceptable
terms. In the event we cannot raise additional capital or operations

23

---



Table of Contents

continue
to decline, we may be unable to satisfy our obligations as they become due.See"Liquidity and Capital Resources, Cash Flow".

Cash Obligations

Once again, subject to uncertainties resulting from the current economic conditions, we believe we will continue to successfully meet
our long-term obligations. The following table summarizes our cash payment obligations, including short term debt and long term debt and operating lease obligations for the next five
fiscal years:

2010

2011

2012

2013

2014

2015 and
Beyond

TotalSturgeon's

$
145,388

$
84,608

$
42,510

$
45,738

$
1,435,544

$


$
1,753,788Kiosks


133,600

















133,600Line of Credit/Term Loan


499,295

















499,295Racusin


300,000


300,000


157,642











757,642Salerno





362,615


637,385











1,000,000Other


33,771


9,202














42,973Operating Leases


1,404,873


1,024,380


607,127


317,184


121,800


67,450


3,542,814Total

$
2,516,927

$
1,780,805

$
1,444,664

$
362,922

$
1,557,344

$
67,450

$
7,730,112


---

Note:
As of January 31, 2009, the amount of Series A Preferred Stock that may be put to us by Mr. Salerno for immediate redemption (without prior approval by our Board of
Directors) is $323,800 (3,238 shares). In prior years, Mr. Salerno forwent his right to have his shares redeemed when we made partial, pro rata calls of Series A Preferred
Stock for redemption.

Sturgeon's

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

(1A) Great Basin Bank
(now Nevada State Bank)
Original Loan

(1B) Great Basin Bank
(now Nevada State Bank)
Amended Loan

(1C) Great Basin Bank
(now Nevada State Bank)
Change in Terms AgreementDate:

February 21, 2006

February 7, 2008

May 5, 2008Lender:

Great Basin Bank of Nevada (now Nevada State Bank)

Great Basin Bank of Nevada (now Nevada State Bank)

Great Basin Bank of Nevada (now Nevada State Bank)Borrower:

AWIG

AWIG

AWIGGuarantor #1:

AWI

AWI

AWIGuarantor #2:

Sturgeon's

Sturgeon's

Sturgeon'sFacility:

Commercial loan

Commercial loan

Commercial loanAmount:

$1,500,000

$1,425,000 (Sturgeon's paid down $75,000 in February 2008)

$1,625,000Rate:

Wall Street Journalprime +2%

8% fixed interest rate per annum

8% fixed interest rate per annum


24

---



Table of Contents

(1A) Great Basin Bank
(now Nevada State Bank)
Original Loan

(1B) Great Basin Bank
(now Nevada State Bank)
Amended Loan

(1C) Great Basin Bank
(now Nevada State Bank)
Change in Terms AgreementMaturity Date:

March 1, 2008 (interest only is payable prior to maturity)

20 year amortizing loan with a balloon payment at maturity February 7, 2013

20 year amortizing loan with a balloon payment at maturity February 4, 2013Collateral:

1st deed of trust on Sturgeon's Inn & Casino and a security interest in Sturgeon's Inn & Casino personal property and fixtures

1st deed of trust on Sturgeon's Inn & Casino and a security interest in Sturgeon's Inn & Casino personal property and fixtures

1st deed of trust on Sturgeon's Inn & Casino and a security interest in Sturgeon's Inn & Casino personal property and fixturesPrepayment Penalty:

None

None

Prepayment of up to 20% of the remaining principal balance is without penalty. Principal prepayments in excess of that amount are subject to 2% of the excess the first year and 1% of the excess the second
year


(1)   Great Basin Bank (now Nevada State Bank) Amended Loans, net of a $75,000 principal reduction

$
1,599,165(3)   IGT equipment loans, of which $109,224 represents the current portion


154,623Total Sturgeon's long-term debt

$
1,753,788


Restrictive Covenants(for Great Basin Bank (now Nevada State Bank) Amended Loans only)

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

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

(b)   pledge
assets to secure other borrowings;

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

(d)   pay
dividends (including to AWI).

Kiosks

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

25

---



Table of Contents

Accordingly,
the Company has accounted for this transaction as a capital lease. The outstanding balance as of January 31, 2009 was $133,600.

Line of Credit/Term Loan

On April 21, 2008, U.S. Bank approved a revolving credit note for $500,000 for the Company. The purpose of this credit
note or line of credit was to provide overdraft protection on our checking accounts. Any negative balances on our checking accounts swept into this overdraft protection credit note and then were
automatically repaid when the funds in the checking accounts returned to a positive balance. The maturity date of this credit note was December 31, 2008. On December 11, 2008,
U.S. Bank gave the Company verbal approval to extend the maturity date of the Company's $500,000 revolving line of credit to 90 days after the original maturity date of
December 31, 2008 (March 31, 2009) and to further negotiate the terms of the line of credit. This credit facility was converted into a term loan, effective March 30, 2009, with
terms as follows:



As
of January 31, 2009, the Company had drawn down $499,295 under the revolving credit note.

Racusin

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

On
September 26, 2005, the Bankruptcy Court issued an order closing the Chapter 11 cases of AWI and Leroy's. All required distributions have been made, except with respect
to the Racusin matter ("Racusin Claim"). For fiscal year ended January 31, 2009 and 2008, the Company has paid $540,986 and $1,124,984, respectively, to the Bankruptcy Court and certain other
lienholders of Racusin, as directed. Payments from February 1 through March 31, 2009 totaled $89,653. As of January 31, 2009, $757,642 remained outstanding to Racusin on the
Racusin Claim.

The
Company and Racusin entered into the Settlement Agreement on September 3, 2004. On or about March 11, 2005, the Company consummated its Plan of Reorganization and
emerged from Bankruptcy. On or about July 27, 2005, the Bankruptcy Court approved an Interpleader Order, whereby pursuant to the Settlement Agreement, the Company agreed to place
250,000 shares of common stock with the clerk of the court as payment of the Racusin Claim while Racusin pursued its appeal of the Bankruptcy Appellate Panel's decision in our favor to the
9th Circuit Court of Appeals. The Interpleader Order further stated that the Company's stock would be substituted with cash payment in the event that the 9th Circuit reverses the
Bankruptcy Appellate Panel. The Company filed

26

---



Table of Contents

a
Form 8-K on July 6, 2007, in response to the 9th Circuit's reversal of the Bankruptcy Appellate Panel. On November 2, 2007, the Bankruptcy Court heard an
argument to determine whether the Company could withdraw its 250,000 shares of common stock and whether it could begin depositing funds pursuant to the Settlement Agreement attached to the
Company's motion (the "Revised Payment Schedule"). Accordingly, we previously estimated post-judgment interest at 8% per annum, compounded, from March 11, 2005, without taking into
consideration the Interpleader Order of July 27, 2005, which was still in effect. That is, by calculating post-judgment interest
during the same time that our stock was held by the Court pursuant to the Settlement Agreement, we previously accrued interest over a period of time for which interest should not be accrued because we
were in compliance with the terms of the Settlement Agreement pursuant to the Interpleader Order. The extra estimated interest accrued pursuant to the Racusin claim was $394,021, which was taken as an
offset to the litigation expense in the fourth quarter of fiscal 2009. The adjustment was recorded in the fourth quarter of fiscal 2009 pursuant to the fourth quarter legal actions described below.

The
Company filed its Corrected Amortization Schedule on March 17, 2008 ("Corrected Amortization Schedule"). The Company received a letter from Racusin stating that he considered
our filing of the Corrected Amortization Schedule to be a breach of the Settlement Agreement on April 2, 2008. On October 10, 2008, Racusin moved the Court to file supplemental
pleadings, and that motion was granted on December 23, 2008. Racusin filed his Adversarial Counterclaim for Breach of the Settlement Agreement on January 14, 2009. We filed our Answer on
January 29, 2009. Racusin filed his Motion for Summary Judgment on breach of the Settlement Agreement on February 24, 2009. We filed our Opposition to the Motion for Summary Judgment on
March 16, 2009. Racusin filed his Reply to our Opposition on March 30, 2009. The hearing on the Motion for Summary Judgment is scheduled for May 8, 2009. Though we believe the
legal analysis for our position is meritorious, there can be no assurance that the Company will prevail in this matter. As of January 31, 2009, $757,642 of long-term debt was
outstanding for the Racusin matter.

Salerno

On November 8, 2007, the Board of Directors approved and authorized Victor and Terina Salerno to borrow $400,000 for the benefit
of the Company pursuant to a line of credit under the terms of a Guaranty Agreement with AWI. The Guaranty Agreement provides for AWI to pay the Salernos interest at the rate of 10.0% per annum
(payable monthly) on the outstanding portion of the loan (up to a maximum of $500,000) and to reimburse them for finance charges, fees, payments and other expenses they may incur under a
personal revolving line of credit with their bank. This current line of credit expires in November 2010. The Guaranty Agreement expires on February 16, 2011. The personal line of credit
is secured by the Salerno's residence and provides for an interest rate of 0.5% below the prime rate published by the Wall Street Journal, adjusted annually. The outstanding balance of this line of
credit was $380,773 at January 31, 2008. The Company paid principal and interest payments totaling $63,630 in fiscal 2009 and $25,814 in fiscal 2008 and paid interest only payments of $3,839
per month in fiscal 2009. In February 2008, an additional $80,000 was also borrowed by the Company against this line of credit. Smaller amounts were loaned to the Company by Mr. Salerno
subsequent to February 2008, but prior to December 31, 2008, totaling $20,000. The payments described above take into consideration the additional borrowings.

On
December 1, 2008, Mr. Salerno, loaned the Company an additional $500,000 to fund urgent cash flow needs of the Company. Due to the urgency, the funds were advanced on an
expedited basis without formal board approval as reported in the Company's Form 10-Q for the quarter ended October 31, 2008. The independent directors of the Company
considered and approved the fairness of a proposed amendment to the original loan agreement to cover the total $1,000,000 that has been loaned by Mr. Salerno at the same terms. The total
$1,000,000 will be repaid with interest only
payments during fiscal 2009 and 2010, and principal payments of $362,615 plus interest in fiscal 2011 and the remainder in fiscal 2012.

27

---





Table of Contents

Other

Various automobile loans, totaling $42,973 as of January 31, 2009 are also included in long-term debt with various
maturities ranging from one to five years and interest rates ranging from 6.4% to 9.4%. These vehicles are generally the service automobiles utilized in the Leroy's and CBS operations.

Operating Leases

Included in the operating leases are rents payable at the Leroy's sports book operating locations, rent for our corporate headquarters,
and office equipment and vehicles leases. Rent at the Leroy's locations includes the base rent due per the contract terms. The rental leases also include locations in which the rent is calculated
based on a formula relating to the activity of the location. The rent to be paid for those locations was estimated for the purpose of the foregoing cash obligations table.

Off-Balance Sheet Arrangements

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

Results of Operations

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

Summary

2009

2008

$ Change

% ChangeRevenues

$
15,488,400

$
18,732,355

$
(3,243,955
)

(17.32
)Costs and Expenses


16,601,536


19,413,280


(2,811,744
)

(14.48
)Other Income (Expense)


185,033


(83,088
)

268,121


322.70Loss Before Income Taxes


(928,103
)

(764,013
)

164,090


21.48


The
decrease in revenues for the year ended January 31, 2009 is attributed to a decrease in Wagering segment revenues of $2,969,742 (-24.57%); a decrease in
Hotel/Casino segment revenues of $304,966 (-10.22%); partially offset by increased Systems segment revenues of $30,753 (+0.84%).

The
decrease in operating costs and expenses for the year ended January 31, 2009 is due to the decrease in direct costs of $2,148,085 (-15.46%) and a decrease in
operating expenses of $663,659 (-12.03%).

The
change in other income (expense) for the year ended January 31, 2009 is due primarily to the following factors: interest income decreased $55,300 (-54.68%);
interest expense decreased $7,061 (-2.52%); litigation expense decreased $367,060 (-546.11%); and other income decreased $50,700 (-31.05%).

Please
refer to the discussions below ("Wagering Segment," "Hotel/Casino Segment," "Systems Segment," and "Other Income and Expense") for additional information, discussion
and analysis.

Wagering Segment

The Wagering Segment includes the operating results of the sports gaming wagers, net of payouts and expenses.

28

---



Table of Contents

Wagering Segment revenues for the fiscal year ended January 31, 2009 decreased $2,969,742 (-24.57%) from the fiscal year ended
January 31, 2008.This increase is attributed to the following factors:

We
experienced increased basketball and baseball handle during the first three quarters of fiscal 2009, compared to the same period in the prior year due to having more locations and the
improvements and expansion of some of our previously existing locations. However, the increase handle for those sports was not carried forward to football, due to the economic recession. Additionally,
the handle increases earlier in the year were more than offset by a reduction in the win percentage for the fiscal year ended January 31, 2009 when compared with the previous year. This was
primarily due to the reduced win percentage in the results of the last big game of the professional football season, held on February 3, 2008, which occurred during the first quarter of fiscal
2009 and a lower than normal hold percentage from the last month of the second quarter which were primarily baseball wagers, and lower handle and hold percentages through the end of the fourth
quarter. We have experienced a change in gambling patterns of our patrons, including a trend toward more conservative bets, which tend to be less profitable to the Company.

Wagering Segment total costs and expenses for the fiscal year ended January 31, 2009 decreased $1,903,124 (-15.73%) from the fiscal year ended
January 31, 2008.This decrease is attributed to the following factors:

Direct
costs decreased $1,607,648 (-15.79%) for the fiscal year ended January 31, 2009 compared to the fiscal year ended January 31, 2008, primarily due to
reductions in personnel costs of approximately $559,000; a reduction in advertising and promotional expenses of approximately $452,000; decreased telephone expenses of approximately $202,000; and
decreases in tax and license and other expenses due to cost controls.

Selling,
general and administrative costs decreased $341,740 (-20.86%) for the fiscal year ended January 31, 2009 compared to the fiscal year ended January 31,
2008 primarily due to decreases in various corporate administrative costs allocated from the AWI parent and a decrease in ticket writer shortages.

Depreciation
and amortization expense increased $46,264 (+16.88%) over the prior fiscal year primarily due to a cumulative net increase in capitalized acquisitions, particularly in
sports book locations, compared to fiscal 2008.

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

We
intend to continue to open new locations that we expect to operate profitably and to continue our review of existing locations in order to close those locations that are not operating
efficiently. There is no assurance that the number of race and sports books operated by us will not decrease in the future due to elimination of unprofitable locations, closure of host properties, and
other factors beyond our control, that we will be able to add new locations, and/or that any new locations so added will be profitable.

Hotel/Casino Segment

The Hotel/Casino Segment consists of the operating results of Sturgeon's.

29

---



Table of Contents

Hotel/Casino Segment revenues for the fiscal year ended January 31, 2009 decreased $304,966 (-10.22%) from the fiscal year ended
January 31, 2008.This decrease is attributed to the following factors:

Casino
revenues decreased primarily due to the reduced tourism travel and reduced local customers due to the economic recession.

