Table of Contents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**(Mark One)**

 
| **x** | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------|--------------------------------------------------------------------------------------------------------|

 
| **For the quarterly period ended  July 31,  2008** |
|-------------------------------------------------------------------|

 
| **o** | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------|---------------------------------------------------------------------------------------------------------|

 
| **For the transition period from                     to                            ** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|

 
| **Commission File Number:  000-20685** |
|--------------------------------------------------|

 

**AMERICAN WAGERING, INC.**

(Exact name of registrantas specified in its charter)

 

| **Nevada**                                                      | ** ** | **88-0344658**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                            |       |                                  |
| **675  Grier Drive, Las Vegas, Nevada**                         | ** ** | **89119**                             |
| (Address of principal  executive offices)                       |       | (Zip Code)                            |

 

**702-735-0101**

(Registrant’s telephonenumber, including area code)

 

 

(Former name, formeraddress and former fiscal year, if changed since last report)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.**                                     **Yes x  No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company.  Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 
| Large accelerated filer o                     |   | Accelerated filer o         |
|-----------------------------------------------|--------|----------------------------------|
|                                          |   |                             |
| Non-accelerated filer o                       |   | Smaller reporting company x |
| (Do not check if a smaller reporting company) |   |                             |

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

Yes o**  **No x.

 

**APPLICABLE ONLY TO ISSUERS INVOLVEDIN BANKRUPTCYPROCEEDINGS DURING THE PRECEDING FIVE YEARS**

 

Indicate by check mark whether the registrant hasfiled all documents and reports required to be filed by Section 12, 13 or15(d) of the Securities Exchange Act of 1934 subsequent to thedistribution of securities under a plan confirmed by a court.            Yes x  No o

 

**APPLICABLE ONLY TO CORPORATEISSUERS**

 

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock as of the latest practicable date:** **As of September 8, 2008, there were8,129,879 shares of common stock, par value $0.01, outstanding.

 

 

 

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Table of Contents

 

**TABLE OF CONTENTS**

 
| ** **                                                                                           | **Page**   |
|------------------------------------------------------------------------------------------------------|------------|
|                                                                                                 |       |
| **PART I  — FINANCIAL INFORMATION**                                                        | **3**      |
| ** **                                                                                           | ** ** |
| Item  1. Consolidated Financial Statements                                                           | 3          |
|                                                                                                 |       |
| **BALANCE SHEETS AS OF JULY 31, 2008 (UNAUDITED)  AND AS OF JANUARY 31, 2008**             | **3**      |
| ** **                                                                                           | ** ** |
| **STATEMENTS  OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JULY 31, 2008 AND 2007  (UNAUDITED)** | **4**      |
| ** **                                                                                           | ** ** |
| **STATEMENTS  OF CASH FLOWS FOR THE SIX MONTHS ENDED JULY 31, 2008 AND 2007 (UNAUDITED)**            | **5**      |
| ** **                                                                                           | ** ** |
| **NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**                                           | **6**      |
| ** **                                                                                           | ** ** |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations  | 11         |
|                                                                                                 |       |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                  | 20         |
|                                                                                                 |       |
| Item 4T. Controls and Procedures                                                                     | 20         |
|                                                                                                 |       |
| **PART II — OTHER INFORMATION**                                                            | **20**     |
| ** **                                                                                           | ** ** |
| Item  1. Legal Proceedings                                                                           | 20         |
|                                                                                                 |       |
| Item  1A. Risk Factors                                                                               | 21         |
|                                                                                                 |       |
| Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                 | 21         |
|                                                                                                 |       |
| Item 3. Defaults Upon Senior Securities                                                              | 21         |
|                                                                                                 |       |
| Item 4. Submission of Matters to a Vote of Security  Holders                                         | 21         |
|                                                                                                 |       |
| Item  5. Other Information                                                                           | 21         |
|                                                                                                 |       |
| Item  6. Exhibits                                                                                    | 21         |

 

2

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# **PART I — FINANCIALINFORMATION**

 

## **Item 1.  Consolidated Financial Statements.**

 

**AMERICAN WAGERING, INC. ANDSUBSIDIARIES**

# **BALANCE SHEETS AS OFJULY 31, 2008 (UNAUDITED) AND AS OF JANUARY 31, 2008**

 
| ** **                                                                                                                                       | ** ** | **July 31,  2008** | ** **    | **January 31,  2008** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|---------------|----------------------------|------------|
| ** **                                                                                                                                       | ** ** | **(Unaudited)**         | ** **    | ** **                 | ** ** |
| **ASSETS**                                                                                                                                       | ** ** | ** **              | ** **    | ** **                 | ** ** |
| CURRENT ASSETS                                                                                                                                   |       |                    |          |                       |       |
| Cash and Cash Equivalents                                                                                                                        |       | $                       | 1,391,804     |                       | $          | 3,316,595 |   |
| Restricted Cash                                                                                                                                  |       | 1,352,553               |          | 1,323,688                  |       |
| Accounts Receivable, net of allowance for  doubtful accounts of $2,986 and $2,835                                                                |       | 294,025                 |          | 345,145                    |       |
| Inventories                                                                                                                                      |       | 344,402                 |          | 443,639                    |       |
| Deferred Tax Assets, net of allowance                                                                                                            |       | 440,481                 |          | 440,481                    |       |
| Prepaid Expenses and Other Current Assets                                                                                                        |       | 272,192                 |          | 497,056                    |       |
| ** **                                                                                                                                       | ** ** | **4,095,457**           | ** **    | **6,366,604**              | ** ** |
|                                                                                                                                             |       |                    |          |                       |       |
| Property and Equipment, net of accumulated  depreciation and amortization                                                                        |       | 4,472,294               |          | 4,783,451                  |       |
| Goodwill                                                                                                                                         |       | 103,725                 |          | 103,725                    |       |
| Other Assets                                                                                                                                     |       | 305,865                 |          | 289,192                    |       |
| ** **                                                                                                                                       | ** ** | **$**                   | **8,977,341** | ** **                 | **$**      | **11,542,972** | ** ** |
|                                                                                                                                             |       |                    |          |                       |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                    | ** ** | ** **              | ** **    | ** **                 | ** ** |
| CURRENT LIABILITIES                                                                                                                              |       |                    |          |                       |       |
| Current Portion of Long-Term Debt                                                                                                                |       | $                       | 768,124       |                       | $          | 1,280,161 |   |
| Accounts Payable                                                                                                                                 |       | 668,005                 |          | 1,055,547                  |       |
| Line of Credit                                                                                                                                   |       | 500,000                 |          | —                     |       |
| Accrued Expenses                                                                                                                                 |       | 962,340                 |          | 1,006,310                  |       |
| Unpaid Winning Tickets                                                                                                                           |       | 841,760                 |          | 1,401,382                  |       |
| Customer Deposits and Other                                                                                                                      |       | 825,931                 |          | 1,535,960                  |       |
| ** **                                                                                                                                       | ** ** | ** **              | ** **    | ** **                 | ** ** |
| ** **                                                                                                                                       | ** ** | **4,566,160**           | ** **    | **6,279,360**              | ** ** |
|                                                                                                                                             |       |                    |          |                       |       |
| Long-Term Debt, less current portion                                                                                                             |       | 3,113,728               |          | 3,046,655                  |       |
| Other Long-Term Liabilities                                                                                                                      |       | 491,932                 |          | 655,693                    |       |
|                                                                                                                                             |       | 3,605,660               |          | 3,702,348                  |       |
| Redeemable Series A Preferred Stock  (3,238 shares)                                                                                         |       | 323,800                 |          | 323,800                    |       |
|                                                                                                                                             |       | 8,495,620               |          | 10,305,508                 |       |
|                                                                                                                                             |       |                    |          |                       |       |
| STOCKHOLDERS’ EQUITY                                                                                                                        |       |                    |          |                       |       |
| Series A Preferred Stock — 10.00% cumulative;  $100.00 par and liquidation value; 18,924 shares authorized; 10,924 shares  outstanding |       | 1,092,400               |          | 1,092,400                  |       |
| Common Stock - $0.01 par value; 25,000,000  shares authorized; 8,129,879 shares issued                                                           |       | 81,299                  |          | 81,299                     |       |
| Additional Paid-In Capital                                                                                                                       |       | 12,290,463              |          | 12,246,651                 |       |
| Deficit                                                                                                                                          |       | (12,654,948             | )             | (11,855,393                | )          |
| Treasury Stock, at cost (61,100 common  shares)                                                                                                  |       | (327,493                | )             | (327,493                   | )          |
| ** **                                                                                                                                       | ** ** | **481,721**             | ** **    | **1,237,464**              | ** ** |
| ** **                                                                                                                                       | ** ** | **$**                   | **8,977,341** | ** **                 | **$**      | **11,542,972** | ** ** |