Hotel
revenues decreased due to a lower occupancy rate, primarily due to decreased travel which may have been influenced by the economic recession and, during a portion of fiscal 2009,
the higher price of gasoline.

Food
and Beverage revenues decreased primarily due to the reduced tourism travel and reduced local customer traffic, primarily due to the economic recession and, during a portion of
fiscal 2009, the higher price of gasoline.

Casino
cash incentives and other promotional allowances decreased for fiscal 2009 compared to fiscal 2008 due to closer scrutiny of these costs by management combined with a decrease in
hotel occupancy.

Hotel/Casino Segment total costs and expenses for the twelve months ended January 31, 2009 decreased $311,684 (-10.55%) from the twelve months
ended January 31, 2008.This decrease is attributed to the following factors:

Direct
costs for the casino operations decreased over the prior fiscal year ended January 31, 2008 primarily due to an emphasis on cost controls implemented by management.

Direct
costs for the hotel operations decreased in fiscal 2009 compared to fiscal 2008, primarily due to lower occupancies due to the economic conditions.

Direct
costs for the food and beverage operations decreased over the prior fiscal year ended January 31, 2008, primarily due to lower occupancies in the hotel.

Selling,
general and administrative costs for Sturgeon's have decreased in fiscal 2009 compared to fiscal 2008, primarily due to no bonus payment made during fiscal 2009 compared to the
same period of fiscal 2008, reduced personnel costs, and lower credit card fees, donations and other expenses.

Systems Segment

The Systems Segment includes the operating results of our systems sales, installations and maintenance fees, less the related expenses.

Systems Segment revenues for the fiscal year ended January 31, 2009 increased $30,753 (+0.84%) from the fiscal year ended January 31,
2008.This increase is attributed to the following factors:

Systems
revenues increased over the prior fiscal year due to the timing and in the number of infrequent or non-recurring sales.

Revenues
from maintenance contracts increased slightly over the prior fiscal year. This increase is attributable to annual contractual increases charged to existing customers.

Systems Segment total costs and expenses for fiscal year ended January 31, 2009 decreased $596,936 (-13.68%) from the fiscal year ended
January 31, 2008.This decrease is attributed to the following factors:

Direct
costs for systems decreased over the prior fiscal year ended January 31, 2008, primarily due to decreased wages and benefits resulting from a reduction and realignment of
personnel, improving our operational efficiencies.

30

---



Table of Contents

Research
and development costs decreased from the prior fiscal year, primarily due to decreased personnel expense and greater efficiencies.

Selling,
general and administrative costs increased slightly for the fiscal year ended January 31, 2009, compared to the prior period, primarily due to increased bad debt expense
partially offset by lower operating expenses due to administrative salaries and utility and communications expense.

Depreciation
and amortization increased from the prior fiscal year, due to increased property acquisitions, primarily due to the equipment and software upgrades to our networks.

Other Income (Expense)

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

Interest income:    The majority of interest income is attributable to interest earned on restricted cash deposits required
for compliance with the Regulation 22.040 reserve. The decrease in interest income of $55,300 is due primarily to decreased interest rates paid on our cash deposits and less overall cash held
in deposits.

Interest Expense:    The decrease in interest expense is primarily due to reductions in debt due to paydowns, partially
offset by increased interest expense related to the bank line of credit and interest on loans payable to Victor Salerno.

Litigation Expense:    Expense of $82,925 was recorded in fiscal 2009 related to interest charges regarding the Racusin
litigation, compared to Racusin litigation expense of $67,213 for the prior fiscal year, and is therefore non-operating. Additionally, a non-operating litigation settlement for
$11,249, regarding an office lease was recorded in fiscal 2009.

These
litigation expenses were offset by the reversal of interest expense for $394,021 related to the Racusin litigation that we do not owe. The Company and Racusin entered into the
Settlement Agreement on September 3, 2004. On or about March 11, 2005, the Company consummated its Plan of Reorganization and emerged from Bankruptcy. On or about July 27, 2005,
the Bankruptcy Court approved an Interpleader Order, whereby pursuant to the Settlement Agreement, the Company agreed to place 250,000 shares of common stock with the clerk of the court as
payment of the Racusin Claim while Racusin pursued its appeal of the Bankruptcy Appellate Panel's decision in our favor to the 9th Circuit Court of Appeals. The Interpleader Order further
stated that the Company's stock would be substituted with cash payment in the event that the 9th Circuit reverses the Bankruptcy Appellate Panel. The Company filed a Form 8-K
on July 6, 2007, in response to the 9th Circuit's reversal of the Bankruptcy Appellate Panel. On November 2, 2007, the Bankruptcy Court heard an argument to determine whether the
Company could withdraw its 250,000 shares of common stock and whether it could begin depositing funds pursuant to the Settlement Agreement attached to the Company's motion (the "Revised Payment
Schedule"). Accordingly, we previously estimated post-judgment interest at 8% per annum, compounded, from March 11, 2005, without taking into consideration the
Interpleader Order of July 27, 2005, which was still in effect. That is, by calculating post-judgment interest during the same time that our stock was held by the Court pursuant to
the Settlement Agreement, we previously accrued interest over a period of time for which interest should not be accrued because we were in compliance with the terms of the Settlement Agreement
pursuant to the Interpleader Order. The extra estimated interest accrued pursuant to the Racusin claim was $394,021, which was taken as an offset to the litigation expense in the fourth quarter of
fiscal 2009. The adjustment was recorded in the fourth quarter of fiscal 2009 pursuant to the fourth quarter legal actions described below.

31

---



Table of Contents

The
Company filed its Corrected Amortization Schedule on March 17, 2008 ("Corrected Amortization Schedule"). The Company received a letter from Racusin stating that he considered
our filing of the Corrected Amortization Schedule to be a breach of the Settlement Agreement on April 2, 2008. On October 10, 2008, Racusin moved the Court to file supplemental
pleadings, and that motion was granted on December 23, 2008. Racusin filed his Adversarial Counterclaim for Breach of the Settlement Agreement on January 14, 2009. We filed our Answer on
January 29, 2009. Racusin filed his Motion for Summary Judgment on breach of the Settlement Agreement on February 24, 2009. We filed our Opposition to the Motion for Summary Judgment on
March 16, 2009. Racusin filed his Reply to our Opposition on March 30, 2009. The hearing on the Motion for Summary Judgment is scheduled for May 8, 2009. Though we believe the
legal analysis for our position is meritorious, there can be no assurance that the Company will prevail in this matter.

Other:    Other income decreased $50,700 primarily due to decreased rental income and various other non-operating income in
the twelve months ended January 31, 2009 compared to the same period in the prior year.

Critical Accounting Estimates and Policies

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

Wagering

We record wagering revenues in compliance with Nevada law and the regulations of the Nevada gaming regulators. For sports and
non-pari-mutuel race, we use an accrual method wherein the handle (total amount wagered) is recognized on the day the event occurs (rather than the day the wager is accepted)
decreased by the total amount owed to patrons with winning wagers. This gross calculation (handle less payouts) is then adjusted upward to account for any winning wagers that were not redeemed
(cashed) within the specified time period. For pari-mutuel race, commission and breakage revenues are recorded when the wagers are settled, typically the same day as the wager. Other
sources of revenue are relatively insignificant.

Hotel/Casino Revenue

We report the wagering revenues of Sturgeon's, which is primarily comprised of slot revenue, hotel room revenue and food and beverage
revenue, in compliance with Nevada law and the regulations of the Nevada gaming regulators. These revenues are generally in the form of cash, personal checks, credit cards, or gaming chips and tokens,
which do not require estimates. We do estimate certain liabilities with payment periods that extend for longer than several months. We believe these estimates are reasonable based on our assumptions
related to possible outcomes in the future. Future actual results might differ materially from these estimates. Slot revenue is the drop (the total amount removed from the machine) less the
fills and the payouts. Bingo revenue is calculated as the total handle (the amount wagered) less the payouts. For non-gaming revenues, such as food and beverage, hotel, etc., we
record revenues in compliance with generally accepted accounting principles, recognizing revenue when it is earned. The Sturgeon's acquisition was completed on March 1, 2006 and wagering
revenues for the Sturgeon's operation were reported for the first time in the fiscal year ended January 31, 2007 and for fiscal 2008, the entire 12 months of revenues and expenses are
reported in this Form 10-K.

32

---



Table of Contents

SystemSoftware

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

SystemHardware

We recognize hardware revenue (including any related installation revenue) upon installation of the hardware.

SystemMaintenance

We negotiate maintenance agreements with each of our customers to provide for the long-term care of the software and
hardware. Pursuant to the terms of the various maintenance agreements, a fixed sum is due at the beginning of each month regardless of whether the customer requires service during that month. We
recognize maintenance revenue on the first day of each month for which the maintenance agreement is in place; we maintain an allowance for doubtful accounts in the event that any such revenue recorded
is not realized.

Long-Lived Assets

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

Accounting for Income Taxes

Effective February 1, 2007, we adopted Financial Accounting Standards Board ("FASB") Interpretation No. 48, Accounting for Uncertainty in Income Taxes,
an interpretation of FASB Statement No. 109, Accounting for Income Taxes("FIN 48").
Accordingly, we have reviewed our previously filed tax returns and particularly our net operating loss carryforwards available to reduce current and future tax obligations and assessed the valuation
allowance we established against our deferred tax assets for the possible effect of FIN 48 and to estimate the extent to which it remains needed as of January 31, 2008. We additionally
believe that we will be sufficiently profitable for the short-term future, and it is therefore more likely than not that $369,000 of our net deferred tax asset, which resulted primarily
from net loss carryforwards, will be realized. We increased our valuation allowance against our deferred tax asset by $71,481 in the fourth quarter of fiscal 2009. Based on our evaluation, management
believes that adopting FIN 48 did not have a material effect on our opening deficit at the time of adoption, our net operating loss carryforwards or the related deferred tax assets or the
related valuation allowance.

Recent Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standard ("SFAS") No. 157, Fair Value Measurements, which
defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value
measurements. Although SFAS No. 157 became effective

33

---



Table of Contents

for
us for financial statements issued for the fiscal year ended January 31, 2009, except that for nonfinancial assets and liabilities, it will not become effective for us until the following
year. We do not presently expect any likely impact of SFAS No. 157 on our future consolidated financial statements.

In
December 2007, the FASB issued SFAS 141R,Business Combinations, which will significantly change the accounting for
business combinations and certain other transactions. SFAS 141R will apply prospectively to business combinations and certain other transactions for which the acquisition date is on or after
the start of our fiscal year 2010, and early adoption is prohibited. Since we are not now
contemplating any covered transactions after its effective date, we currently expect that SFAS 141R will not have an impact on our future financial position, results of operations and operating
cash flows.

In
December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statementsan amendment of
Accounting Research Bulletin No. 51("SFAS 160"), which establishes accounting and reporting standards for ownership interests in certain subsidiaries and for
when a subsidiary is deconsolidated. However, the Company currently has and expects to have no noncontrolling interests in any of its subsidiaries.

In
March 2008, the FASB issued SFAS No. 161,"Disclosures about Derivative Instruments and Hedging Activitiesan amendment of
FASB Statement No. 133"(SFAS 161), which amends and expands the disclosure requirements of SFAS 133 dealing with derivative instruments. The provisions of
SFAS 161 will be effective for periods beginning after November 15, 2008. However, since we have and expect to have no transactions or balances involving derivatives SFAS 161 is
not expected to have a material impact on our financial position, results of operations or cash flows.

Item 7A.    Quantitative and Qualitative Disclosures about Market Risk

Not required.

Item 8.    Financial Statements and Supplementary Data

Audited Financial Statements for Years Ended January 31, 2009 and 2008, including:



34

---







Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board
of Directors
American Wagering, Inc.

We
have audited the accompanying consolidated balance sheets of American Wagering, Inc. and Subsidiaries (collectively, the "Company") as of January 31, 2009 and 2008, and
the related consolidated statements of operations, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 31, 2009 and 2008, and the
results of its operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.

PIERCY
BOWLER TAYLOR & KERN

/s/ PIERCY
BOWLER TAYLOR & KERN

Certified
Public Accountants
Las Vegas, Nevada
May 1, 2009

35

---





Table of Contents



AMERICAN WAGERING, INC. AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS        JANUARY 31, 2009 AND 2008

2009

2008ASSETSCURRENT ASSETSCash and Cash Equivalents

$
3,357,978

$
3,316,595Restricted Cash


1,298,463


1,323,688Accounts Receivable, net of allowance for doubtful accounts of $0 and $2,835


219,264


345,145Inventories


219,601


443,639Deferred Tax Assets, net of allowance


369,000


440,481Prepaid Expenses and Other


379,910


497,0565,844,216


6,366,604Property and Equipment, net of accumulated depreciation and amortization


4,171,160


4,783,451Goodwill


103,725


103,725Other Assets


321,222


289,192$
10,440,323

$
11,542,972LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIESCurrent Portion of Long-Term Debt

$
612,759

$
1,280,161Accounts Payable


1,191,649


1,055,547Line of Credit Payable


499,295


Accrued Expenses


652,439


1,006,310Unpaid Winning Tickets


1,193,900


1,401,382Customer Deposits and Other


2,150,230


1,535,9606,300,272


6,279,360Long-Term Debt, less current portion


3,075,244


3,046,655Other Long-Term Liabilities


530,071


655,6933,605,315


3,702,348Redeemable Series A Preferred Stock (3,238 shares)


323,800


323,80010,229,387


10,305,508STOCKHOLDERS' EQUITYSeries A Preferred Stock10% cumulative; $100.00 par and liquidation value; 18,924 shares authorized; 10,924 shares
outstanding


1,092,400


1,092,400Common Stock$0.01 par value; 25,000,000 shares authorized; 8,129,879 shares issued


81,299


81,299Additional Paid-In Capital


12,361,309


12,246,651Deficit


(12,996,579
)

(11,855,393
)Treasury Stock, at cost (61,100 shares)


(327,493
)

(327,493
)210,936


1,237,464$
10,440,323

$
11,542,972


See
notes to consolidated financial statements.

36

---





Table of Contents



AMERICAN WAGERING, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS        FOR THE YEARS ENDED JANUARY 31, 2009 AND 2008

2009

2008REVENUES:Wagering

$
9,115,501

$
12,085,243Hotel/Casino


2,677,644


2,982,610Systems


3,695,255


3,664,50215,488,400


18,732,355OPERATING COSTS AND EXPENSES:Direct Costs:Wagering


8,576,477


10,184,125Hotel/Casino


2,060,634


2,325,003Systems


1,113,187


1,389,25511,750,298


13,898,383Operating Expenses:Research and Development


591,121


952,163Selling, General and Administrative


3,232,566


3,625,376Depreciation and Amortization


1,027,551


937,3584,851,238


5,514,89716,601,536


19,413,280OPERATING LOSS


(1,113,136
)

(680,925
)OTHER INCOME (EXPENSE):Interest Income


45,835


101,135Interest Expense


(273,215
)

(280,276
)Litigation Income (Expense)


299,847


(67,213
)Other


112,566


163,266185,033


(83,088
)LOSS BEFORE TAXES


(928,103
)

(764,013
)INCOME TAXES


71,481


NET LOSS

$
(999,584
)
$
(764,013
)NET LOSS PER COMMON SHAREBASIC

$
(0.14
)
$
(0.11
)DILUTED


N/A


N/A


See
notes to consolidated financial statements.

37

---





Table of Contents



AMERICAN WAGERING, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY        FOR THE YEARS ENDED JANUARY 31, 2009 AND 2008

Preferred Stock

Common Stock

Treasury StockAdditional
Paid-In
Capital



Total
EquityShares

Dollars

Shares

Dollars

Shares

Dollars

DeficitBalances, February 1, 2007


10,924

$
1,092,400


8,129,879

$
81,299


61,100

$
(327,493
)
$
12,121,822

$
(10,949,796
)
$
2,018,232Preferred Stock Dividends























(141,584
)

(141,584
)Net Loss























(764,013
)

(764,013
)Stock-based compensation expense




















124,829





124,829Balances, January 31, 2008


10,924


1,092,400


8,129,879


81,299


61,100


(327,493
)

12,246,651


(11,855,393
)

1,237,464Preferred Stock Dividends























(141,602
)

(141,602
)Net Loss























(999,584
)

(999,584
)Contributed services from certain executives




















52,085





52,085Stock-based compensation expense




















62,573





62,573Balances, January 31, 2009


10,924

$
1,092,400


8,129,879

$
81,299


61,100

$
(327,493
)
$
12,361,309

$
(12,996,579
)
$
210,936


See notes to consolidated financial statements.

38

---





Table of Contents



AMERICAN WAGERING, INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF CASH FLOWS        FOR THE YEARS ENDED JANUARY 31, 2009 AND 2008

2009

2008OPERATING ACTIVITIESNet cash provided by (used in) operating activities

$
(215,355
)
$
237,947INVESTING ACTIVITIESGross increases in restricted cash


(763,602
)

(1,751,275
)Withdrawals from restricted cash


788,827


1,541,243Proceeds from the sale of property and equipment


1,500


14,943Purchase of property and equipment


(392,888
)

(978,356
)Net cash used in investing activities


(366,163
)

(1,173,445
)FINANCING ACTIVITIESProceeds from borrowings


5,018,670


400,000Repayment of borrowings


(4,254,167
)

(543,747
)Dividends on preferred stock


(141,602
)

(141,584
)Net cash provided by (used in) financing activities


622,901


(285,331
)NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS


41,383


(1,220,829
)CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD


3,316,595


4,537,424CASH AND CASH EQUIVALENTS AT END OF PERIOD

$
3,357,978

$
3,316,595SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for interest

$
328,128

$
429,410Non-cash investing and financing activities:Property and equipment acquired directly with proceeds of bank and vendor financing

$
10,000

$
259,629


See
notes to consolidated financial statements.

39

---





Table of Contents



AMERICAN WAGERING, INC. AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        YEARS ENDED JANUARY 31, 2009 AND 2008

1. Nature of Operations and Summary of Significant Accounting Policies

Organization and Business

American Wagering, Inc. ("AWI") is a publicly traded holding company that earns its revenues through the consolidated operations
of its wholly-owned subsidiaries. Leroy's Horse & Sports Place, Inc. ("Leroy's") owns and operates 62 (as of April 11, 2009) race and sports wagering locations ("books") in
leased space within nonrestricted casinos throughout the state of Nevada. Computerized Bookmaking Systems, Inc. ("CBS"), designs, sells, installs, and maintains computerized race and sports
wagering systems. AWI Manufacturing, Inc. ("AWIM") develops and leases self-service race and sports wagering kiosks to the gaming industry. AWI Gaming, Inc. ("AWIG") was
formed in June 2005 for the purpose of acquiring hotel/casino operations,
which it did through Sturgeons, LLC, a wholly-owned subsidiary of AWIG that owns and operates Sturgeon's Inn & Casino in Lovelock, Nevada ("Sturgeon's").

Basis of Presentation

The consolidated financial statements include the accounts of AWI and all of its subsidiaries for applicable periods, (collectively
referred to hereafter as the "Company"). All subsidiaries are directly or indirectly wholly-owned by AWI. All significant inter-company accounts and transactions have been eliminated in consolidation.

Basis of Accounting

The Company has not elected to adopt the option available under Financial Accounting Standards Board (FASB) Statement of Financial
Accounting Standards (SFAS) No. 159,The Fair Value Option for Financial Assets and Financial Liabilities, to measure any of its eligible
financial instruments or other items. Accordingly, the Company continues to measure all of its assets and liabilities on the historical cost basis of accounting except as required under generally
accepted accounting principles and disclosed herein.

Concentrations and Economic Conditions, and Related Risks and Uncertainties

Because the Company operates primarily in the larger metropolitan areas of Nevada in the highly regulated gaming industry, realization
of its receivables and its future operations could be affected by adverse economic conditions in Nevada and its key feeder markets in the western United States, and by possible future
anti-wagering legislation and regulatory limitations on the scope of wagering. All of the Company's wagering revenue comes from its Nevada race and sports books and more than
one-fourth of that is derived from professional football events. If the professional football season were to be interrupted, this could have a significant adverse impact on future
operations. Management also estimates that a significant amount of the Company's Nevada non-casino wagering relates to college sports and, therefore, the passage of amateur sports
anti-wagering legislation could have a material adverse impact upon future operations. In addition, because the Company generates substantial revenue from system sales and maintenance to a
relatively small population of potential customers, a decline in the size, demand or number of these contracts could also adversely affect future operations.

The
United States is currently experiencing a recession accompanied by, among other things, weakness in the commercial and investment banking systems resulting in reduced credit and
capital

40

---



Table of Contents

AMERICAN WAGERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED JANUARY 31, 2009 AND 2008

1. Nature of Operations and Summary of Significant Accounting Policies (Continued)

financing
availability, and highly curtailed gaming, other recreational activities and general discretionary consumer spending, and is also engaged in war, all of which are likely to continue to have
far-reaching effects on economic conditions in the country for an indeterminate period. The effects and duration of these developments and related risks and uncertainties on our future
operations and cash flows, including the principal officer's ability to continue to provide financial support for the Company, as in the past, and, other access to capital or credit financing, cannot
be estimated at this time but may likely be significant.

The
Company often carries cash and cash equivalents, including statutorily restricted amounts, on deposit with financial institutions substantially in excess of federally-insured limits,
and the risk of losses related to such concentrations may be increasing as result of recent economic developments and uncertainties discussed in the foregoing paragraph. The extent of a future loss as
a result of uninsured deposits in the event of a future failure of a bank or other financial institution, if any, is not subject to estimation at this time.

Accounts Receivable and Allowance for Doubtful Accounts

The Company manages its concentrations of credit risk by requesting deposits; evaluating the creditworthiness of systems' customers
before extending credit; and by perfecting and using, when necessary, security interests in the hardware and software.

Accounts
receivable are evaluated quarterly for collectability, and carried net of an appropriate allowance, at their estimated collectible value. Since customer credit is generally
extended on a short-term basis, accounts receivable do not bear interest, although a finance charge may be applied to accounts that are more than 30 days past due.

The
allowances for doubtful accounts represent allowances for accounts receivable that are estimated to be partially or entirely uncollectible. These allowances are used to reduce gross
accounts receivable to their estimated net realizable value. The Company records these allowances as a charge to general and administrative expenses.

In
establishing an allowance for doubtful accounts, if any, the Company is required to make judgments based on historical data and future expectations regarding the collectability of the
amount owed to the Company. The Company considers, among other things, the customer's financial condition; the relative strength of the Company's legal position, including the related cost of any
proceedings and its relationship with the customer; the amounts on the aging schedule; historical payment information; and local and general economic conditions.

Generally,
accounts for which no payments have been received for three consecutive months are considered delinquent, and the customary collection efforts are initiated. Accounts for
which no payments have been received for 12 months or if management becomes aware that no payment will be made to the Company, are written off. The maximum losses that the Company would incur
if a customer failed to pay would be limited to the amount due after any allowances were provided.

41

---



Table of Contents

AMERICAN WAGERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED JANUARY 31, 2009 AND 2008

1. Nature of Operations and Summary of Significant Accounting Policies (Continued)

Use of Estimates

Timely preparation of financial statements in conformity with generally accepted accounting principles in the United States of
America requires management to make estimates and assumptions that affect reported amounts, which estimates may require revision in future periods. Settings and adjustments of betting lines on
sporting events that have not yet taken place as of the most recent balance sheet date, valuation of deferred tax assets, and estimated costs of litigation, claims and assessments are subject to
change materially within one year.

Cash and Cash Equivalents

Cash equivalents include highly liquid investments with initial maturities of three months or less. Excluded from cash and cash
equivalents, but included in current assets, are restricted cash amounts primarily required to be maintained on deposit with a bank under Nevada Gaming Commission Regulation 22.040
(Note 6a), to fund gaming losses.

Inventories

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

Property and Equipment

Property and equipment (Note 2) is stated at cost, net of accumulated depreciation and amortization, computed using the
straight-line method over the estimated useful lives of the depreciable assets (generally 3 to 10 years for equipment, furniture and fixtures, and 40 years for building
improvements, but limited to the lease term (Note 6c) for leasehold improvements.

Goodwill

As of the most recent balance sheet date, goodwill primarily consists of the excess of the purchase price over fair value of net assets
acquired in connection with the acquisition of CBS. Goodwill is evaluated periodically and at least annually, for impairment as events or circumstances warrant. Such evaluations include, among other
analysis, cash flow and profitability projections, including the impact on other operations of the Company. There were no impairment provisions deemed necessary or taken for the fiscal years ended
January 31, 2009 or 2008.

Revenue Recognition

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

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

42

---



Table of Contents

AMERICAN WAGERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED JANUARY 31, 2009 AND 2008

1. Nature of Operations and Summary of Significant Accounting Policies (Continued)

Wagering

The Company records wagering revenues in compliance with Nevada law and with the regulations of the Nevada gaming regulators. For
sports and non-pari-mutuel race wagering, the Company uses an accrual method wherein the handle (total amount wagered) is recognized on the day the event occurs (rather than
the day the wager is accepted) and is decreased by the total amount owed to patrons with winning wagers. This gross calculation (handle less payouts) is then adjusted upward to account for any winning
wagers that were not redeemed (cashed) within the specified time period. For pari-mutuel race, commission and breakage revenues are recorded when the wagers are settled, typically the same
day as the wager.

Hotel/Casino

Revenues of Sturgeon's consist primarily of slot revenue, recorded in compliance with Nevada gaming law and regulations, hotel room and
food and beverage revenue. Casino revenue is the aggregate net difference between gaming wins and losses. Food and beverage and other operating revenues are recognized as services are performed.
Advance deposits, if any, are recorded as deferred revenue until the goods or services are provided to the customer. Sturgeon's casino gaming, food and beverage and other operating revenues are
included in hotel/casino revenue. Casino revenues are recognized net of certain sales incentives in accordance with Emerging Issues Task Force Issue No. 01-9, Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor's Products.)Accordingly, cash incentives to patrons
for gambling, which are not material, have been recognized as a direct reduction of casino revenue. Revenue does not include the retail value of food and beverage, and other services gratuitously
furnished to patrons, which is not material. The estimated cost of providing such gratuities is included in wagering direct expenses.

SystemSoftware

The Company recognizes software development revenue in accordance with the provisions of Statement of Position ("SOP")
97-2,Software Revenue Recognition, as amended by SOP 98-9,Software Revenue Recognition, With
Respect to Certain Transactions. Software license fees represent revenues related to licenses for race/sports software delivered to customers for in-house use.
Revenues from software license agreements (including any related training revenue) are recognized upon installation of the software.

SystemHardware

The Company recognizes revenue from the sale of hardware (and any related installation revenue) upon installation of
the hardware.

SystemMaintenance

The Company negotiates maintenance agreements with each of its customers to provide for the long-term care of the software
and hardware. Pursuant to the terms of the various maintenance agreements, a fixed sum is due at the beginning of each month regardless of whether the customer

43

---



Table of Contents

AMERICAN WAGERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED JANUARY 31, 2009 AND 2008

1. Nature of Operations and Summary of Significant Accounting Policies (Continued)

requires
service during that month. The Company recognizes maintenance revenue on the first day of each month for which the maintenance agreement is in place.

Advertising

The Company expenses all advertising costs as incurred. Advertising expense was $310,130 and $683,037 for the fiscal years ended
January 31, 2009 and 2008, respectively.

Stock-Based Compensation

Stock options expected to be exercised currently and in future periods are measured at estimated fair value with the expense associated
with these awards being recognized on a straight-line basis over the award's vesting period. The fair value of options granted at the date of grant is estimated using the Black-Scholes
Multiple Option pricing model based on Level 2 inputs pursuant to SFAS No. 157,Fair Value Measures,with the following weighted-average
assumptions in the fiscal years ended January 31:

2009

2008Risk-free interest rate


4.0
%

4.0
%Expected life of options (in years)


4.05


5.47Expected volatility of stock price


107.85
%

82.43
%Expected dividend yield


0.0
%

0.0
%


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

The
Company granted stock options for 0 and 30,800 shares of common stock to employees and non-employee directors in fiscal 2009 and 2008, respectively. The Company's
adoption of SFAS No. 157 when required had no effect on its financial statements.

Legal Defense Costs

In accordance with an interpretation of SFAS No. 5,Accounting for
Contingencies, the Company records provisions for probable losses equal to the lower end of the estimated probable loss range for matters in litigation or other disputes such
as those discussed in Note 6.b. and periodically revises these estimates as known facts and circumstances change. The Company does not accrue for estimated future legal and related
defense costs, if any, to be incurred in connection with outstanding or threatened litigation and other disputed matters but rather, records such as period costs when the related services
are rendered.

Income Taxes

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate resolution of deferred tax assets is dependent upon the generation of future taxable income during periods in

44

---



Table of Contents

AMERICAN WAGERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED JANUARY 31, 2009 AND 2008

1. Nature of Operations and Summary of Significant Accounting Policies (Continued)

which
those temporary differences become deductible. Management considers the amount and timing of scheduled reversals of deferred tax liabilities and projected future taxable income over periods for
which deferred tax assets are deductible.

Effective
February 1, 2007, the Company adopted the provisions of FASB Interpretation (FIN) No. 48,Accounting for Uncertainty in Income
Taxesan Interpretation of FASB Statement No. 109.Based on management's evaluation, the Company concluded that there were no significant uncertain tax
positions requiring recognition in its financial statements or related disclosures. Accordingly, no adjustments to recorded tax liabilities or accumulated deficit were required, and there was no
effect on fiscal 2008 operations as a result of adopting FIN 48. As of January 31, 2009, the Company had not recognized any liabilities for penalties and interest as the Company does not
have a liability for unrecognized tax benefits.