 

**See Notes to Consolidated FinancialStatements**

 

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**AMERICAN WAGERING, INC. ANDSUBSIDIARIES**

# **STATEMENTS OF OPERATIONS**

# **(UNAUDITED)**

 
| ** **                          | ** ** | **For the Three Months Ended  July 31,** | ** ** | **For the Six Months Ended  July 31,** | ** ** |
|-------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                          | ** ** | **2008**                                                          | ** ** | **2007**                                                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| **REVENUES:**                       |       |                                                              |       |                                                            |       |   |   |   |   |
| Wagering                            |       | $                                                                 | 1,718,427  |                                                            | $          | 2,359,567 |   | $ | 4,420,248 |   | $ | 4,523,156 |   |
| Hotel/Casino                        |       | 764,704                                                           |       | 893,450                                                         |       | 1,392,235 |   | 1,556,344 |   |
| Systems                             |       | 1,038,115                                                         |       | 737,153                                                         |       | 1,968,223 |   | 2,084,868 |   |
|                                |       | 3,521,246                                                         |       | 3,990,170                                                       |       | 7,780,706 |   | 8,164,368 |   |
| **OPERATING COSTS AND EXPENSES:**   |       |                                                              |       |                                                            |       |   |   |   |   |
| **Direct Costs:**                   |       |                                                              |       |                                                            |       |   |   |   |   |
| Wagering                            |       | 1,993,195                                                         |       | 2,353,998                                                       |       | 4,202,124 |   | 4,434,178 |   |
| Hotel/Casino                        |       | 551,226                                                           |       | 647,810                                                         |       | 1,055,829 |   | 1,197,396 |   |
| Systems                             |       | 290,704                                                           |       | 289,983                                                         |       | 590,485 |   | 690,474 |   |
|                                |       | 2,835,125                                                         |       | 3,291,791                                                       |       | 5,848,438 |   | 6,322,048 |   |
|                                |       |                                                              |       |                                                            |       |   |   |   |   |
| **Operating Expenses:**             |       |                                                              |       |                                                            |       |   |   |   |   |
| Research and Development            |       | 135,947                                                           |       | 242,140                                                         |       | 302,797 |   | 517,120 |   |
| Selling, General and Administrative |       | 967,778                                                           |       | 1,144,656                                                       |       | 1,749,431 |   | 1,934,186 |   |
| Depreciation and Amortization       |       | 254,305                                                           |       | 232,216                                                         |       | 511,809 |   | 449,129 |   |
|                                |       | 1,358,030                                                         |       | 1,619,012                                                       |       | 2,564,037 |   | 2,900,435 |   |
|                                |       | 4,193,155                                                         |       | 4,910,803                                                       |       | 8,412,475 |   | 9,222,483 |   |
| **OPERATING LOSS**                  |       | (671,909                                                          | )          | (920,633                                                        | )          | (631,769 | ) | (1,058,115 | ) |
|                                |       |                                                              |       |                                                            |       |   |   |   |   |
| **OTHER INCOME(EXPENSES):**         |       |                                                              |       |                                                            |       |   |   |   |   |
| Interest Income                     |       | 13,886                                                            |       | 28,622                                                          |       | 27,496 |   | 61,275 |   |
| Interest Expense                    |       | (69,569                                                           | )          | (67,438                                                         | )          | (132,578 | ) | (134,050 | ) |
| Litigation Expense                  |       | (19,152                                                           | )          | (52,862                                                         | )          | (55,317 | ) | (108,337 | ) |
| Other                               |       | 33,431                                                            |       | 33,938                                                          |       | 63,027 |   | 61,446 |   |
|                                |       | (41,404                                                           | )          | (57,740                                                         | )          | (97,372 | ) | (119,666 | ) |
|                                |       |                                                              |       |                                                            |       |   |   |   |   |
| **NET LOSS**                        |       | $                                                                 | (713,313   | )                                                               | $          | (978,373 | ) | $ | (729,141 | ) | $ | (1,177,781 | ) |
|                                |       |                                                              |       |                                                            |       |   |   |   |   |
| **NET LOSS PER COMMON SHARE BASIC** |       | $                                                                 | (0.09      | )                                                               | $          | (0.13 | ) | $ | (0.10 | ) | $ | (0.15 | ) |

 

**See Notes to Consolidated FinancialStatements**

 

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**AMERICAN WAGERING, INC. ANDSUBSIDIARIES**

# **STATEMENTS OF CASH FLOWS**

# **(UNAUDITED)**

 
| ** **                                               | ** ** | **For the Six Months Ended  July 31,** | ** **     |
|----------------------------------------------------------|------------|-----------------------------------------------------------------|----------------|
| ** **                                               | ** ** | **2008**                                                        | ** **     | **2007** | ** ** |
| ** **                                               | ** ** | ** **                                                      | ** **     | ** ** | ** ** |
| **Operating Activities**                                 | ** ** | ** **                                                      | ** **     | ** ** | ** ** |
| **Net cash used in operating activities**                | ** ** | **$**                                                           | **(2,051,515** | **)** | **$** | **(1,035,793** | **)** |
| ** **                                               | ** ** | ** **                                                      | ** **     | ** ** | ** ** |
| **Investing Activities**                                 | ** ** | ** **                                                      | ** **     | ** ** | ** ** |
| Gross increases in restricted cash                       |       | (421,948                                                        | )              | (247,226 | ) |
| Withdrawal of restricted cash                            |       | 393,083                                                         |           | 215,453 |   |
| Proceeds from the sale of property and  equipment        |       | 1,500                                                           |           | — |   |
| Purchase of property and equipment                       |       | (200,531                                                        | )              | (396,050 | ) |
| **Net cash used in investing activities**                | ** ** | **(227,896**                                                    | **)**          | **(427,823** | **)** |
| ** **                                               | ** ** | ** **                                                      | ** **     | ** ** | ** ** |
| **Financing Activities**                                 |       |                                                            |           |   |   |
| Repayment of borrowings                                  |       | (2,092,623                                                      | )              | (205,838 | ) |
| Proceeds from borrowings                                 |       | 2,517,657                                                       |           | — |   |
| Preferred stock dividends                                |       | (70,414                                                         | )              | (70,228 | ) |
| **Net cash provided by (used in) financing  activities** | ** ** | **354,620**                                                     | ** **     | **(276,066** | **)** |
|                                                     |       |                                                            |           |   |   |
| **NET DECREASE IN CASH AND CASH EQUIVALENTS**            | ** ** | **(1,924,791**                                                  | **)**          | **(1,739,682** | **)** |
| ** **                                               | ** ** | ** **                                                      | ** **     | ** ** | ** ** |
| **CASH AND CASH EQUIVALENTS AT BEGINNING OF  PERIOD**    | ** ** | **3,316,595**                                                   | ** **     | **4,537,424** | ** ** |
| ** **                                               | ** ** | ** **                                                      | ** **     | ** ** | ** ** |
| **CASH AND CASH EQUIVALENTS AT END OF PERIOD**           | ** ** | **$**                                                           | **1,391,804**  | ** ** | **$** | **2,797,742** | ** ** |

 

**See Notes to Consolidated FinancialStatements**

 

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**AMERICAN WAGERING, INC. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

 

**Three and Six Months Ended July 31,2008**

 

**1.**                                     Basis ofPresentation

 

The accompanying unaudited interim consolidatedfinancial statements of American Wagering, Inc. and all of itssubsidiaries (collectively referred to hereafter as the “Company” or “AWI”)have been prepared in accordance with the instructions to Form 10-Q aspublished by the Securities and Exchange Commission (“SEC”).  Accordingly, the financial statements do notinclude all of the information and disclosures required by generally acceptedaccounting principles for annual financial statements.  In the opinion of management, all adjustmentsnecessary for a fair presentation have been included.  Due to seasonality and other factors, resultsof operations for the current interim periods are not necessarily indicative ofresults to be expected for the full year. For further information, please refer to the annual consolidatedfinancial statements of the Company, and the related notes, included in itsAnnual Report on Form 10-K for the fiscal year ended January 31,2008, filed on May 13, 2008, with the SEC from which the balance sheetinformation presented as of January 31, 2008, is derived.  All significant inter-company accounts andtransactions have been eliminated in the consolidation.