The
Company will recognize interest and penalties related to income tax matters as part of income tax expense in its consolidated statements of operations, if any.

Net Loss Per Common Share

Basic loss per common share is calculated based on the weighted average number of shares of common stock outstanding during the
reporting period. Diluted net income per common share is calculated giving effect to all potentially dilutive common shares, assuming such shares were outstanding during the reporting period. Except
for loss periods, net income per common share considers potentially dilutive securities, which consist solely of stock options of 900 and 3,200 at January 31, 2009 and 2008,
respectively. There is no computation of dilution for loss periods, since the effect of including potentially dilutive common shares would be anti-dilutive because of the losses. The
amounts of potentially anti-dilutive common shares that have been excluded from the calculation of basic net loss per share were 2,160,642 and 551,283 at January 31, 2009 and
2008, respectively.

45

---



Table of Contents

AMERICAN WAGERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED JANUARY 31, 2009 AND 2008

1. Nature of Operations and Summary of Significant Accounting Policies (Continued)

Following
is a reconciliation of the numerators and denominators of the net loss per common share computations for the periods presented.

Net
Income (Loss)
(numerator)

Weighted
Average
Common
Shares
(denominator)

Per
Share
Amount2009Net loss

$
(999,584
)Less preferred stock dividends (Note 4)


(141,602
)Basic net loss per common share:Net loss available to common shares


(1,141,186
)

8,068,779

$
(0.14
)Effect of dilutive stock options





*Diluted net loss per common share:Net loss available to common shares

$
*


*

$
*2008Net loss

$
(764,013
)Less preferred stock dividends (Note 4)


(141,584
)Basic net loss per common share:Net loss available to common shares


(905,597
)

8,068,779

$
(0.11
)Effect of dilutive stock options





*Diluted net loss per common share:Net loss available to common shares

$
*


*

$
*






2. Property and Equipment

Prior to the year ended January 31, 2007, the Company completed a sale and leaseback of a building with an unrelated party and realized a gain of $1,638,000. However, pursuant to
SFAS No. 28,Accounting for Sales with Lease-backs, only a portion of the gain, consisting of $327,600, was recognized in each of the
succeeding years, including those ended January 31, 2009 and 2008. The remainder of the gain has been deferred and will be amortized against the lease payments over the initial lease term
(ending in December 2009); the deferred gain balance is carried on the consolidated balance sheet as "Other Long-Term Liabilities."

46

---



Table of Contents

AMERICAN WAGERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED JANUARY 31, 2009 AND 2008

2. Property and Equipment (Continued)

Property
and equipment consists of the following as of January 31, 2009 and 2008:

2009

2008Land

$
505,558

$
505,558Building and building improvements


825,068


823,540Leasehold improvements


228,647


195,477Equipment, furniture and fixtures


7,665,038


7,298,9819,224,311


8,823,556Less accumulated depreciation and amortization


5,053,151


4,040,105$
4,171,160

$
4,783,451


3. Long-term Debt

Total long-term debt maturities as of January 31, 2009 are as follows:

2010

2011

2012

2013

2014

2015 and
Beyond

TotalSturgeon's

$
145,388

$
84,608

$
42,510

$
45,738

$
1,435,544

$


$
1,753,788Kiosks


133,600

















133,600Line of Credit


499,295

















499,295Racusin


300,000


300,000


157,642











757,642Salerno





362,615


637,385











1,000,000Other


33,771


9,202














42,973Total

$
1,112,054

$
756,425

$
837,537

$
45,738

$
1,435,544

$


$
4,187,298


Sturgeon's

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

Subsequent
to the acquisition, AWI entered into two casino equipment contracts payable with International Game Technology ("IGT"), of which terms are similar in nature, maturing in March
and May of 2009, with fixed interest rates of 10.50% and 10.75% per annum. In fiscal 2008, AWI entered

47

---



Table of Contents

AMERICAN WAGERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED JANUARY 31, 2009 AND 2008

3. Long-term Debt (Continued)

into
three additional similar loans with IGT, one maturing in fiscal 2010 and the other two maturing in 2011, with a total balance outstanding of $154,623 at January 31, 2009. See
table below.

Bank Loan (net of a $75,000 principal reduction)

$
1,599,165IGT equipment loans, of which $109,224 represents the current portion


154,623Total Sturgeon's long-term debt

$
1,753,788


Kiosks

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

Line of Credit/Term Loan

On April 21, 2008, U.S. Bank approved a revolving credit note for $500,000 for the Company. The purpose of this credit
note or line of credit was to provide overdraft protection on our checking accounts. Any negative balances on our checking accounts swept into this overdraft protection credit note and then were
automatically repaid when the funds in the checking accounts returned to a positive balance. The maturity date of this credit note was December 31, 2008. On December 11, 2008,
U.S. Bank gave the Company verbal approval to extend the maturity date of the Company's $500,000 revolving line of credit to 90 days after the original maturity date of
December 31, 2008 (March 31, 2009) and to further negotiate the terms of the line of credit. This credit facility was converted into a term loan, effective March 30, 2009, with
terms as follows:



As
of January 31, 2009, the Company had drawn down $499,295 under the revolving credit note.

48

---



Table of Contents

AMERICAN WAGERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED JANUARY 31, 2009 AND 2008

3. Long-term Debt (Continued)

Racusin

The total amount of Racusin long-term obligation was $757,642 outstanding at January 31, 2009, bearing interest at a
rate of 8.0% per annum. (See Note 6b.)

Salerno(See Note 7)

Other

Other consists primarily of various automobile loans, most of which mature in fiscal 2010, with interest rates ranging from 6.4%
to 9.4%.

4. Series A Preferred Stock

The Series A Preferred Stock is held by two persons. One shareholder is an officer and director of the Company (the "Officer/Director Shareholder"); owning a total of
8,900 shares (5,662 regular shares and 3,238 redeemable shares). The other shareholder is a director of the Company (the "Director Shareholder"); owning a total of
5,262 shares (all regular shares).

Holders
of the Series A Preferred Stock are entitled to receive monthly payments, upon declaration by the Board of Directors, cumulative cash dividends at the annual rate of 10%
per share. Interest at the rate of 10%, compounded annually, accrues on Series A Preferred Stock dividends that have accumulated but have not been paid. The Series A Preferred Stock is
not convertible but is callable, in whole or (on a pro rata basis) in part, at any time at the option of the Company. There were no shares called during the fiscal years ending
January 31, 2009 or 2008. The holders of Series A Preferred Stock are not entitled to vote (on a cumulative basis or otherwise) as a class or with AWI's common stock
(the "Common Stock") upon any matters submitted to shareholders for a vote, except as mandated
under Nevada law. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of the Series A Preferred Stock shall be entitled to receive,
prior and in preference to any distribution of any assets or surplus funds, an amount equal to $100 per share plus all accumulated and unpaid dividends thereon and any unpaid interest due.

Over
the years, the Officer/Director Shareholder has forgone his right to have shares redeemed in accordance with the pro-rata provision applicable when shares were called,
and accordingly, the affected 3,238 shares have been reclassified as "Redeemable Series A Preferred Stock" (in the liabilities section); these may be put to the Company for
redemption at any time.

49

---



Table of Contents

AMERICAN WAGERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED JANUARY 31, 2009 AND 2008

5. Common Stock and Stock Options

Stock Repurchase

In 1999, the Board of Directors approved a program to repurchase up to 250,000 shares of the Company's publicly held Common
Stock from time to time in the open market. As of January 31, 2009, 61,100 shares had been repurchased and are held by the Company as treasury stock, and accordingly are
non-voting. 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.

2001 Stock Option Plan

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

The
following tables summarize the current status of the 2001 Plan:

2009

2008Number of
Shares

Weighted
Average
Exercise
Price

Number of
Shares

Weighted
Average
Exercise
PriceOutstanding at Beginning of Fiscal Year


728,499

$
1.76


737,749

$
1.81Granted Price > or = Market Price








30,000


0.96Exercised











Cancelled


(40,000
)

1.25


(39,250
)

2.00Outstanding at End of Fiscal Year


688,499


1.79


728,499


1.76Exercisable at End of Fiscal Year


558,499





468,499


50

---



Table of Contents

AMERICAN WAGERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED JANUARY 31, 2009 AND 2008

5. Common Stock and Stock Options (Continued)

Outstanding
and Exercisable by Price Range as of January 31, 2009:

Options Outstanding

Options ExercisablePrice Range

Number
Outstanding

Remaining
Life

Weighted
Average
Exercise
Price

Number
Exercisable

Weighted
Average
Exercise
Price$0.96


30,000


8.51

$
0.96


10,000

$
0.96$1.25


60,000


0.16


1.25


60,000


1.25$1.50


30,000


3.34


1.50


20,000


1.50$1.80


250,000


6.36


1.80


150,000


1.80$2.00


318,499


2.46


2.00


318,499


2.00January 31, 2009


688,499


3.98


1.79


558,499


1.83Available For Grant


229,567


Vesting Schedule

Vested at January 31, 2009


558,499Vesting, fiscal year ending January 31, 2010


70,000Vesting, fiscal year ending January 31, 2011


60,000Number of Options Outstanding at January 31, 2009


688,499


Directors Stock Option Plan

In 1996, the Company adopted the Directors Stock Option Plan (the "Directors Plan"). The Directors Plan was extended in
August 2006 to terminate on April 30, 2011. In October 2007, the Board of Directors ratified this practice as an amendment to the Directors Plan and such prior grants and
amendments to the Directors Plan were approved by the stockholders at the last Annual Stockholders' Meeting held in December 2007. Beginning in fiscal year 2002, each non-employee
director of the Company has been awarded options for 400 shares of stock on the last day of each fiscal year, in lieu of 100 shares of stock per committee on which such
non-employee directors serve. Mr. Swecker and Mr. Barengo voluntarily renounced their rights to stock option awards that would have been granted on January 31, 2009 as
part of the Directors' Stock Option Plan for the best financial interests of the Company.

No
more than 40,000 options may be granted pursuant to the Directors Plan, which will be exercisable on the anniversary of the date of grant and will expire no later than
10 years from the grant date. Pursuant to the terms of the Directors Plan, the exercise price of options must be equal to the market value of the Company's common stock on the date of
the grant.

51

---



Table of Contents

AMERICAN WAGERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED JANUARY 31, 2009 AND 2008

5. Common Stock and Stock Options (Continued)

The
following tables summarize the current status of the Directors Plan:

2009

2008Number of
Shares

Weighted
Average
Exercise
Price

Number of
Shares

Weighted
Average
Exercise
PriceOutstanding at Beginning of Year


20,800

$
1.28


20,000

$
1.30Granted Price > or = Market Price








800


0.79Outstanding at End of Year


20,800


1.28


20,800


1.28Exercisable at End of Year


20,800





20,000


Outstanding
and Exercisable by Price Range as of January 31, 2009:

Options Outstanding

Options ExercisablePrice Range

Number
Outstanding

Remaining
Life

Weighted
Average
Exercise
Price

Number
Exercisable

Weighted
Average
Exercise
Price$0.12


400


4.00

$
0.12


400

$
0.12$0.15


800


5.00


0.15


800


0.15$0.35


400


3.00


0.35


400


0.35$0.55


800


6.00


0.55


800


0.55$0.79


800


4.00


0.79


800


0.79$1.00


10,000


7.52


1.00


10,000


1.00$2.00


7,600


6.58


2.00


7,600


2.00January 31, 2008


20,800


6.73


1.28


20,800


1.28Available For Grant


19,200


Vesting

The number of options outstanding and vested at January 31, 2009 was 20,800.

6. Commitments and Contingencies



Nevada
Gaming Commission Regulation 22.040 ("Regulation 22.040") requires us to maintain reserves (cash, surety bonds, irrevocable standby letter of credit, etc.)
sufficient to cover any outstanding wagering liability including unpaid winning tickets, future tickets and telephone account deposits. Since November 16, 2007, we have maintained a
Regulation 22.040 reserve in the amount of $3.4 million in the form of a surety bond issued by Fidelity and Deposit Company of Maryland (a subsidiary of Zurich American Insurance)
("Fidelity") secured by $1.2 million in cash deposits. The cash deposits, in the form of two certificates of deposit, are held at Great Basin Bank of Nevada (now Nevada State Bank) along
with an irrevocable letter of credit, also with Great Basin Bank of

52

---



Table of Contents

AMERICAN WAGERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED JANUARY 31, 2009 AND 2008

6. Commitments and Contingencies (Continued)

Nevada
(now Nevada State Bank). On February 22, 2008, the bond amount was decreased to $2.8 million, due to decreased handle, and still secured by $1.2 million
in deposits.

In
March 2009, the Company was notified that Fidelity will cancel its surety bond effective May 8, 2009. While we are searching for a replacement bond company, we have been
unable to secure a replacement bond with acceptable terms at this time. Therefore, the Company formalized a request to the Nevada Gaming Commission, requesting a lower reserve amount of
$1.2 million with an additional $600,000 float, which was granted in April 2009. This makes our reserve amount $1.8 million until August 15, 2009, which is collateralized
by the $1.2 million in certificates of deposit held at Great Basin Bank (now Nevada State Bank). We believe that such amount will provide an adequate reserve until football season, at
which time; we may need to increase the reserve amount. If the Company is unable to locate an alternate bond with acceptable terms or if we are required to increase the
Regulation 22.040 reserve and are unable to do so, it would have an adverse impact on us including, but not limited to, requiring a significant reduction in the number of race/sports locations
operated by Leroy's, an elimination or reduction of telephone wagering accounts, resulting in an adverse change in our operating results.



Currently,
the Company is not a party in any litigation and has no knowledge of any pending material legal proceedings in any court or agency of government or governmental authority,
except as noted below. In accordance with an interpretation of SFAS No. 5,Accounting for Contingencies, the Company has recorded
provisions for probable losses equal to the lower end of the estimated probable loss range for the matters. As of January 31, 2009 and 2008, respectively, the aggregate recorded provision for
the following matters, included in long term debt, was $757,642 and $1,671,663.



The Company and Racusin entered into the Settlement Agreement on September 3, 2004. On or about March 11, 2005, the
Company consummated its Plan of Reorganization and emerged from Bankruptcy. On or about July 27, 2005, the Bankruptcy Court approved an Interpleader Order, whereby pursuant to the Settlement
Agreement, the Company agreed to place 250,000 shares of common stock with the clerk of the court as payment of the Racusin Claim while Racusin pursued its appeal of the Bankruptcy Appellate
Panel's decision in our favor to the 9th Circuit Court of Appeals. The Interpleader Order further stated that the Company's stock would be substituted with cash payment in the event that the
9th Circuit reverses the Bankruptcy Appellate Panel. The Company filed a Form 8-K on July 6, 2007, in response to the 9th Circuit's reversal of the Bankruptcy
Appellate Panel. On November 2, 2007, the Bankruptcy Court heard an argument to determine whether the Company could withdraw its 250,000 shares of common stock and whether it could begin
depositing funds pursuant to the Settlement Agreement attached to the Company's motion (the "Revised Payment Schedule"). Accordingly, we previously estimated post-judgment interest at 8%
per annum, compounded, from March 11, 2005, without taking into consideration the Interpleader Order of July 27, 2005, which was still in effect. That is, by calculating
post-judgment interest during the same time that our stock was held by the Court pursuant to the Settlement Agreement, we previously accrued interest over a period of time for which
interest should not be accrued because we were in

53

---



Table of Contents

AMERICAN WAGERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED JANUARY 31, 2009 AND 2008

6. Commitments and Contingencies (Continued)

compliance
with the terms of the Settlement Agreement pursuant to the Interpleader Order. The extra estimated interest accrued pursuant to the Racusin claim was $394,021, which was taken as an offset
to
the litigation expense in the fourth quarter of fiscal 2009. The adjustment was recorded in the fourth quarter of fiscal 2009 pursuant to the fourth quarter legal actions described below.