 

The second quarter is typically the Company’s worstquarter regarding cash flow and earnings. This is due to the seasonality of thesports wagering business. The third and fourth quarters have historically beenthe best two quarters regarding cash flow and earnings for the Company and itis anticipated that this year will be no different. The current economicdownturn may have a negative impact on cash flow and earnings. Management hasinstituted cost saving programs, which will continue to benefit the Company inthe future.

 

**2.**                                     Net Loss PerCommon Share

 

Basic loss per common share is calculated based on theweighted average number of shares of common stock outstanding during thereporting period. Diluted net income per common share is ordinarily calculatedgiving effect to all potentially dilutive common shares, assuming such shareswere outstanding during the reporting period. However, diluted net loss percommon share is not presented for loss periods, since the effect of includingpotentially dilutive common shares would be anti-dilutive because of thelosses. The amounts of potentially anti-dilutive common shares that have beenexcluded from any calculation of basic net loss per share were 747,699 and719,099 for the three months ended July 31, 2008 and 2007, respectively. Theamounts of potentially anti-dilutive common shares that have been excluded fromany calculation of basic net loss per share were 746,899 and 719,099 for thesix months ended July 31, 2008 and 2007, respectively.  Following is a reconciliation of thenumerators and denominators of the net loss per common share computations forthe periods presented.

 
| ** **                                         | ** ** | **Net Loss  (numerator)** | ** ** | **Weighted  Average  Common  Shares  (denominator)** | ** ** | **Per Share  Amount** | ** ** |
|----------------------------------------------------|------------|--------------------------------|------------|------------------------------------------------------|------------|----------------------------|------------|
| **For the three months ended July 31,  2008** |       |                           |       |                                                 |       |                       |       |
| Net loss                                           |       | $                              | (713,313   | )                                                    |       |                       |       |   |
| Less preferred stock dividends                     |       | (35,594                        | )          |                                                 |       |                       |       |
| **Basic net loss per common share:**               |       |                           |       |                                                 |       |                       |       |
| Net loss available to common shares                |       | (748,907                       | )          | 8,068,779                                            |       | $                          | (0.09      | ) |
| Effect of dilutive stock options                   |       |                           |       | *                                                    |       |                       |       |
| **Diluted net loss per common share:**             |       |                           |       |                                                 |       |                       |       |
| Net loss available to common shares                |       | $                              | *          |                                                 | *          |                       | $          | * |   |
|                                               |       |                           |       |                                                 |       |                       |       |
| **For the three months ended July 31,  2007** |       |                           |       |                                                 |       |                       |       |
| Net loss                                           |       | $                              | (978,373   | )                                                    |       |                       |       |   |
| Less preferred stock dividends                     |       | (35,697                        | )          |                                                 |       |                       |       |

 

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| ** **                                      | ** ** | **Net Loss  (numerator)** | ** ** | **Weighted  Average  Common  Shares  (denominator)** | ** ** | **Per Share  Amount** | ** ** |
|-------------------------------------------------|------------|--------------------------------|------------|------------------------------------------------------|------------|----------------------------|------------|
| **Basic net loss per common share:**            |       |                           |       |                                                 |       |                       |       |
| Net loss available to common shares             |       | (1,014,070                     | )          | 8,068,779                                            |       | $                          | (0.13      | ) |
| Effect of dilutive stock options                |       |                           |       | *                                                    |       |                       |       |
| **Diluted net loss per common share:**          |       |                           |       |                                                 |       |                       |       |
| Net loss available to common shares             |       | $                              | *          |                                                 | *          |                       | $          | * |   |
|                                            |       |                           |       |                                                 |       |                       |       |
| **For the six months ended July 31, 2008** |       |                           |       |                                                 |       |                       |       |
| Net loss                                        |       | $                              | (729,141   | )                                                    |       |                       |       |   |
| Less preferred stock dividends                  |       | (70,414                        | )          |                                                 |       |                       |       |
| **Basic net loss per common share:**            |       |                           |       |                                                 |       |                       |       |
| Net loss available to common shares             |       | (799,555                       | )          | 8,068,779                                            |       | $                          | (0.10      | ) |
| Effect of dilutive stock options                |       |                           |       | *                                                    |       |                       |       |
| **Diluted net loss per common share:**          |       |                           |       |                                                 |       |                       |       |
| Net loss available to common shares             |       | $                              | *          |                                                 | *          |                       | $          | * |   |
|                                            |       |                           |       |                                                 |       |                       |       |
| **For the six months ended July 31, 2007** |       |                           |       |                                                 |       |                       |       |
| Net loss                                        |       | $                              | (1,177,781 | )                                                    |       |                       |       |   |
| Less preferred stock dividends                  |       | (70,228                        | )          |                                                 |       |                       |       |
| **Basic net loss per common share:**            |       |                           |       |                                                 |       |                       |       |
| Net loss available to common shares             |       | (1,248,009                     | )          | 8,068,779                                            |       | $                          | (0.15      | ) |
| Effect of dilutive stock options                |       |                           |       | *                                                    |       |                       |       |
| **Diluted net loss per common share:**          |       |                           |       |                                                 |       |                       |       |
| Net loss available to common shares             |       | $                              | *          |                                                 | *          |                       | $          | * |   |

 

----

* Diluted income (loss)per share is not applicable for loss periods.

 

**3.**                                     Income Taxes

 

Effective February 1, 2007, as required, theCompany adopted Financial Accounting Standards Board (“FASB”)  Interpretation No. 48, *Accounting for Uncertainty in Income Taxes, an interpretation of FASBStatement No. 109, Accounting for Income Taxes* (“FIN 48”).Accordingly, management has reviewed the Company’s previously filed tax returnsand particularly its NOL carryforwards available to reduce current and futuretax obligations for the possible effect of FIN 48 as of January 1, 2007,and subsequently. Based on its evaluation, management believes that adoptingFIN 48 did not have a material effect on our opening deficit at the time ofadoption, the Company’s federal tax net operating loss (“NOL”)  carryforwards, or the related deferred taxassets or the valuation allowance. The income tax years of 2007, 2006, 2005 and2004 remain open to examination under the statute of limitations by the U.S.federal, state and local respective taxing jurisdictions.

 

At July 31, 2008, the Company had federal tax NOLcarryforwards available to potentially reduce future tax obligations in theaggregate amount of approximately $5.0 million, of which approximately $1.8million expires in 2019.  In assessingthe realizability of deferred tax assets, the Company considers whether it ismore likely than not that some portion or all of the deferred tax assets willnot be realized.  The ultimaterealization of deferred tax assets is dependent upon the generation of futuretaxable income during the periods in which those temporary differences becomedeductible. The determination of profitability in the future is partially basedon the market penetration of our kiosks and potential volume of systems sales;implementation of cost reductions; our sports betting volumes and win percentages;and other factors. Therefore, no additional tax benefit or expense provisionwas recognized for the current period loss.

 

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Management believes that AWI will be sufficientlyprofitable for the short-term future, with the upcoming football season, and itis therefore more likely than not that a portion, estimated to be approximately$440,000, of its net deferred tax asset, which resulted primarily from NOLcarryforwards, will be realized. However, there can be no assurance that theCompany will be profitable in the future.