The
Company filed its Corrected Amortization Schedule on March 17, 2008 ("Corrected Amortization Schedule"). The Company received a letter from Racusin stating that he considered
our filing of the Corrected Amortization Schedule to be a breach of the Settlement Agreement on April 2, 2008. On October 10, 2008, Racusin moved the Court to file supplemental
pleadings, and that motion was granted on December 23, 2008. Racusin filed his Adversarial Counterclaim for Breach of the Settlement Agreement on January 14, 2009. We filed our Answer on
January 29, 2009. Racusin filed his Motion for Summary Judgment on breach of the Settlement Agreement on February 24, 2009. We filed our Opposition to the Motion for Summary Judgment on
March 16, 2009. Racusin filed his Reply to our Opposition on March 30, 2009. The hearing on the Motion for Summary Judgment is scheduled for May 8, 2009. Though we believe the
legal analysis for our position is meritorious, there can be no assurance that the Company will prevail in this matter. We have accrued $757,642 at January 31, 2009 pursuant to the
Corrected Amortization Schedule as payable under the Settlement Agreement as discussed above.



On July 17, 2008, Internet Sports International, Ltd. ("ISI") filed a complaint against three of our subsidiaries, AWI
Manufacturing, Inc. ("AWIM"), AWI Gaming, Inc. ("AWIG") and Computerized Bookmaking Systems, Inc. ("CBS"), and our General Counsel. The complaint was filed in the District Court,
Clark County, Nevada as Case No. A567638, asserting claims for breach of contract, breach of implied covenant of good faith and fair dealing, intentional and negligent interference with prospective
economic advantage, andquantum meruit. The claims arise out of agreements with plaintiff to jointly develop an upright kiosk, including an equipment
purchase agreement, software license agreement, and a marketing agreement. Plaintiff alleges that we failed to perform under, and effectively and prematurely terminated, the equipment purchase
agreement as to 100 upright kiosks. Plaintiff further alleges that it had entered into negotiations with an established customer of ours to place kiosks and plaintiff's products on the
customer's casino floor, and that we contacted the customer and terminated plaintiff's opportunity. Plaintiff seeks for (i) the recovery of actual, consequential and punitive damages, and
(ii) the recovery of attorneys' fees, costs and expenses.

On
September 15, 2008, we filed a Motion to Dismiss requesting CBS, AWIG, and General Counsel be dismissed from the proceeding for failure to state a claim upon which a remedy may
be granted. Specifically, we argued that accepting all ISI's allegations in its Complaint as true, neither CBS nor AWIG were parties to the three agreements at issue, therefore, they cannot be held
liable as a matter of law for breach of contract or breach of the implied covenant of good faith and fair dealing; that AWIM cannot as a matter of law be held liable for unjust enrichment since AWIM
was a party to the agreements at issue and unjust enrichment only applies to redress injuries caused by non-parties; that CBS, AWIG, and General Counsel cannot be liable as a matter of law
for intentional interference with a prospective economic advantage since none were parties to the agreements at issue; that none of the defendants could be liable for negligent interference with a
prospective business advantage since

54

---



Table of Contents

AMERICAN WAGERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED JANUARY 31, 2009 AND 2008

6. Commitments and Contingencies (Continued)

Nevada
expressly has chosen not to recognize this cause of action; and that CBS and AWIG cannot be liable as a matter of law for unjust enrichment since neither were parties to the agreements
at issue.

On
October 29, 2008, the Court heard oral arguments on the Motion to Dismiss. Our Motion to Dismiss was filed under NRCP 12(b), but the Court made its ruling under the legal
standard for a Motion for Summary Judgment filed under NRCP 56 because evidence outside of ISI's Complaint was considered. The Court (i) granted summary judgment and dismissed CBS and
AWIG from the breach of contract and breach of the implied covenant of good faith and fair dealing; (ii) granted summary judgment and dismissed the claim of unjust enrichment against AWIM;
(iii) granted summary judgment and dismissed the claim of negligent interference with a prospective business advantage against all defendants; (iv) denied summary judgment and refused to
dismiss the claim of intentional interference with a prospective business advantage against CBS, AWIG, and General Counsel; (v) denied summary judgment and refused to dismiss the claim of
quantum meruit against CBS and AWIG; and (vi) denied summary judgment and refused to dismiss the claim of unjust enrichment against CBS and AWIG.

The
Court's Order was entered on December 8, 2008. On December 29, 2008, the Defendants filed their answer, affirmative defenses and counter-claims for abuse of process,
breach of contract, breach of the implied covenant of good faith and fair dealing, accounting, rescission, and violation of relevant provisions of the Nevada Revised Statutes.

The
case is pending in arbitration. Discovery has not begun. We will defend this case vigorously and believe there is no accruable loss at this time.



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

2010

2011

2012

2013

2014Sports book locations

$
996,175

$
975,700

$
575,950

$
303,300

$
121,800Office equipment and vehicles


52,969


48,680


31,177


13,884


Building rent


355,729











Total

$
1,404,873

$
1,024,380

$
607,127

$
317,184

$
121,800


Rent
expense for all operating leases was $1,771,428 and $1,740,964 during the fiscal years ended January 31, 2009 and 2008, respectively.



The
Company has employment agreements with the following executive officers:

Victor J. Salerno:Mr. Salerno's employment agreement was effective July 1, 2002 with automatic renewals for
successive
five-year terms as of January 31, 2008. The agreement provides an annual base salary of $240,000. However, Mr. Salerno agreed to temporarily reduce his annual base salary in
an

55

---



Table of Contents

AMERICAN WAGERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED JANUARY 31, 2009 AND 2008

6. Commitments and Contingencies (Continued)

amount
sufficient to cover payroll deductions for benefits, effective November 24, 2008. He is entitled to an annual performance bonus equal to 5% of our pre-tax earnings
(as defined in his agreement) for the prior fiscal year, employer contributions to a profit-sharing or retirement plan of not less than 4% of his base salary, health and life insurance
coverage, and use of an automobile that we provide for him. Mr. Salerno's agreement also entitles him to certain benefits if he is terminated without cause or if his employment terminates
within 24 months after a change in control of AWI.

Bruce Dewing:Mr. Dewing's employment agreement was effective on July 1, 2005 with automatic renewals for successive
three-year terms on January 31, 2008. The agreement provides an annual base salary of $180,000. However, Mr. Dewing agreed to temporarily reduce his annual base salary by
20%, effective October 3, 2008. He is entitled to a performance bonus each year equal to 2% of our pre-tax earnings (as defined in his agreement) for the prior fiscal
year, employer contributions to a profit-sharing or retirement plan of not less than 4% of his base salary, health insurance coverage for him and his wife, use of an automobile that we provide for
him, and options to purchase 250,000 shares of our common stock under a five-year vesting schedule. Mr. Dewing's agreement also entitles him to certain benefits if he is
terminated without cause or if his employment terminates within 24 months after a change in control of AWI.

Melody Sullivan:Ms. Sullivan's employment agreement was effective on August 6, 2007, expiring on August 6, 2009.
The agreement
provides an annual base salary of $180,000 with an annual performance bonus of 1% of Consolidated Income Before Income Taxes. However, Ms. Sullivan agreed to temporarily reduce her annual base
salary by 20%, effective January 3, 2009. Ms. Sullivan also received non-qualified stock options of 30,000 shares upon hire with one-third vesting
on each anniversary of her hiring date, at an exercise price equal to the closing market price of the Company's stock on her hire date. Along with other standard employee benefits, the Company will
pay one-time only, the employer paid matching amount of 4% for her 401(k) contributions for the first year, since she is not otherwise eligible to participate for one year.
Ms. Sullivan's agreement also entitles her to certain benefits if she is terminated without cause.

The
following table summarizes our long-term employment commitments through the existing terms of the agreements. This table considers only base salary (based on the stated
contract amount) and retirement plan contributions; it does not consider automatic renewals, temporary salary reductions (as discussed herein), annual increases in base salary, value of health and/or
life insurance, value of automobile allowance or performance bonus payments as such factors are variable from year-to-year.

Fiscal Year Ending January 31,

Base Salary

Retirement
Plan

Total2009

$
600,000

$
12,255

$
612,2552010

$
600,000

$
24,000

$
624,000


56

---



Table of Contents

AMERICAN WAGERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED JANUARY 31, 2009 AND 2008

7. Related Party Transactions

The Company has engaged in the following related-party transactions during the years ended January 31, 2009 and 2008:

On
November 8, 2007, the Board of Directors approved and authorized Victor and Terina Salerno to borrow $400,000 for the benefit of the Company pursuant to a line of credit under
the terms of a Guaranty Agreement with AWI. The Guaranty Agreement provides for AWI to pay the Salernos
interest at the rate of 10.0% per annum (payable monthly) on the outstanding portion of the loan (up to a maximum of $500,000) and to reimburse them for finance charges, fees, payments and
other expenses they may incur under a personal revolving line of credit with their bank. This current line of credit expires in November 2010. The Guaranty Agreement expires on
February 16, 2011. The personal line of credit is secured by the Salerno's residence and provides for an interest rate of 0.5% below the prime rate published by the Wall Street Journal,
adjusted annually. The outstanding balance of this line of credit was $1,000,000 and $380,773 at January 31, 2009 and 2008, respectively. The Company paid principal and interest payments
totaling $63,630 in fiscal 2009 and $25,814 in fiscal 2008 and paid interest only payments of $3,839 per month in fiscal 2009. In February 2008, an additional $80,000 was also borrowed by the
Company against this line of credit. Smaller amounts were loaned to the Company by Mr. Salerno during fiscal 2008, totaling $20,000. The payments described above take into consideration
the additional borrowings.

On
December 1, 2008, Mr. Salerno, loaned the Company an additional $500,000 to fund urgent cash flow needs of the Company. Due to the urgency, the funds were advanced on an
expedited basis without formal board approval as reported in the Company's Form 10-Q for the quarter ended October 31, 2008. The independent directors of the Company
considered and approved the fairness of a proposed amendment to the original loan agreement to cover the total $1,000,000 that has been loaned by Mr. Salerno at the same terms. The total
$1,000,000 is to be repaid with interest only payments through fiscal 2010, and principal payments of $362,615 plus interest in fiscal 2011 and the remainder in fiscal 2012.

Additionally,
Mr. Salerno's personal residence secures the U.S. Bank term loan for $500,000, effective March 30, 2009.

Related
party interest expense recorded for fiscal 2009 and 2008 was $63,630 and $9,020, respectively.

57

---



Table of Contents

AMERICAN WAGERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED JANUARY 31, 2009 AND 2008

8. Income Taxes

The tax effect of significant temporary differences representing deferred tax assets and liabilities for the Company as of January 31, 2009 and 2008 is as follows:

2009

2008Deferred tax assets:Net operating loss carryforward

$
2,396,049

$
1,975,413Deferred gain on sale and leaseback of asset


97,910


209,294Accrued expenses


205,503


350,819Other


46,360


39,2282,745,822


2,574,754Valuation allowance


(2,241,817
)

(1,931,193
)504,005


643,561Deferred tax liabilities:Depreciation and amortization


(50,169
)

(95,815
)Advance payments


(84,836
)

(107,265
)Net deferred tax assets

$
369,000

$
440,481


The
difference between the normal federal statutory tax rate of 34.00% applied to loss from continuing operations before income taxes and the Company's effective tax rate is:

2009

2008Income tax expense (benefit) at federal statutory rate

$
(315,555
)
$
(259,764
)Non-deductible expenses


44,441


51,460Other


31,971


(23,112
)Increase in deferred tax valuation allowances


310,624


231,416$
71,481

$



At
January 31, 2009, the Company had federal tax net operating loss ("NOL") carryforwards available to potentially reduce future tax obligations in the aggregate
amount of approximately $7.0 million; of which approximately $1.3 million is expected to expire in 2019. In assessing the realizability of deferred tax assets, the Company considers
whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become deductible. Management believes that the Company will be profitable for at least the short-term future and
that it is therefore more likely than not that our net deferred tax asset of $369,000, which resulted primarily from NOLs, will be fully realized. The determination of profitability in the future is
partially based on the market penetration of our kiosks and potential systems sales; implementation of cost reductions; our sports betting volumes and other factors. We additionally believe
that we will be sufficiently profitable for the short-term future, and it is therefore more likely than not that $369,000 of our net deferred tax asset, which resulted primarily from net
loss carryforwards, will be realized.

58

---



Table of Contents

AMERICAN WAGERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED JANUARY 31, 2009 AND 2008

9. Business Segments

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

Wagering Segment

The following table indicates the primary components of revenue and operating costs resulting in this segment's operating
income (loss).

Year Ended January 31,2009

2008Revenue

$
9,115,501

$
12,085,243Direct Costs


8,576,477


10,184,125Selling, General and Administrative


1,296,523


1,638,263Depreciation and Amortization


320,308


274,04410,193,308


12,096,432Operating Loss

$
(1,077,807
)
$
(11,189
)


Hotel/Casino Segment

The following table indicates the primary components of revenue and operating costs resulting in this segment's operating income.

Year Ended January 31,2009

2008Revenue:Casino

$
1,289,800

$
1,383,654Hotel


587,827


670,980Food/Beverage


916,027


1,068,699Less: Casino Cash Incentives and Other Promotional Allowances


(116,010
)

(140,723
)2,677,644


2,982,610Direct Costs and Expenses:Casino


564,807


667,300Hotel


197,461


232,965Food/Beverage


863,323


986,791Unallocated


435,043


437,9472,060,634


2,325,003Selling, General and Administrative


303,666


374,031Depreciation and Amortization


277,908


254,8582,642,208


2,953,892Operating Income

$
35,436

$
28,718


59

---



Table of Contents

AMERICAN WAGERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED JANUARY 31, 2009 AND 2008

9. Business Segments (Continued)

Systems Segment

The following table indicates the primary components of revenue and operating costs resulting in this segment's operating loss.

Year Ended January 31,2009

2008Revenue

$
3,695,255

$
3,664,502Direct Costs


1,113,187


1,389,255Research and Development


591,121


952,163Selling, General and Administrative


1,632,377


1,613,082Depreciation and Amortization


429,335


408,4563,766,020


4,362,956Operating Loss

$
(70,765
)
$
(698,454
)


Operating Income (Loss) to Net Loss

The following table reconciles the operating income (loss) from each segment to income before taxes.