 

The Company’s effective tax rate of zero for theinterim periods presented differs from statutory tax rates primarily due tochanges in deferred tax activity and related adjustments to the relateddeferred tax asset valuation allowance.

 

**4.**                                     Litigationand Contingencies

 

For the three-month andsix-month periods ended July 31, 2008 and 2007, the Company recordedadditional accrued interest expense of $19,152 and $52,862, and $44,069 and$108,337, respectively, with respect to our previously recorded obligation dueto Michael Racusin under a litigation settlement agreement.

 

Additionally, $11,249 related to a settlementregarding an office space contract was recorded in the first quarter of fiscal2009.

 

Due to several recent financial institution failures,the Company is evaluating the risk regarding it’s uninsured deposits held inbanks. The Company will explore alternatives to mitigate these risks bymonitoring the health of the financial institutions, evaluating existingdeposit and related loan agreements and researching other options.

 

**Racusin**

 

On or about June 13, 2008, the Company receivedwritten notification from Racusin of a perceived breach of the SettlementAgreement by the Company. The Company filed a Notice of Filing a CorrectedAmortization Schedule on March 17, 2008 to rectify an inaccurate interestcalculation in the prior Exhibit 1 to the Settlement Agreement. As aresult the Company began making payments according to the corrected Exhibit 1on March 1, 2008, and has continued to do so every month thereafter.Racusin alleges that the Company’s actions breach the Settlement Agreement. Racusinfurther alleges that under the terms of the Settlement Agreement the entireobligation became due and payable with interest calculated at twelve percent(12%) from June 30, 2004, and that Racusin may commence an adversarialproceeding. The Company has engaged counsel and intends to vigorously defendagainst the claims presented.

 

**Internet SportsInternational, Ltd.**

 

On July 17, 2008, Internet Sports International,Ltd. filed a complaint against three of our subsidiaries, AWI Manufacturing, Inc.,AWI Gaming, Inc. and Computerized Bookmaking Systems, Inc., and ourGeneral 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 andnegligent interference with prospective economic advantage, and quantum merit.The claims arise out of agreements with plaintiff to jointly develop an uprightkiosk, including a purchase agreement and a marketing agreement. Plaintiffalleges that we failed to perform under, and effectively and prematurelyterminated, the purchase agreement as to 100 kiosks. Plaintiff further allegesthat it had entered into negotiations with an established customer of ours toplace kiosks and plaintiff’s products on the customer’s casino floor, and thatwe contacted the customer and terminated plaintiff’s opportunity. Plaintiffseeks for (i) the recovery of actual, consequential and punitive damages,and (ii) the recovery of attorneys’ fees, costs and expenses. We haveengaged counsel and intend to vigorously defend against the claims presented.

 

**Other**

 

The Company is a party to proceedings that areordinary in nature and incidental to the Company’s business. Management isunable to estimate any minimum losses from any of these proceedings.Accordingly, no losses have been accrued for the six months ended July 31,2008.

 

**5.**                                     StockOptions

 

Activity related to both the employee and directors’stock option plans for the six months ended July 31, 2008 and 2007, was asfollows:

 

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| ** **                       | ** ** | **Option Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** ** |
|----------------------------------|------------|------------------------|------------|---------------------------------------------|------------|
| Balance at February 1, 2008 |       | 749,299                |       | $                                           | 1.75       |   |
| Granted                          |       | —                 |       |                                        |       |
| Exercised                        |       | —                 |       |                                        |       |
| Forfeited or canceled            |       | —                 |       |                                        |       |
|                             |       |                   |       |                                        |       |
| Balance at July 31, 2008    |       | 749,299                |       | 1.75                                        |       |
|                             |       |                   |       |                                        |       |
| Balance at February 1, 2007 |       | 757,749                |       | $                                           | 1.80       |   |
| Granted                          |       | —                 |       |                                        |       |
| Exercised                        |       | —                 |       |                                        |       |
| Forfeited or canceled            |       | (26,250                | )          | 2.00                                        |       |
|                             |       |                   |       |                                        |       |
| Balance at July 31, 2007    |       | 731,499                |       | 1.79                                        |       |

 

Stock options exercisable and available for futuregrants for both current stock option plans as of July 31, 2008 are asfollows:

 
| ** **                  | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Weighted-  Average  Remaining Life** | ** ** |
|-----------------------------|------------|------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| Exercisable                 |       | 548,500    |       | $                                           | 1.85       |                                        | 4.98 years |   |
| Available for future grants |       | 208,767    |       | —                                      |       | —                                      |       |
|                             |            |            |            |                                             |            |                                             |            |  |

 

Non-cash stock-based compensation expense recorded in “Selling,General and Administrative Expenses” on the consolidated income statements forthe three months ended July 31, 2008 and 2007, was $26,615 and $50,839,respectively.  Non-cash stock-basedcompensation expense recorded in “Selling, General and Administrative Expenses”on the consolidated income statements for the six months ended July 31,2008 and 2007, was $43,811 and $97,006, respectively.

 

**6.**             **Business Segments**

 

The Company reports the results of operations throughthree operating segments:  Wagering,Hotel/Casino, and Systems.

 

**Wagering Segment**.  The following table indicates the primarycomponents of this segment’s operating loss for the periods indicated.

 
| ** **                          | ** ** | **Three Months Ended July 31,** | ** ** | **Six Months Ended July 31,** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                          | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Revenue**                         |       | $                                                   | 1,718,427  |                                              | $          | 2,359,567 |   | $ | 4,420,248 |   | $ | 4,523,156 |   |
| Direct Costs                        |       | 1,993,195                                           |       | 2,353,998                                         |       | 4,202,124 |   | 4,434,178 |   |
| Selling, General and Administrative |       | 416,003                                             |       | 359,476                                           |       | 717,169 |   | 583,374 |   |
| Depreciation and Amortization       |       | 79,006                                              |       | 71,881                                            |       | 158,450 |   | 139,399 |   |
|                                |       | 2,488,204                                           |       | 2,785,355                                         |       | 5,077,743 |   | 5,156,951 |   |
| **Operating Loss**                  |       | $                                                   | (769,777   | )                                                 | $          | (425,788 | ) | $ | (657,495 | ) | $ | (633,795 | ) |

 

**Hotel/Casino Segment**.  The following table indicates the primarycomponents of this segment’s operating income/ (loss) for the periodsindicated.

 

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| ** **                                                    | ** ** | **Three Months Ended July 31,** | ** ** | **Six Months Ended July 31,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                    | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Revenue**                                                   |       |                                                |       |                                              |       |   |   |   |   |
| Casino                                                        |       | $                                                   | 369,267    |                                              | $          | 386,967 |   | $ | 744,361 |   | $ | 732,382 |   |
| Hotel                                                         |       | 189,322                                             |       | 253,512                                           |       | 302,588 |   | 387,795 |   |
| Food/Beverage                                                 |       | 234,230                                             |       | 312,408                                           |       | 404,650 |   | 557,297 |   |
| Less: Casino Cash Incentives and Other  Promotional Allowance |       | (28,115                                             | )          | (59,437                                           | )          | (59,364 | ) | (121,130 | ) |
|                                                          |       | 764,704                                             |       | 893,450                                           |       | 1,392,235 |   | 1,556,344 |   |
| **Direct Costs and Expenses**                                 |       |                                                |       |                                              |       |   |   |   |   |
| Casino                                                        |       | 288,386                                             |       | 308,082                                           |       | 575,084 |   | 576,933 |   |
| Hotel                                                         |       | 58,800                                              |       | 74,932                                            |       | 106,343 |   | 127,795 |   |
| Food/Beverage                                                 |       | 204,040                                             |       | 264,796                                           |       | 374,402 |   | 492,668 |   |
|                                                          |       | 551,226                                             |       | 647,810                                           |       | 1,055,829 |   | 1,197,396 |   |
|                                                          |       |                                                |       |                                              |       |   |   |   |   |
| Selling, General and Administrative                           |       | 93,430                                              |       | 256,319                                           |       | 183,850 |   | 483,449 |   |
| Depreciation and Amortization                                 |       | 69,090                                              |       | 64,239                                            |       | 138,176 |   | 121,548 |   |
|                                                          |       | 713,746                                             |       | 968,368                                           |       | 1,377,855 |   | 1,802,393 |   |
| **Operating Income (Loss)**                                   |       | $                                                   | 50,958     |                                              | $          | (74,918 | ) | $ | 14,380 |   | $ | (246,049 | ) |
|                                                               |            |                                                     |            |                                                   |            |  |  |  |  |  |  |  |  |  |

 

**Systems Segment. **The following table indicates the primarycomponents of this segment’s operating income (loss) for the periods indicated.

 
| ** **                          | ** ** | **Three Months Ended July 31,** | ** ** | **Six Months Ended July 31,** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                          | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                |       |                                                |       |                                              |       |   |   |   |   |
| **Revenue**                         |       | $                                                   | 1,038,115  |                                              | $          | 737,153 |   | $ | 1,968,223 |   | $ | 2,084,868 |   |
| Direct Costs                        |       | 290,704                                             |       | 289,983                                           |       | 590,485 |   | 690,474 |   |
| Research and Development            |       | 135,947                                             |       | 242,140                                           |       | 302,797 |   | 517,120 |   |
| Selling, General and Administrative |       | 458,344                                             |       | 528,861                                           |       | 848,411 |   | 867,363 |   |
| Depreciation and Amortization       |       | 106,210                                             |       | 96,096                                            |       | 215,184 |   | 188,182 |   |
|                                |       | 991,205                                             |       | 1,157,080                                         |       | 1,956,877 |   | 2,263,139 |   |
| Operating Income (Loss)             |       | $                                                   | 46,910     |                                              | $          | (419,927 | ) | $ | 11,346 |   | $ | (178,271 | ) |

 

**Operating Income (Loss) to Loss Before IncomeTaxes. **Thefollowing table reconciles the operating income (loss) from each segment to netloss before income taxes for the periods indicated.

 
| ** **                  | ** ** | **Three Months Ended July 31,** | ** ** | **Six Months Ended July 31,** | ** ** |
|-----------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                  | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Operating Income (Loss)** |       |                                                |       |                                              |       |   |   |   |   |
| Wagering                    |       | $                                                   | (769,777   | )                                                 | $          | (425,788 | ) | $ | (657,495 | ) | $ | (633,795 | ) |
| Hotel/Casino                |       | 50,958                                              |       | (74,918                                           | )          | 14,380 |   | (246,049 | ) |
| Systems                     |       | 46,910                                              |       | (419,927                                          | )          | 11,346 |   | (178,271 | ) |
|                        |       | (671,909                                            | )          | (920,633                                          | )          | (631,769 | ) | (1,058,115 | ) |
| **Other Income (Expenses)** |       |                                                |       |                                              |       |   |   |   |   |
| Interest Income             |       | 13,886                                              |       | 28,622                                            |       | 27,496 |   | 61,275 |   |
| Interest Expense:           |       |                                                |       |                                              |       |   |   |   |   |
| Hotel/Casino                |       | (41,931                                             | )          | (52,958                                           | )          | (80,532 | ) | (101,170 | ) |
| Systems                     |       | (27,638                                             | )          | (14,480                                           | )          | (52,046 | ) | (32,880 | ) |
|                        |       | (69,569                                             | )          | (67,438                                           | )          | (132,578 | ) | (134,050 | ) |
|                        |       |                                                |       |                                              |       |   |   |   |   |
| Litigation Expense          |       | (19,152                                             | )          | (52,862                                           | )          | (55,317 | ) | (108,337 | ) |
| Other, net                  |       | 33,431                                              |       | 33,938                                            |       | 63,027 |   | 61,446 |   |
|                        |       | (41,404                                             | )          | (57,740                                           | )          | (97,372 | ) | (119,666 | ) |
| Loss Before Income Taxes    |       | $                                                   | (713,313   | )                                                 | $          | (978,373 | ) | $ | (729,141 | ) | $ | (1,177,781 | ) |

 

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## **Item 2.****      ****Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.**

##  

**Definitions. **For the purposes of thisreport, the following terms have the following meanings:

 

“Company” means American Wagering, Inc. and itssubsidiaries collectively.

 

“AWI” means American Wagering, Inc.

 

“AWIG” means AWI Gaming, Inc., a wholly-ownedsubsidiary of AWI.

 

“AWIM” means AWI Manufacturing, Inc., a wholly-ownedsubsidiary of AWI.

 

“CBS” means Computerized Bookmaking Systems, Inc.,a wholly-owned subsidiary of AWI.

 

“Leroy’s” means Leroy’s Horse & Sports Place, Inc.,a wholly-owned subsidiary of AWI.

 

“Sturgeons, LLC” means Sturgeons, LLC, a wholly-ownedsubsidiary of AWIG.

 

“Sturgeon’s” means Sturgeon’s Inn & Casino(which, as of March 1, 2006, is owned by Sturgeons, LLC).

 

**Overview. **Ourprimary operating strategies for the foreseeable future are to focus on ourcore businesses relating to the race and sports industry, and the operation ofSturgeon’s. Our intentions regarding the following subsidiaries are tocontinue:

 

·      Leroy’s – operating existing sportsbooks, adding new books where and when appropriate, and continuing to becomemore efficient in order to reduce expenses. We will also continue our review ofexisting Leroy’s locations in order to close those locations that are notoperating efficiently.  Based on ourstrategy, the number of race and sports books operated by Leroy’s may increaseor decrease in the future, due to the closure of unprofitable locations or hostproperties, closures due to other factors beyond our control and/or thepossible opening of new locations with greater potential for profitability.  There is no assurance that Leroy’s will beable to add new locations and/or that any new locations so added will beprofitable.

 

·      CBS – developing, selling andmaintaining computerized race and sports wagering systems for the gamingindustry and seeking strategic international alliances with third party gamingsuppliers and/or gaming operators that desire to utilize our expertise in therace and sports industry.  Thesestrategies should enable us to gain a competitive advantage by offering the gamingoperator and/or the betting patron a well-rounded gaming experience, both inthe United States and abroad.

 

·      AWIM – developing the self-servicewagering kiosk, installing kiosks in Leroy’s locations to assist in controllingpersonnel costs, and marketing the kiosks to non-Leroy’s locations.

 

·      Sturgeon’s – effectively operatingthe hotel/casino while reviewing and modifying existing procedures andpersonnel alignment to increase efficiency and reduce expenses.

 

Where appropriate, we will continue to explorepossible new locations for our products, including foreign jurisdictions.  We have implemented, and are continuing toinitiate, other cost cutting measures throughout the Company.  In the first quarter of fiscal 2009, theCompany reduced its workforce by means of a lay-off of several employees ineach of our subsidiaries and began to focus more on cost controls. We willcontinue to evaluate and closely monitor costs, looking for efficiencies andimprovements during at least the remainder of fiscal 2009. During the sixmonths ended July 31, 2008, AWI’s corporate expenses that are allocated toLeroy’s and CBS have been reduced primarily due to reductions in administrativesalaries and benefits, including accounting, decreased audit fees and outsideservices; which were partially offset by increases in insurance expense, legalexpense and computer expenses.

 

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During fiscal 2008, and continuing through the firstand second quarters of fiscal 2009, our local, regional and national economyhas been negatively impacted due to a number of factors, including the subprimemortgage crisis and higher gasoline and transportation costs. Confidence in thecredit market has also eroded, which resulted in a tightening of credit availability.Consumer demand for gambling, due to decreased disposable income, may furtherdecline during an economic downturn or recession. During the six months ended July 31,2008, Las Vegas has experienced higher foreclosure and unemployment rates andreduced passenger traffic at McCarran airport and higher transportation costs.We face the risk that the effects of higher interest rates, continued higherenergy costs and pressure on housing prices may place added strain on consumers’ability to make purchases, repay their loans and thus, leave less fundsavailable for travel and leisure activities. Accordingly, this economicdownturn in the United States could hurt our financial performance if wageringactivity decreases. We may undergo additional cost reductions due to a declinein the demand for wagering, depending on the economic conditions.