Year Ended January 31,2009

2008Operating Income (Loss)Wagering

$
(1,077,807
)
$
(11,189
)Hotel/Casino


35,436


28,718Systems


(70,765
)

(698,454
)(1,113,136
)

(680,925
)Other Income (Expense)Interest Income


45,835


101,135Interest Expense


(273,215
)

(280,276
)Litigation Income (Expense)


299,847


(67,213
)Other


112,566


163,266185,033


(83,088
)Net Loss Before Taxes

$
(928,103
)
$
(764,013
)


60

---



Table of Contents

AMERICAN WAGERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED JANUARY 31, 2009 AND 2008

9. Business Segments (Continued)

Other Information

Other information regarding the Wagering Segment, Hotel/Casino Segment, and Systems Segment and certain other unallocated items are set
forth below.

2009

2008Capital ExpendituresWagering

$
216,720

$
425,008Hotel/Casino


20,982


372,503Systems


99,685


420,206Unallocated


1,530


56,268$
338,917

$
1,273,985Identifiable Property(1)Wagering

$
1,000,296

$
1,077,100Hotel/Casino


2,026,225


2,275,062Systems


1,569,586


1,824,206$
4,596,107

$
5,176,368






61

---



Table of Contents

AMERICAN WAGERING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

YEARS ENDED JANUARY 31, 2009 AND 2008



10. Additional Supplementary Cash Flow Information

The reconciliation of net loss to net cash provided by (used in) operating activities is as follows:

2009

2008Net loss

$
(999,584
)
$
(764,013
)Depreciation and amortization of property and equipment


1,013,679


937,358Amortization of deferred gain on sale/leaseback


(327,600
)

(327,600
)Other amortization


14,120


31,746SFAS 123(R) stock based compensation


62,573


124,829Bad debt expense


(2,835
)

2,835Non-cash contributed services


52,085


Non-cash litigation judgment Racusin


(394,021
)

Increase in deferred tax asset net of valuation allowance


71,481


Decrease (increase) in operating assets:Accounts receivable


128,716


371,875Inventories


224,038


(86,309
)Prepaid expenses


117,146


76,694Other current assets


(46,150
)

73,058Increase (decrease) in operating liabilities:Accounts payable


136,102


266,818Accrued expenses


(151,956
)

(331,624
)Principal payments on Racusin litigation judgment


(520,000
)

(1,010,711
)Unpaid winning tickets


(207,482
)

203,009Customer deposits and other current liabilities


614,333


669,982Net cash provided by (used in) operating activities

$
(215,355
)
$
237,947


11. Financial Instruments

The Company's financial instruments consist of cash and cash equivalents, restricted cash, accounts and notes receivable, accounts payable, unpaid winning tickets, advance deposits, and
long-term debt. The Company's cash equivalents are short-term and diversified among security types and issuers, and their costs approximate estimated fair values. The fair values of other
financial instruments that are also short-term and have little or no interest rate risk have
estimated fair values equal to their historical cost carrying value. Management believes the estimated fair values of notes receivable and long-term liabilities are also not materially
different from their historical cost carrying values due to the instruments' interest rates approximating market rates for similar borrowings at January 31, 2009 and 2008.

62

---





Table of Contents

Item 9.    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.

Item 9A(T).    Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of January 31, 2009. We determined that
our disclosure controls and procedures, specifically with respect to a late Form 8-K filed on February 29, 2008 (which should have been filed on or before February 13,
2008) and a late Form 8-K filed on April 29, 2009 (which should have been filed on or before April 2, 2009), were not effective. Management has implemented a procedure requiring
that any material agreement or amendment thereto be submitted to and reviewed by our Chief Financial Officer and in-house counsel prior to execution thereof.

Changes in Internal Control over Financial Reporting

Other than described below, there have been no changes in the Company's internal control over financial reporting during the most
recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect, the Company's internal control over financial reporting.

In
our Form 10-KSB for the fiscal year ended January 31, 2008, the Company reported efforts made to remediate the material weaknesses and the ineffectiveness of
the Company's disclosure controls and procedures that had been reported in the prior fiscal year 2007.

We
believe we have continued to improve the Company's disclosure controls and procedures for this fiscal year ended January 31, 2009. Since we have had two late Form 8-K
filings, we need to increase our efforts for complete and effective communication to allow timely required disclosure.

Management's Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we
conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework inInternal ControlIntegrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes
those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
Company; (b) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with generally accepted accounting
principles and that receipts and expenditures of the Company are being made only in accordance with authorizations of the management and directors; and (c) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements. In the course of this
evaluation and in accordance with Section 302 of the Sarbanes Oxley Act of 2002, we sought to identify material weaknesses in our controls, to determine whether we had identified any acts of
fraud involving personnel who have a significant role in our internal control over financial reporting that would have a

63

---



Table of Contents

material
effect on our consolidated financial statements, and to confirm that any necessary corrective action, including process improvements, were being undertaken.

Based
on our evaluation under the framework inInternal ControlIntegrated Framework, our management concluded that our
internal control over financial reporting was effective as of January 31, 2009.

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

Item 9B.    Other Information

None.

64

---





Table of Contents

PART III

Item 10.    Directors, Executive Officers and Corporate Governance

Our directors and executive officers are as follows:

Name

Age

PositionVictor J. Salerno


65

President, CEO, COO, and Chairman of the BoardMelody Sullivan


52

Chief Financial Officer and TreasurerRobert R. Barengo


67

DirectorW. Larry Swecker


64

DirectorJudith L. Zimbelmann


57

DirectorBruce Dewing


59

Director and President of AWIG


Victor
J. Salerno has been our President, CEO, COO, and Chairman of the Board since our inception. Mr. Salerno has been the President, CEO and a Director of Leroy's since
September 1979. Mr. Salerno served as an Executive Vice-President and Director of Autotote CBS Corporation (subsequently purchased by us and renamed Computerized Bookmaking
Systems, Inc.). He is a past President of the Nevada Association of Race and Sports Operators.

Melody
Sullivan, a Certified Management Accountant, has been our Chief Financial Officer since August 2007. Prior to joining the Company, Ms. Sullivan worked for a year as
an independent consultant specializing in SEC reporting, accounting, finance and Sarbanes-Oxley compliance requirements for the Company and another publicly-traded gaming company in Las
Vegas, NV. Prior to her consulting work, Ms. Sullivan served in several senior financial management positions including CFO of Gaming Partners International Corporation, a publicly held,
international gaming supply company, from December 2002 until August 2006.

Robert
R. Barengo became a Director in July 2005, and previously served on our Board of Directors from 1992 to 2000. Mr. Barengo has owned and operated his own law practice for
over 30 years during which he has handled, among other matters, general business, municipal finance, bonding, investment banking, government and administration law, and gaming law.
Mr. Barengo has extensive elected office and legislative experience as a Nevada Assemblyman (1972-1982) where he served on various committees including Interim Finance, Ways and
Means, Commerce and Judiciary; Chairman of the Judiciary Committee (1973-1979); Speaker Pro Tempore (1978-1981); Chairman of the Legislative Commission (1981-1983);
Speaker of the Assembly (1981-1983); and Judge Pro-Tem for the City of Sparks Municipal Court and the City of Reno Municipal Court (1976-1995). Mr. Barengo
also served on the Board of Directors of Riviera Holdings Corporation, a publicly reporting company, from 1992 to April 2005 and also served as that company's Director of Government and Public
Affairs from January 2001 to April 2005. Mr. Barengo also served as President of Columbia Trust Company from 2004 to 2008. Mr. Barengo serves as Chairman of the audit
committee.

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

Judith
L. Zimbelmann became a Director in January 2001 and serves on the audit committee and the compensation committee. Ms. Zimbelmann is the daughter of Leroy Merillat,
the founder of Leroy's Horse & Sports Place, and was formerly married to Victor Salerno. Ms. Zimbelmann is a

65

---



Table of Contents

private
investor with numerous holdings and is a member and officer of UV Doctor, LLC (which provides ultra-violet lighting for sterilization).

Bruce
Dewing became a Director in July 2003 and President of AWIG in July 2005. Mr. Dewing has over thirty years of progressive experience in hotel/casino senior
level management positions. Mr. Dewing was formerly the President of the Holder Hospitality Group, Inc. where he oversaw the daily operations of five casinos, an AM radio station, a
statewide (Nevada) slot route, several event companies and over 1,500 executives and employees. Mr. Dewing is a founding member of the Air Service Task Force for Washoe County (Nevada)
Airport Authority, a member of the Advisory Board to Washoe Airport Authority, a Board member of the Reno Air Race Association, and a Board member of the Nevada Hotel and Lodging Association.
Mr. Dewing is currently chairman of the Pershing County Tourism Board. In July 2008, Mr. Dewing was appointed to the Nevada Commission on Tourism.

Licensing

Pursuant to Nevada gaming regulations/statutes and the status of Leroy's, AWIM, AWIG and Sturgeon's as gaming licensees, officers and
directors of Leroy's, AWIM, AWIG and Sturgeon's must be investigated and licensed by the Commission, a process that may be both lengthy and expensive. AWI and CBS are not licensees and therefore, the
officers and directors of AWI and CBS must also be investigated and found "suitable" according to the Nevada gaming regulations and statutes. Victor Salerno is licensed by the Commission to be an
officer and director of Leroy's, AWIM, AWIG and Sturgeon's and has been found suitable as an officer and director of AWI and CBS. Bruce Dewing is licensed by the Commission to be an officer and
director of AWIG and Sturgeon's. Robert Barengo has been found suitable as a director of AWI and CBS. Judith Zimbelmann has been found suitable by the Commission to be a director of AWI and CBS and is
licensed by the Commission to be an officer of Leroy's, AWIM, AWIG, and Sturgeons. Melody Sullivan is licensed by the Commission to be an officer of Leroy's, AWIM, AWIG and Sturgeon's and has been
found suitable to be an officer of AWI and CBS. John Salerno is licensed by the Commission to be an officer of Leroy's,
AWIM, AWIG and Sturgeon's and has been found suitable to be an officer of AWI and CBS and licensed as a director of AWIG.

Involvement in Certain Legal Proceedings

To the best of our knowledge, during the past five years, none of the following occurred with respect to our directors or executive
officers: (1) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years
prior to that time (with the exception of the Chapter 11 proceedings for AWI and Leroy's, during which Victor Salerno held his positions with us); (2) any conviction in a criminal
proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) being subject to any order, judgment or decree, not subsequently
reversed, suspended or vacated, of any court of any competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his or her involvement in any type of
business, securities or banking activities; and (4) being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodities Futures Trading Commission to have
violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.

Audit Committee

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

66

---



Table of Contents

Audit Committee Financial Expert

Our Board of Directors has determined that a member of our audit committee, W. Larry Swecker, who meets the audit committee
independence criteria prescribed by NASDAQ, qualifies as an audit committee financial expert under the applicable rules of the SEC.
Mr. Swecker's qualifications include, among other things, his practice as a certified public accountant for the past 30 years.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our directors and executive officers and persons who beneficially own more than 10%
of our common stock to file with the SEC certain reports regarding their stock ownership ("Section 16(a) Reports"). Such persons are required to furnish us with copies of all
Section 16(a) Reports they file. Based solely on our review of such reports (and amendments thereto) that were furnished to us and written representations made to us by reporting persons
in connection with certain of these reporting requirements, we believe that all the reporting persons met their Section 16(a) reporting obligations on a timely basis during our last fiscal
year, except as follows: Additionally, Mr. Barengo's and Mr. Swecker's Form 4 filing to report the annual grant of their stock options as of January 31, 2008 were also
filed late on May 9, 2008.

Code of Ethics

We have adopted, and have filed with the SEC, a Code of Ethics for Financial Executives, which include our principal executive officer,
principal financial officer, principal accounting officer or controller, or persons performing similar functions.

Item 11.    Executive Compensation

The following table summarizes the compensation for the periods indicated of our Chief Executive Officer and the two most highly
compensated executive officers who served as executive officers as of January 31, 2009.

Summary Compensation Table

Name and
principal
position

Year
Ended
01/31

Salary

Bonus

Stock
Awards

Option
Awards
(4)

Non-equity
incentive
plan
compensation
(5)

Non-qualified
deferred
compensation
earnings

All other
compensation
(6)

Total(a)

(b)

(c)

(d)

(e)

(f)

(g)

(h)

(i)

(j)Victor Salerno,


2009

$
203,689
(1)






$


$





$
15,598

$
219,287CEO, COO,
President


2008

$
240,000
(1)






$
9,542

$
91,535




$
18,147

$
359,224Melody Sullivan,


2009

$
178,615
(2)






$
5,373







$
1,662
(6)
$
185,650CFO and Treasurer


2008

$
135,435
(2)
$
1,000




$
2,613







$
3,323
(6)
$
142,371Bruce Dewing,


2009

$
168,923
(3)






$
43,610







$
11,793

$
224,326Director of AWI
and President of AWIG


2008

$
180,000
(3)






$
73,451

$
36,614




$
12,780

$
302,845


---

67

---



Table of Contents



Employment Agreements

We have the following employment agreements with the following executive officers;

Victor Salerno:Mr. Salerno's employment agreement became effective on July 1, 2002 with the initial term expiring on
January 31, 2008. The employment agreement automatically renewed for successive five-year terms as of January 31, 2008. The agreement provides that Mr. Salerno may
resign without cause upon 30 days' written notice to us. The agreement provides an annual base salary of $240,000, which is subject to annual review. However, Mr. Salerno agreed to
temporarily reduce his annual base salary in an amount sufficient to cover payroll deductions for benefits, effective November 24, 2008. In addition, Mr. Salerno is entitled to an
annual performance bonus equal to 5% of our pre-tax earnings (as defined in his agreement) for the prior fiscal year, employer contributions to a profit-sharing or retirement plan
of not less than 4% of his base salary, health and life insurance coverage, and use of an automobile that we provide for him. Mr. Salerno is also entitled to participate in our benefit plans
available to our officers and employees generally. If the Company terminates Mr. Salerno's employment without cause, he is entitled to an amount equal to five times his base salary at the rate
in effect at the time of his termination, any bonus awarded but not yet paid, reimbursement for expenses incurred but not paid prior to the termination, continuation of Company provided health
benefits and participation in the Company's long-term disability insurance for a period of 60 months following the termination (or the economic equivalent thereof), and such rights
to other benefits as may be provided in applicable plans and programs of the Company, including, without limitation, applicable employee benefit plans and programs, according to the terms and
conditions of such plans and programs. Mr. Salerno's agreement also entitles him to certain benefits if his employment

68

---



Table of Contents

terminates
within 24 months after a change in control of AWI, as described below under "Payments in the Event of a Change in Control."

Bruce Dewing:Mr. Dewing's employment agreement became effective on July 1, 2005 with the initial term expiring on
January 31,
2008. The employment agreement automatically renewed for successive three-year terms on January 31, 2008. The agreement provides that Mr. Dewing may resign without cause upon
30 days' written notice to us. The agreement provides an annual base salary of $180,000, which is subject to annual review. However, Mr. Dewing agreed to temporarily reduce his annual
base salary by 20%, effective October 3, 2008. In addition, Mr. Dewing is entitled to a performance bonus each year equal to 2% of our pre-tax earnings (as defined in
his agreement) for the prior fiscal year, employer contributions to a profit-sharing or retirement plan of not less than 4% of his base salary, health insurance coverage for him and his wife, use of
an automobile that we provide for him, and options to purchase 250,000 shares of our common stock under a five-year vesting schedule. Mr. Dewing is also entitled to
participate in our benefit plans available to our officers and employees generally. If the Company terminates Mr. Dewing's employment without cause, he is entitled to an amount equal to three
times his base salary at the rate in effect at the time of his termination, any bonus awarded but not yet paid, reimbursement for expenses incurred but not paid prior to the termination, continuation
of Company provided health benefits and participation in the Company's long-term disability insurance for a period of 30 months following the termination (or the economic equivalent
thereof), and such rights to other benefits as may be provided in applicable plans and programs of the Company, including, without limitation, applicable employee benefit plans and programs, according
to the terms and conditions of such plans and programs. Mr. Dewing's agreement also entitles him to certain benefits if his
employment terminates within 24 months after a change in control of AWI, as described below under "Payments in the Event of a Change in Control."

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

Melody Sullivan:Ms. Sullivan's employment agreement became effective on August 6, 2007 and the initial term expires on
August 6, 2009. The agreement provides an annual base salary of $180,000 with an annual performance bonus of 1% of Consolidated Income Before Income Taxes. However, Ms. Sullivan agreed
to temporarily reduce her annual base salary by 20%, effective January 3, 2009. Ms. Sullivan also received non-qualified stock options of 30,000 shares upon
hire with one-third vesting on each anniversary of her hiring date, at an exercise price equal to the closing market price of the Company's stock on her hire date. Along with other
standard employee benefits, the Company will pay one-time only, the employer paid matching amount of 4% for her 401(k) contributions for the first year, since she is not otherwise eligible
to participate for one year. If the Company terminates Ms. Sullivan's employment without cause during the term of the employment agreement and she provides the Company with a separation
agreement and release, she will receive the payout of her base salary through the term of the employment agreement, six months' severance pay, continuation of Company-provided health insurance for six
months, any bonuses awarded but not previously paid and immediate vesting and exercisability of stock options, in addition to compensation earned through the date of termination.

The
following table summarizes our long-term employment commitments through the existing terms of the agreements. For fiscal 2010, 401(k) amounts are assumed to be the
maximum allowable per the agreements of 4%. This table considers only base salary (based on the stated contract amount) and retirement plan contributions, including those made to Melody Sullivan,
pursuant to her employment agreement; it does not consider automatic renewals, temporary salary reductions (as

69

---



Table of Contents

discussed
herein) annual increases in base salary, value of health and/or life insurance, value of automobile allowance or performance bonus payments as such factors are variable from
year-to-year.

Fiscal Year Ending January 31,

Base Salary

Retirement
Plan

Total2009

$
600,000

$
12,255

$
612,2552010

$
600,000

$
24,000

$
624,000


The
following table provides information concerning executive officers' unexercised stock options as of January 31, 2009.

Outstanding Equity Awards at Fiscal Year-End

Option awardsName

Number of
securities
underlying
unexercised
options
# exercisable(1)

Number of
securities
underlying
unexercised
options
# unexercisable(1)

Equity
incentive
plan awards:
Number of
securities
underlying
unearned
options
#

Option
exercise
price
$

Option
expiration
date(a)

(b)

(c)

(d)

(e)

(f)Victor J. Salerno


50,000







$
2.00


08/31/2012Bruce Dewing


200,000


50,000




$
1.80


06/10/2015Bruce Dewing


400







$
0.15


01/31/2014Bruce Dewing


400







$
0.55


01/31/2015Melody Sullivan


10,000


20,000




$
0.96


08/06/2017






Payments in the Event of a Change in Control

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

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

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

70

---



Table of Contents

In
addition, Ms. Sullivan's employment agreement provides that if she resigns for Good Reason other than due to a Change of Control (as those terms are defined in her
employment agreement), she will receive the payout of her base salary through the term of the employment agreement, 12 months' severance pay, continuation of Company-provided health insurance
for 12 months, any bonuses awarded but not previously paid and immediate vesting and exercisability of stock options, in addition to compensation earned through the date of resignation. If
Ms. Sullivan resigns for Good Reason due to a Change of Control, she will receive the greater of (i) her compensation for the remainder of the employment agreement term or
(ii) 12 months' severance pay, along with a pro rata share of bonus and vested and unvested stock options.

Compensation of Directors

Directors who are not our employees or consultants receive a fee of $1,000 per month plus travel expenses. In addition, each Committee
Chairman (audit committee, compensation committee, etc.) receives an additional $1,000 per month for each committee chaired. Mr. Swecker and Mr. Barengo agreed to forego director fees in
the amount of $6,000 each since November 2008, for the best interests of the financial health and well-being of the Company. The following table summarizes the compensation paid to
the directors for the fiscal year ended January 31, 2009.

Director Compensation

Name

Fees
Earned or
Paid in
Cash
$

Stock
Awards
$

Option
Awards
$

Non-Equity
Incentive
Plan
Compensation
$

Non-qualified
Deferred
Compensation
Earnings
$

All
Other
Compensation
$

Total
$(a)

(b)

(c)

(d)

(e)

(f)

(g)

Sum (b-g)W. Larry Swecker

$
18,000
















$
18,000Robert R. Barengo

$
18,000
















$
18,000


---

71

---



Table of Contents

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

Date

Granted To

Number of Shares



Terms08/09/2001

Victor J. Salerno


30,000


(1)

$0.70 exercise price per share; became fully exercisable on August 9, 2001; exercised on August 8, 200608/09/2001

Judith L. Zimbelmann


1,200


(1)

$0.60 exercise price per share; became fully exercisable on August 9, 2001; exercised on August 3, 200601/31/2002

W. Larry Swecker


400


(2)

$0.35 exercise price per share; became fully exercisable on January 31, 2003; expires on January 31, 201201/31/2003

W. Larry Swecker


400


(2)

$0.12 exercise price per share; became fully exercisable on January 31, 2004; expires on January 31, 201301/31/2004

W. Larry Swecker


400


(2)

$0.15 exercise price per share; became fully exercisable January 31, 2005; expires on January 31, 201401/31/2004

Bruce Dewing


400


(2)

$0.15 exercise price per share; became fully exercisable on January 31, 2005; expires on January 31, 201401/31/2005

W. Larry Swecker


400


(2)

$0.55 exercise price per share; became fully exercisable on January 31, 2006; expires on January 31, 201501/31/2005

Bruce Dewing


400


(2)

$0.55 exercise price per share; became fully exercisable on January 31, 2006; expires on January 31, 201507/11/2005

Bruce Dewing


250,000


(1)

$1.80 exercise price per share; fully exercisable over a 5-year vesting schedule (20% per year commencing June 10, 2006); expires on June 10, 201508/31/2005

Robert R. Barengo


3,800


(2)

$2.00 exercise price per share; fully exercisable over a 2-year vesting schedule (50% per year commencing August 31, 2006); expires on August 31, 201508/31/2005

Victor J. Salerno


50,000


(1)

$2.00 exercise price per share; fully exercisable over a 2-year vesting schedule (50% per year commencing August 31, 2006); expires on August 31, 201208/31/2005

W. Larry Swecker


3,800


(2)

$2.00 exercise price per share; fully exercisable over a 2-year vesting schedule (50% per year commencing August 31, 2006); expires on August 31, 2015


72

---



Table of Contents

Date

Granted To

Number of Shares



Terms08/31/2005

Judith Zimbelmann


3,000


(1)

$2.00 exercise price per share; fully exercisable over a 2-year vesting schedule (50% per year commencing August 31, 2006); expires on August 31, 201208/07/2006

Robert R. Barengo


5,000


(2)

$1.50 exercise price per share; fully exercisable over a 2-year vesting schedule (50% per year commencing August 7, 2007); expires on August 7, 201108/07/2006

W. Larry Swecker


5,000


(2)

$1.50 exercise price per share; fully exercisable over a 2-year vesting schedule (50% per year commencing August 7, 2007); expires on August 7, 201101/31/2008

Robert R. Barengo


400


(2)

$0.79 exercise price per share; fully exercisable on the first anniversary of grant date (100% on January 31, 2009); expires on January 31, 201301/31/2008

W. Larry Swecker


400


(2)

$0.79 exercise price per share; fully exercisable on the first anniversary of grant date (100% on January 31, 2009); expires on January 31, 2013


---

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table sets forth, as of April 30, 2009, the number and percentage of outstanding shares of our common stock,
which, according to information supplied to us, are beneficially owned by: (i) each person who is a beneficial owner of more than 5.00% of our outstanding common stock; (ii) each of our
directors, and named executive officers individually; and (iii) all of our current directors and executive officers as a group. Under SEC rules, a person is deemed a beneficial owner of our
common stock with respect to which he or she has or shares voting power (which includes the power to vote or to direct the voting of the security), or investment power (which includes the power to
dispose of, or to direct the disposition of, the security).

A
person is also deemed the beneficial owner of shares with respect to which he or she could obtain voting or investment power within 60 days of April 30, 2009 (such as
upon the exercise of options or warrants). The percentage of outstanding common stock represented by each named person's stock ownership assumes the exercise by that person of all stock options that
are exercisable within 60 days of April 30, 2009 but does not assume the exercise of stock options by any other persons. The percentage of outstanding common stock represented by the
stock ownership of all directors and executive officers as a group assumes the exercise by all members of that group of their respective stock options that are exercisable within 60 days of
April 30, 2009, but does not assume the exercise of options by any persons outside of that group.

73

---



Table of Contents

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

Name

Number of
Shares

Percentage of
Outstanding
SharesVictor J. Salerno(1)


2,488,054


30.42
%Judith L. Zimbelmann(2)


1,004,200


12.35
%Robert R. Barengo(3)


534,200


6.56
%W. Larry Swecker(4)


30,800


0.38
%Bruce Dewing(5)


245,600


2.95
%Melody Sullivan(6)


10,000


0.12
%All directors and executive officers as a group (six persons)(7)


4,312,854


51.26
%


---

74

---



Table of Contents

Securities authorized for issuance under equity compensation plans

The following table provides information regarding the securities underlying outstanding options and securities remaining available for
issuance under our equity compensation plans as of January 31, 2009.

Equity Compensation Plans Approved by Security Holders:

Plan Category

(a)
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights

(b)
Weighted-average
exercise price of
outstanding options,
warrants and rights

(c)
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities reflected
in column (a))Equity compensation plans approved by security holders:2001 Stock Option Plan


688,499

$
1.79


229,567Directors Stock Option Plan


20,800


1.30


19,200Equity compensation plans not approved by security holders


None


None


NoneTotal


709,299

$
1.78


248,767


Item 13.    Certain Relationships and Related Transactions, and Director Independence

Other than as set forth below, there have been no transactions since the beginning of our last fiscal year, nor are there any proposed
transactions, to which we were or are to be a party, in which any of the following persons had or is to have a direct or indirect material interest:

(a)   any
director or executive officer;

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

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

Our
policy regarding related transactions requires that any director or executive officer who has an interest in any transaction disclose the presence and the nature of the interest to
our Board of Directors prior to any approval of the transaction by our Board of Directors. The transaction may then be approved by a majority of our disinterested directors, provided that an
interested director may be counted in determining the presence of a quorum at the meeting of our Board of Directors to approve the transaction. Our policy regarding compensation for directors and
executive officers is that our Board of Directors may, without regard to personal interest, establish the compensation of directors for services in any capacity.

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

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

75

---





Table of Contents

In prior years, Mr. Salerno forwent his right to have his shares redeemed when we made partial, pro rata calls of Series A Preferred Stock
for redemption. Those affected shares have been classified as "Redeemable Series A Preferred Stock" in the liabilities section of our Consolidated Balance Sheet, and may be put to us by
Mr. Salerno for redemption at any time. As of January 31, 2008, the amount of Series A Preferred Stock that may be put to us by Mr. Salerno for immediate redemption
(without prior approval by our Board of Directors) is $323,800 (3,238 shares). When we and Leroy's filed Chapter 11 Petitions, this Redeemable Series A Preferred Stock became
subject to compromise under the Bankruptcy Code. (Under the Bankruptcy Code, the ordinary Series A Preferred Stock, which is classified in the equity section of our Consolidated Balance Sheet,
was not designated as subject to compromise.) Pursuant to the Plan that we and Leroy's consummated on March 11, 2005 (the "Effective Date"), the Redeemable Series A Preferred
Stock is no longer considered subject to compromise, and we will pay the redemption price in the ordinary course of business.

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

Paid

Accrued

Unpaid02/2003 through 07/2003

$
72,195

$
0

$
008/2003 through 01/2004

$
0

$
71,392

$
71,39202/2004 through 01/2005

$
0

$
142,008

$
213,40002/2005

$
0

$
10,864

$
224,26403/11/2005(1)

$
226,241

$
0

$
003/12/2005 through 01/31/2006

$
141,620

$
0

$
0Fiscal 2007

$
141,620

$
0

$
0Fiscal 2008

$
141,584

$
0

$
0Fiscal 2009

$
141,602

$
0

$
0






On
November 8, 2007, the Board of Directors approved and authorized Victor and Terina Salerno to borrow $400,000 for the benefit of the Company pursuant to a line of credit under
the terms of a Guaranty Agreement with AWI. The Guaranty Agreement provides for AWI to pay the Salernos interest at the rate of 10.0% per annum (payable monthly) on the outstanding portion of the loan
(up to a maximum of $500,000) and to reimburse them for finance charges, fees, payments and other expenses they may incur under a personal revolving line of credit with their bank. This current
line of credit expires in November 2010. The Guaranty Agreement expires on February 16, 2011. The personal line of credit is secured by the Salerno's residence and provides for an
interest rate of 0.5% below the prime rate published by the Wall Street Journal, adjusted annually. The outstanding balance of this line of credit was $380,773 at January 31, 2008. The Company
paid principal and interest payments totaling $63,630 in fiscal 2009 and $25,814 in fiscal 2008 and paid interest only payments of $3,839 per month in fiscal 2009. In February 2008, an
additional $80,000 was also borrowed by the Company against this line of credit. Smaller amounts were loaned to the Company by Mr. Salerno subsequent to February 2008, but prior to
December 31, 2008, totaling $20,000. The payments described above take into consideration the additional borrowings.