 

**Liquidityand Capital Resources.**

** **

**CashFlow**

** **

As of July 31, 2008, we had a working capitaldeficit of $(470,703), compared to working capital of $87,244 at January 31,2008.  The decrease in working capital isprimarily due to the seasonality of sports wagering activity for our secondquarter as expected, a result of the ongoing pay-down of the Racusinobligation; and reductions in future bets and unpaid tickets as a result ofpaying out these tickets after the end of football season and the last biggame.   Our second quarter is typicallyour worst quarter regarding cash flow and earnings. This is due to theseasonality of the sports wagering business. The third and fourth quarters havehistorically been the best two quarters regarding cash flow and earnings for usand we anticipate this year will be no different. The current economic downturnmay have a negative impact on cash flow and earnings. Management has institutedcost saving programs, which will continue to benefit us in the future.

 

On April 21, 2008, U.S. Bank approved a revolvingcredit note for $500,000 for the Company. The purpose of this credit note is to provide overdraft protection onour checking accounts.  Any negativebalances on our checking accounts will sweep into this overdraft protectioncredit note and then will be automatically repaid when the funds in thechecking accounts return to a positive balance. The maturity date of thiscredit note is December 31, 2008, but may be renewed at that time, ifagreed to by the Company and the bank. The unpaid principal balance will bear interest at the prime rate.Interest is payable monthly commencing on May 1, 2008.  As of July 31, 2008, the Company had drawndown $500,000 under the revolving credit note.

 

Our principal cash requirements consist of payroll andbenefits, business insurance, real estate and equipment leases, legal expenses,telecommunications, debt service, interest expense, and costs related toinventory, including those costs to assemble race/sports systems for our CBScustomers.

 

As of July 31, 2008, net cash used in operationsincreased by $1,015,722 over the comparable six month period of last year,primarily due to the payout on the last big football game wagers, our use ofour bank line of credit, and the continued reduction of the Racusin debt.

 

Net cash used in investing activities for the sixmonths ended July 31, 2008 decreased by $199,927, as compared to in thesame period last year, primarily as a result of decreased purchases offurniture and equipment as we did not acquire or remodel as many sports booklocations as we did in the prior year.

 

Net cash provided by financing activities for the sixmonths ended July 31, 2008 was $354,620, as compared to net cash used infinancing activities of ($276,066) for the six months ended July 31, 2007. Theincrease was due primarily to on increase in borrowings during 2008, primarilydue to the bank line of credit.

 

Regulation:  Nevada Gaming Commission Regulation 22.040 (“Regulation22.040”) requires us to maintain reserves (cash, surety bonds, irrevocablestandby letter of credit, etc.) sufficient to cover any outstanding wageringliability including unpaid winning tickets, future tickets and telephoneaccount deposits.  We maintained aRegulation 22.040 reserve in the amount of $3.0 million in the form of a suretybond issued by Fidelity and Deposit Company of Maryland (a subsidiary of ZurichAmerican Insurance) secured by a $1.0 million deposit.  On November 16, 2007, due to increasedhandle, we increased the bond to $3.4 million along with a total cash depositof $1.2 million which secures this bond. The cash deposits, in the form ofcertificates of deposit, are held at Great 

 

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Basin Bank of Nevadaalong with an irrevocable letter of credit, also with Great Basin Bank ofNevada. On February 22, 2008, the bond amount was decreased to $2.8million still secured by $1.2 million in each deposits, and we remain incompliance with Regulation 22.040. However, if we are required to increase theRegulation 22.040 reserve and are unable to do so, it would have an adverseimpact on us including, but not limited to, requiring a significant reductionin the number of race/sports locations operated by Leroy’s, an elimination orreduction of telephone wagering accounts, and/or a reduction in net income.

 

**Other.**

** **

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

 

We believe that we will be able to satisfy ouroperating cash requirements for at least the next 12 months from existing cashbalances and anticipated cash flows.  Weplan to accumulate cash liquidity during the current fiscal year (ending January 31,2009) to help us fund the following: indebtedness, litigation expenses andjudgments; potential purchase of kiosks; volatility and seasonality effects ofsports betting; volatility and timing of system sales; compliance costsassociated with Section 404 of the Sarbanes-Oxley Act of 2002. See Liquidityand Capital Resources, Cash Flow.

 

**Resultsof Operations.**

** **

We report our results of operations through threeoperating segments:  Wagering,Hotel/Casino and Systems.  Althoughnumerous factors are taken into consideration, the operating income (loss) ofthe segment represents a significant profitability measure used by us inallocating resources and assessing performance of the segments.

 
| ** **                         | ** ** | **Three Months Ended July 31,** | ** ** | **Six Months Ended July 31,** | ** ** |
|------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **Summary**                        | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **$ Change** | ** ** | **%   Change** | ** ** | **2008** | ** ** | **2007** | ** ** | **$ Change** | ** ** | **%   Change** | ** ** |
| Revenues                           |       | $                                                   | 3,521,246  |                                              | $          | 3,990,170 |   | $ | (468,924 | ) | (11.75 | )% | $ | 7,780,706 |   | $ | 8,164,368 |   | $ | (383,662 | ) | (4.70 | )% |
| Less: Costs and  Expenses          |       | 4,193,155                                           |       | 4,910,803                                         |       | (717,648 | ) | (14.61 | )% | 8,412,475 |   | 9,222,483 |   | (810,008 | ) | (8.78 | )% |
| Less: Other  (Income) and Expenses |       | (41,404                                             | )          | (57,740                                           | )          | (16,336 | ) | (28.29 | )% | (97,372 | ) | (119,666 | ) | (22,294 | ) | (18.63 | )% |
|                               |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Loss                           |       | $                                                   | (713,313   | )                                                 | $          | (978,373 | ) | $ | (265,060 | ) | (27.09 | )% | $ | (729,141 | ) | (1,177,781 | ) | $ | (448,640 | ) | (38.09 | )% |
|                                    |            |                                                     |            |                                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Please refer to the discussions below (“WageringSegment,” “Hotel/Casino Segment,” “Systems Segment,” and “Other Income andExpense”) for additional information, discussion and analysis.

 

**Forthe Three Months Ended July 31, 2008, Compared to the Three Months Ended July 31,2007.**

** **

**WageringSegment.**

** **

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

 

**Wagering Segment revenues for the three monthsended July 31, 2008, decreased $(641,140) (-27.17%) over the three monthsended July 31, 2007.  This decreaseis attributed to the following factors:**

 

We experienced a decline in handle and win percentageduring the three months ended July 31, 2008, compared to the same periodlast year.  Our handle and the winpercentages decreased for the three months ended July 31, 2008, ascompared to the same period last year. The slight decline in handle and the related win percentage is dueprimarily to the overall gaming economic downturn.

 

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**Wagering Segment total costs and expenses for thethree months ended July 31, 2008, decreased ($297,151) (-10.67%) over thethree months ended July 31, 2007. **Thisdecrease is attributed to the following factors:

 

Direct costs decreased ($360,803)(-15.33%) primarily due to cost reductions in personnel expense, and a decreasein advertising spending.

 

Selling, general and administrative costsincreased $56,527 (+15.72%) primarily due to increases in bank charges, andlicensing costs for a key employee in the three months ending July 31,2008, compared to the three months ending July 31, 2007.

 

Depreciation and amortization expenseincreased $7,125 (+9.91%) over the prior year’s three month period primarilydue to an increase in capitalized acquisitions made in prior periods for newand remodeled sports books.

 

Note that an increase or decrease in handle is notnecessarily indicative of an increase or decrease in revenues or profits.  Elimination of unprofitable locations,closure of host properties, changes in state and/or federal regulations, andother factors beyond our control may result in declines in handle.

 

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

 

**Hotel/CasinoSegment.**

** **

The Hotel/Casino Segment includes the operatingresults of Sturgeon’s.  Sturgeon’scommenced operations on March 1, 2006.