On
December 1, 2008, Mr. Salerno, loaned the Company an additional $500,000 to fund urgent cash flow needs of the Company. Due to the urgency, the funds were advanced on an
expedited basis without formal board approval as reported in the Company's Form 10-Q for the quarter ended October 31, 2008. All of the independent directors of the Company
considered and approved the fairness of a proposed amendment to the original loan agreement to cover the total $1,000,000 that has

76

---



Table of Contents

been
loaned by Mr. Salerno at the same terms. The total $1,000,000 will be repaid with interest only payments during fiscal 2009 and 2010, and principal payments of $362,615 plus interest in
fiscal 2011 and the remainder in fiscal 2012.

Additionally,
Mr. Salerno's personal residence secures the U.S. Bank term loan for $500,000, effective March 30, 2009.

We
employ on a full-time basis Terina Salerno, the wife of Victor Salerno, as our General Counsel. For our fiscal year ended January 31, 2009, her total compensation
was $92,182. Ms. Salerno agreed to temporarily reduce her annual base salary in an amount sufficient to cover payroll deductions for benefits, effective November 24, 2008.

The
contributed services expense for Victor and Terina Salerno for fiscal 2009 was $52,085.

We
employ on a full-time basis John Salerno, the son of Victor Salerno and Judith Zimbelmann, as a Vice President and gaming analyst of Leroy's. For our fiscal year ended
January 31, 2009, his total annual compensation was $70,269. John Salerno agreed to temporarily reduce his annual base salary by 20%, effective January 3, 2009.

Director Independence

We follow the director independence standards prescribed by NASDAQ. We are not listed on NASDAQ, but we are required by SEC rules to
select a standard for determining independence for disclosure purposes. As such, the members of our Board of Directors who are considered independent are Robert Barengo and W. Larry Swecker.

Under
the audit committee independence standards prescribed by NASDAQ, two of our three audit committee members, namely Robert Barengo (Chairman) and W. Larry Swecker are independent and
Judith Zimbelmann is not.

Under
the director independence standards prescribed by NASDAQ, one of our two compensation committee members, namely W. Larry Swecker, is independent and Judith Zimbelmann
is not.

Our
entire Board of Directors serves as our nominating committee.

Item 14.    Principal Accountants' Fees and Services

Our audit committee selected and our Board of Directors approved the firm of Piercy Bowler Taylor & Kern Certified Public
Accountants ("PBTK") as our independent registered public accounting firm to audit our annual consolidated financial statements and perform quarterly financial statement review services for the fiscal
year ended January 31, 2009. PBTK previously performed similar audit and review services for the years ended January 31, 2001 through January 31, 2008. PBTK's primary offices are
located at 6100 Elton Avenue, Suite 1000, Las Vegas, Nevada, 89107.

77

---



Table of Contents

Audit Committee's Pre-Approval of Engagement

Our policy is that before we engage our registered public accounting firm annually to render audit or approved non-audit
services, the engagement is reviewed and approved by our audit committee. All of our principal accountants' services for which we paid tax-related fees or other non-audit fees
for our last two fiscal years, as described below, were within the scope of the engagement that our audit committee approved before we entered into the engagement.

Total Fees.Total fees paid and accrued to PBTK are as follows:

Year Ending January 31,Service Provided

2009

2008Audit Service Fees

$
131,062

$
148,113Tax Service Fees


17,112


32,580Other Fees


21,433


21,085Total

$
169,607

$
201,778


Audit Service Fees

The aggregate fees for audit services were for the audits of our annual consolidated financial statements and review of our quarterly
consolidated financial statements for interim periods within the audit year. There were no Audit Related Services.

Tax Fees

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

Other Fees

The aggregate Other Fees were for audits of our 401(k) employee benefit plan and all regulatory compliance attestation services.

78

---





Table of Contents

PART IV

Item 15.    Exhibits, Financial Statement Schedules



Included
in Part II of this report:



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



Exhibit
Number

Description2.1*

Restated Amended Joint Plan of Reorganization of American Wagering Inc. and Leroy's Horse & Sports Place, Inc. (see Exhibit 2.1 to Form 10-KSB filed May 1, 2006, SEC File
No. 000-20685)3.1*

Amended and Restated By-Laws of American Wagering, Inc. (see Exhibit 3.1 to Form 8-K filed November 20, 2007, SEC File No. 000-20685)3.2*

Amended and Restated Articles of Incorporation of American Wagering, Inc. (see Exhibit 3.1 to Registration Statement on Form SB-2 filed December 13, 1995, SEC File No. 33-80431)3.3*

Certificate of Designations, Preferences and Rights of Series A Preferred Stock of American Wagering, Inc. (see Exhibit 3.1.1 to Form 8-K filed December 10, 1998, SEC File
No. 000-20685)10.1*(A)

American Wagering, Inc. 2001 Stock Option Plan (see Exhibit 99 to our Definitive Schedule 14A filed October 16, 2001, SEC File No. 000-20685)10.2*

Amended and Restated Guaranty Agreement dated June 8, 2006, between American Wagering, Inc. and Victor and Terina Salerno (see Exhibit 10.1 to Form 10-QSB filed June 14, 2006, SEC
File No. 000-20685)10.3*

Purchase and Sale Agreement for the acquisition of Sturgeon's Inn & Casino (see Exhibit 10.1 to Form 8-K filed June 21, 2005, SEC File No. 000-20685)10.4*

Lease Schedule No. 1 (with Options), dated July 14, 2006 by and between AWI Manufacturing Inc., American Wagering, Inc. and PDS Gaming Corporation-Nevada, and Master Lease Agreement
(see Exhibit 10.2 to Form 10-QSB filed December 26, 2006, SEC File No. 000-20685)10.5*(A)

Executive Employment Agreement between American Wagering, Inc. and Victor J. Salerno dated June 28, 2002 (see Exhibit 10.1 to Form 10-QSB filed September 14, 2005, SEC File
No. 000-20685)


79

---



Table of Contents

Exhibit
Number

Description10.6*(A)

Severance Agreement between American Wagering, Inc. and Timothy F. Lockinger dated February 9, 2007 (see Exhibit 10.6 to Form 10-KSB filed May 31, 2007, SEC File No. 000-20685)10.7*(A)

Executive Employment Agreement between American Wagering, Inc. and Bruce Dewing dated June 14, 2005 (see Exhibit 99.1 to Form 8-K filed June 15, 2005, SEC File No. 000-20685)10.8*(A)

Executive Employment Agreement between American Wagering, Inc. and Melody Sullivan, dated August 6, 2007 (See Exhibit 10.19 to Form 8-K filed August 8, 2007, SEC File No. 000-20685)10.9*(A)

Compensation terms for American Wagering, Inc. directors (see Exhibit 10.8 to Form 10-KSB filed May 1, 2006, SEC File No. 000-20685)10.10*(A)

American Wagering, Inc. Amended and Restated Directors Stock Option Plan (see Appendix A to our Definitive Proxy Statement on Schedule 14A filed November 30, 2007, SEC File
No. 000-20685)10.11*

Commercial Loan Agreement, dated February 21, 2006, between AWI Gaming, Inc. and Great Basin Bank of Nevada (see Exhibit 10.12 to Form 10-KSB filed May 31, 2007, SEC File
No. 000-20685)10.12*

Promissory Note, dated February 21, 2006, executed by AWI Gaming, Inc. in favor of Great Basin Bank of Nevada (see Exhibit 10.13 to Form 10-KSB filed May 31, 2007, SEC File
No. 000-20685)10.13*

Commercial Guaranty, dated February 21, 2006, executed by American Wagering, Inc. in favor of Great Basin Bank of Nevada (see Exhibit 10.14 to Form 10-KSB filed May 31, 2007, SEC File
No. 000-20685)10.14*

Commercial Guaranty, dated February 21, 2006, executed by Sturgeons, LLC in favor of Great Basin Bank of Nevada (see Exhibit 10.15 to Form 10-KSB filed May 31, 2007, SEC File
No. 000-20685)10.15*

Commercial Security Agreement, dated February 21, 2006, executed by AWI Gaming, Inc. in favor of Great Basin Bank of Nevada (see Exhibit 10.16 to Form 10-KSB filed May 31, 2007, SEC File
No. 000-20685)10.16*

Deed of Trust, dated February 21, 2006, among AWI Gaming, Inc., Great Basin Bank of Nevada and Western Title Company Inc. (see Exhibit 10.17 to Form 10-KSB filed May 31, 2007, SEC
File No. 000-20685)10.17*

Settlement Agreement by American Wagering, Inc., Leroy's Horse & Sports Place, Inc. and Michael Racusin d/b/a M. Racusin & Co., dated September 3, 2004 (see Exhibit 99.1
to Form 8-K filed September 7, 2004, SEC File No. 000-20685)10.18*

Corrected Amortization Schedule as filed with the U.S. Bankruptcy court on March 17, 2008 related to the Settlement Agreement by American Wagering, Inc., Leroy's Horse & Sports Place, Inc.
and Michael Racusin d/b/a M. Racusin & Co., dated September 3, 2004 (see Exhibit 10.18 to Form 10-K filed May 13, 2008, SEC File No. 000-20685)


80

---



Table of Contents

Exhibit
Number

Description10.19*

Changes in Terms Agreement, dated February 4, 2008, between AWI Gaming, Inc., and Great Basin Bank of Nevada; Commercial Guaranty, dated February 4, 2008, by American Wagering, Inc. in favor of Great
Basin Bank of Nevada; Commercial Guaranty, dated February 4, 2008, by Sturgeon's, LLC in favor of Great Basin Bank of Nevada (see Exhibit 10.19 to Form 10-K filed May 13, 2008, SEC File No. 000-20685)10.20*

Revolving Credit Agreement, dated April 17, 2008, between American Wagering, Inc. and U.S. Bank, N.A.; Addendum to Revolving Credit Agreement and Note, dated April 17, 2008, between American
Wagering, Inc. and U.S. Bank, N.A.; Revolving Credit Note, dated April 17, 2008, by American Wagering, Inc. in favor of U.S. Bank, N.A. (see Exhibit 10.20 to Form 10-K filed May 13, 2008, SEC File
No. 000-20685)10.21*

Line of Credit Confirmation Letter, dated April 21, 2008, between Victor and Terina Salerno and AWI, under the terms of the Guaranty Agreement dated June 8, 2006, with Loan Amortization Schedule (see
Exhibit 10.21 to Form 10-K filed May 13, 2008, SEC File No. 000-20685)10.22*

Change in Terms Agreement, dated May 5, 2008, between AWI Gaming, Inc., and Great Basin Bank of Nevada (see Exhibit 10.1 to Form 10-Q filed June 13, 2008, SEC File No. 000-20685)10.23*

Commercial Guaranty, dated May 5, 2008, by Sturgeon's, LLC in favor of Great Basin Bank of Nevada (see Exhibit 10.2 to Form 10-Q filed June 13, 2008, SEC File No. 000-20685)10.24*

Commercial Guaranty, dated May 5, 2008, by American Wagering, Inc. in favor of Great Basin Bank of Nevada (see Exhibit 10.3 to Form 10-Q filed June 13, 2008, SEC File No. 000-20685)10.25*(A)

Amendment to Bruce Dewing Employment Agreement (described in registrant's Form 8-K filed on October 9, 2008, SEC File No. 000-20685)10.26*

Loan Agreement from Victor Salerno (described in registrant's Form 8-K filed on December 15, 2008, SEC File No. 000-20685)10.27*(A)

Amendment to Executive Employment Agreement of Victor Salerno (described in registrant's Form 8-K filed on December 15, 2008, SEC File No. 000-20685)10.28*(A)

Amendment to Executive Employment Agreement of Melody Sullivan (described in registrant's Form 8-K filed on December 15, 2008, SEC File No. 000-20685)10.29*

Amendment to Loan Agreement and Note executed January 21, 2009 (to be effective as of December 31, 2008) between American Wagering Inc. and U.S. Bank N.A. (see Exhibit 10.1 to Form 8-K filed
on January 26, 2009, SEC File No. 000-20685)10.30*

Deed of Trust, Security Agreement and Assignment of Rents and Leases (Including Fixture Filing Under Uniform Commercial Code) dated as of December 31, 2008 and made by the Victor John Salerno Separate Property
Trust dated December 11, 2001 to U.S. Bank Trust Company, N.A., as trustee, for the benefit of U.S. Bank, N.A., and related documents (see Exhibit 10.2 to Form 8-K filed on January 26, 2009, SEC File No. 000-20685)10.31*

Continuing Guaranty dated April 17, 2008 by Victor J. and Terina M. Salerno, as guarantors, for the benefit of U.S. Bank, N.A. (see Exhibit 10.3 to Form 8-K filed on January 26, 2009, SEC File
No. 000-20685)


81

---



Table of Contents

Exhibit
Number

Description10.32*

Term Loan Agreement executed April 24, 2009 (to be effective as of March 30, 2009) between American Wagering, Inc. and U.S. Bank, N.A. (see Exhibit 10.1 to Form 8-K filed on April 29, 2009,
SEC File No. 000-20685)10.33*

Term Note executed April 24, 2009 (to be effective as of March 30, 2009) between American Wagering, Inc. and U.S. Bank, N.A. (see Exhibit 10.2 to Form 8-K filed on April 29, 2009, SEC
File No. 000-20685)10.34*

Continuing Guaranty dated March 30, 2009 by Victor J. and Terina M. Salerno, as guarantors, for the benefit of U.S. Bank, N.A. (see Exhibit 10.3 to Form 8-K filed on April 29, 2009, SEC File
No. 000-20685)14.1*

Code of Business Conduct and Ethics (see Exhibit 14.1 to Form 10-QSB filed June 14, 2005, SEC File No. 000-20685)21.1

Subsidiaries of American Wagering, Inc.23.1

Consent of Independent Registered Public Accounting Firm31.1

Certification of Principal Executive Officer pursuant to Exchange Act Rule 13a-14(a)31.2

Certification of Principal Financial Officer pursuant to Exchange Act Rule 13a-14(a)32.1

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350


---

82

---







Table of Contents

SIGNATURES

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

AMERICAN WAGERING, INC.May 1, 2009By:

/s/ VICTOR SALERNOVictor Salerno
President and Chief Executive Officer


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

Signature

Title

Date/s/ VICTOR SALERNO Victor Salerno

President and Chief Executive Officer (Principal Executive Officer)

May 1, 2009/s/ MELODY SULLIVAN Melody Sullivan

Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

May 1, 2009/s/ ROBERT R. BARENGO Robert R. Barengo

Director

May 1, 2009/s/ W. LARRY SWECKER W. Larry Swecker

Director

May 1, 2009/s/ JUDITH ZIMBELMANN Judith Zimbelmann

Director

May 1, 2009/s/ BRUCE DEWING Bruce Dewing

Director

May 1, 2009


83

---





Table of Contents

EXHIBIT INDEX

Number

Description21.1

Subsidiaries of American Wagering, Inc.23.1

Consent of Independent Registered Public Accounting Firm31.1

Certification of Principal Executive Officer pursuant to Exchange Act Rule 13a-14(a)31.2

Certification of Principal Financial Officer pursuant to Exchange Act Rule 13a-14(a)32.1

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350


---