 

**Hotel/Casino Segment revenues for the three monthsended July 31, 2008, decreased ($128,746) (-14.41%) over the three monthsended July 31, 2007.** This decrease is attributed to the following factors:

 

Casino revenues decreased ($17,700)(-4.57%) primarily due to decreased handle and wagering activities for thequarter ending July 31, 2008, compared to the same period ending July 31,2007, which can be attributed to the lower hotel occupancy rate, due to reducedtourism travel.

 

Hotel revenues decreased ($64,190)(-25.32%) in the second quarter of fiscal 2009 compared to the second quarterof fiscal 2008 due to a lower occupancy rate, primarily due to decreasedhighway travel, attributed to rising gasoline prices.

 

Food and beverage revenues decreased($46,856) (-18.52%) primarily due to the decline in occupancy for the threemonths ended July 31, 2008, compared to the three months ended July 31,2007.   The contra-revenue accounts of “casinocash incentives and other promotional allowances” were reduced by closermonitoring of these costs by management, and the reduction in hotel occupancy.

 

**Hotel/Casino Segment total costs and expenses forthe three months ended July 31, 2008, decreased ($254,622) (26.29%) overthe three months ended July 31, 2007.**  This decrease is attributed to the followingfactors:

 

Direct costs for the casino operationsdecreased ($19,696) (-6.39%) for the three months ended July 31, 2008,compared to the three months ended July 31, 2007, due to lower casinorevenue and an emphasis on cost controls.

 

Direct costs for the hotel operationsdecreased ($16,132) (-21.53%) primarily due to lower occupancies for the threemonths ended July 31, 2008, compared to the three months ended July 31,2007.

 

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Direct costs for food and beverage operationsdecreased ($60,756) (-22.94%) primarily due to lower occupancies in the hotelfor the three months ended July 31, 2008, compared to the three monthsended July 31, 2007.

 

Selling, general and administrative costsfor Sturgeon’s decreased ($162,889) (-63.55%) primarily because there was nobonus payment made during the second quarter of fiscal 2009 compared to thesame period of fiscal 2008 and reduced credit card fees, donations and otherexpenses.

 

**SystemsSegment.**

** **

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

 

**Systems Segment revenues for the three monthsended July 31, 2008 increased $300,962 (+40.83%)over the three monthsended July 31, 2007.** This is attributed primarily to increased equipment sales during thesecond quarter of fiscal 2009 compared to the same quarter of fiscal 2008.

 

Revenues from maintenance contracts increased slightlyover the prior fiscal year.  Thisincrease is attributable to annual contractual increases charged to existingcustomers.

 

**Systems Segment total costs and expenses for thethree months ended July 31, 2008, decreased ($165,875) (-14.34%) over thethree months ended July 31, 2007.**  This decrease is attributed to the followingfactors:

 

Research and development costsdecreased ($106,193) (-43.85%) from the prior three months ended July 31,2007, primarily due to decreased personnel expense and greater efficiencies.

 

Selling, General and Administrativecosts decreased ($70,517) (-13.33%) from the prior three months ended July 31,2007, primarily due an improvement in operating efficiencies.

 

Depreciation and amortizationincreased $10,114 (+10.52%) from the prior three months ended July 31,2007, due to increased property acquisitions, primarily due to the equipmentand software upgrades to our networks.

 

**Other income and (expenses). **The other income and(expenses) categories are primarily administrative in nature and, as such, arenot directly attributable to any operating segment.  Accordingly, these items are generally nottaken into consideration by us when we allocate resources to the segments orassess the performance of the segments.

 

Interest Income:  The majority of interest income isattributable to interest earned on restricted cash deposits required for theRegulation 22.040 reserve.  The decreasein interest income of $14,736 is due primarily to decreased interest rates paidon our cash deposits and smaller amounts being held in our consolidated bankaccounts.

 

Litigation expense of $19,153 wasrecorded in the three months ended July 31, 2008; which was related to theRacusin litigation settlement, compared to Racusin litigation expense of$52,862 for the same three month period of the prior fiscal year.  The decreased interest is due to a decline inthe principal amount owed to Racusin, due to our payments.

 

**Forthe Six Months Ended July 31, 2008, Compared to the Six Months Ended July 31,2007.**

** **

**WageringSegment.**

** **

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

 

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**Wagering Segment revenues for the six months endedJuly 31, 2008 decreased ($102,908) (-2.28%) over the six months ended July 31,2007.  This decrease is attributed to thefollowing factors:**

 

We experienced increased basketball and baseballhandle during the six months ended July 31, 2008 compared to the sameperiod in the prior year due to having more locations and the improvements andexpansion of some of our previously existing locations.  However, the increase handle was more thanoffset by a reduction in the win percentage for the six months ended July 31,2008 when compared with the previous year.  This was primarily due to negative change in the results of the last big game of football season,held on February 3, 2008, which occurred during the first quarter of fiscal2009 and a lower than normal hold percentage in the last month of the secondquarter which were primarily baseball wagers.

 

**Wagering Segment total costs and expenses for thesix months ended July 31, 2008 decreased ($79,208) (-1.54%) over the sixmonths ended July 31, 2007. **Thisincrease is attributed to the following factors:

 

Direct costs decreased ($232,054)(-5.23%) primarily due to reductions in personnel costs and a reduction inadvertising spending.

 

Selling, general and administrative costsincreased $133,795 (+22.93%) primarily due to increases in variousadministrative costs, including gaming license expenses, in the six monthsending July 31, 2008 compared to the six months ending July 31, 2007.

 

Depreciation and amortization expenseincreased $19,051 (+13.67%) over the prior year’s six month period primarilydue to an increase in capitalized acquisitions made during prior periods.

 

Note that an increase or decrease in handle is notnecessarily indicative of an increase or decrease in revenues or profits.  Elimination of unprofitable locations,closure of host properties, changes in state and/or federal regulations, andother factors beyond our control may result in declines in handle.

 

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

 

**Hotel/CasinoSegment.**

** **

The Hotel/Casino Segment includes the operatingresults of Sturgeon’s.  Sturgeon’scommenced operations on March 1, 2006.

 

**Hotel/Casino Segment revenues for the six monthsended July 31, 2008, decreased ($164,109) (-10.54%) over the six monthsended July 31, 2007.** This decrease is attributed to the following factors:

 

Casino revenues increased slightly,$11,979 (+1.63%) due to increased handle and wagering activities for thequarter ending July 31, 2008 compared to the same period ending July 31,2007, offset by a reduction in the occupancy rate due to decreased travel.

 

Hotel revenues decreased ($85,207)(-21.97%) in the first six months of fiscal 2009 compared to the same period offiscal 2008 due to a lower occupancy rate, primarily due to decreased travelwhich may have been influenced by slowing economic conditions and the price ofgasoline.

 

Food and beverage revenues decreased($90,881) (-20.84%) primarily due to the decline in occupancy for the sixmonths ended July 31, 2008 compared to the six months ended July 31,2007.  The contra-revenue accounts of “casinocash incentives and other promotional allowances” declined primarily due tocloser scrutiny of these costs by management combined with a decrease in hoteloccupancy.

 

**Hotel/Casino Segment total costs and expenses forthe six months ended July 31, 2008, decreased ($424,538) (-23.55%) overthe six months ended July 31, 2007.**  This decrease is attributed to the followingfactors:

 

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Direct costs for the casino operationsdecreased ($1,849) (-0.32%) for the six months ended July 31, 2008,compared to the six months ended July 31, 2007, due to an emphasis on costcontrols implemented by management.

 

Direct costs for the hotel operationsdecreased ($21,452) (-16.79%) primarily due to lower occupancies for the sixmonths ended July 31, 2008, compared to the six months ended July 31,2007.

 

Direct costs for food and beverage operationsdecreased ($118,266) (-24.01%) primarily due to lower occupancies in the hotelfor the six months ended July 31, 2008, compared to the six months ended July 31,2007.

 

Selling, general and administrative costsfor Sturgeon’s decreased ($299,599) (-61.97%) primarily because there was nobonus payment made during the first six months of fiscal 2009 compared to thesame period of fiscal 2008, reduced credit card fees, donations and otherexpenses.

 

**SystemsSegment.**

** **

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

 

**Systems Segment revenues for the six months ended July 31,2008, decreased ($116,645) (-5.59%) over the six months ended July 31,2007.**  This decrease isattributed to the following factors:

 

Systems revenues decreased ($99,989) (-14.48%) overthe prior fiscal year due to a slight decrease in the number of infrequentsales during the six months ended July 31, 2008, when compared to the sixmonth period ended July 31, 2007.

 

Revenues from maintenance contracts increased slightlyover the prior fiscal year.  Thisincrease is attributable annual contractual increases charged to existingcustomers.

 

**Systems Segment total costs and expenses for thesix months ended July 31, 2008 decreased ($306,262) (-13.53%) over the sixmonths ended July 31, 2007.**  This decrease is attributed to the followingfactors:

 

Direct costs for systems decreased($99,989) (-14.48%) over the prior six months ended July 31, 2007,primarily due to decreased wages and benefits resulting from a reduction andrealignment of personnel, improving our operational efficiencies and a slightdecline in product sales.

 

Research and development costsdecreased ($214,323) (-41.44%) from the prior six months ended July 31,2007, primarily due to decreased personnel expense and greater efficiencies.

 

Selling, general and administrativecosts decreased ($18,952) (-2.20%)  forthe six months ended July 31, 2008, compared to the prior year six monthperiod, primarily due to reduced allocated management fees from AWI.

 

Depreciation and amortizationincreased $27,002 (+14.34%) from the prior six months ended July 31, 2007,due to increased property acquisitions, primarily due to the equipment andsoftware upgrades to our networks.

 

**Other income and (expenses). **The other income and(expenses) categories listed below are primarily administrative in nature and,as such, are not directly attributable to any operating segment.  Accordingly, these items are generally nottaken into consideration by us when we allocate resources to the segments orassess the performance of the segments.

 

Interest Income:  The majority of interest income isattributable to interest earned on restricted cash deposits required for theRegulation 22.040 reserve.  The decreasein interest income of $33,779 is due primarily to decreased interest rates paidon our cash deposits and less overall cash held in deposits.

 

Litigation expense of $55,317 wasrecorded in the six months ending July 31, 2008; of which $44,069 wasrelated to the Racusin litigation settlement, compared to Racusin litigationexpense of $108,337 for the same six

 

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month period of the priorfiscal year.  The decreased interest isdue to a decline in the principal amount owed to Racusin, due to our payments.

 

**Critical AccountingEstimates and Policies.**

** **

Although our financial statements necessarily make useof certain accounting estimates by our management, we believe that, except asdiscussed below, we do not employ any critical accounting policies or estimatesthat are either selected from among available alternatives, or require theexercise of significant management judgment to apply, or that if changed arelikely to affect future periods.  Thefollowing summarizes our critical estimates and policies.

 

**Wagering**

** **

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

 

**Hotel/Casino Revenue**

** **

We report the wagering revenues of Sturgeon’s, whichis primarily comprised of slot revenue, hotel room revenue and food andbeverage revenue, in compliance with Nevada law and the regulations of theNevada gaming regulators.  These revenuesare generally in the form of cash, personal checks, credit cards, or gamingchips and tokens, which do not require estimates.  We do estimate certain liabilities withpayment periods that extend for longer than several months.  We believe these estimates are reasonablebased on our assumptions related to possible outcomes in the future.  Future actual results might differ materiallyfrom these estimates.  Slot revenue isthe drop (the total amount removed from the machine) less the fills and thepayouts.  Bingo revenue is calculated asthe total handle (the amount wagered) less the payouts.  For non-gaming revenues, such as food andbeverage, hotel, etc., we record revenues in compliance with generally acceptedaccounting 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 thefirst time in the fiscal year ended January 31, 2007.

 

**System — Software**

** **

We recognize software revenue in accordance with theprovisions of Statement of Position (“SOP”) 97-2, *Software Revenue Recognition*, as amended by SOP 98-9, *Software Revenue Recognition, With Respect to CertainTransactions*.  Softwarelicense fees represent revenues related to licenses for race/sports softwaredelivered to customers for in-house use. Revenues from software license agreements (including any relatedtraining revenue) are recognized upon installation of the software.

 

**System — Hardware**

** **

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

 

**System — Maintenance**

** **

We negotiate maintenance agreements with each of ourcustomers to provide for the long-term care of the software and hardware.  Pursuant to the terms of the variousmaintenance agreements, a fixed sum is due at the beginning of each monthregardless of whether the customer requires service during that month.  We recognize maintenance revenue on the firstday of each month for which the maintenance agreement is in place; we maintainan allowance for doubtful accounts in the event that any such revenue recordedis not realized.

 

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**Long-Lived Assets**

** **

Owned property and equipment are recorded at cost anddepreciated to residual values over the estimated useful lives using thestraight-line method.  Leaseholdimprovements on operating leases are amortized over the life of the lease orthe life of the asset, whichever is shorter. The useful life, currently estimated, of our equipment generally rangesfrom 3 to 10 years.  We test forimpairment losses on long-lived assets used in operations when events andcircumstances indicate that the assets might be impaired, under the standardsof Statement of Financial Accounting Standard (“SFAS”) No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets*.  Animpairment loss is recognized if the carrying amount of the asset is notrecoverable from its undiscounted cash flows and is measured as the differencebetween the carrying amount and fair value of the asset.

 

**Accounting for IncomeTaxes**

** **

Effective February 1, 2007, the Company adoptedFinancial Accounting Standards Board (“FASB”) Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes, an interpretation of FASB Statement No. 109, Accountingfor Income Taxes* (“FIN 48”). Accordingly, we have reviewed our previously filed tax returns andparticularly our NOL carryforwards available to reduce current and future taxobligations for the possible effect of FIN 48 and to estimate the extent towhich it remains needed as of July 31, 2008. Based on our evaluation, webelieve that adopting FIN 48 did not have a material effect on our openingdeficit at the time of adoption, our NOL carryforwards, or the related deferredtax assets or valuation allowance. We also believe that we will be sufficientlyprofitable for the short-term future, and it is therefore more likely than notthat an estimate of approximately $440,000 of our net deferred tax asset, whichresulted primarily from NOL carryforwards, will be realized.

 

**Recent AccountingPronouncements**

** **

In September 2006, the FASB issued SFAS No. 157,*Fair Value Measurements*, whichdefines fair value, establishes a framework for measuring fair value andexpands disclosures about fair value measurements.  In February 2007, the FASB issued SFAS No. 159,*The Fair Value Option for Financial Assetsand Financial Liabilities — Including an Amendment of SFAS No 115*,which will permit the option of choosing to measure certain eligible items atfair value at specified election dates and report unrealized gains and lossesin earnings.  SFAS No. 157 iseffective for us for financial statements issued for the fiscal year ending January 31,2009, and interim period therein, except that for nonfinancial assets andliabilities, it will not become effective for us until the following year.Since we have no assets or liabilities carried at estimated fair values, and wedo not presently intend to take the fair value option offered by SFAS No. 159,there will likely be no affect of SFAS No. 157 or SFAS No. 159 on ourfuture consolidated financial statements.

 

In December 2007, the FASB issued SFAS 141R,*Business Combinations*, which willsignificantly change the accounting for business combinations and certain othertransactions. SFAS 141R will apply for us prospectively to businesscombinations and certain other transactions for which the acquisition date ison or after February 1, 2009, and early adoption is prohibited. Since weare not now contemplating any covered transactions after its effective date, wecurrently expect that SFAS 141R will not have an impact on our futurefinancial position, results of operations and operating cash flows.

 

InDecember 2007, the FASB issued SFAS No. 160, *Noncontrolling Interests in Consolidated Financial Statements — anAmendment of Accounting Research Bulletin No. 51*, whichestablishes accounting and reporting standards for interests in subsidiaries,including certain variable interest entities, held by parties other than theparent, the amount of consolidated net income attributable to the parent and tothe noncontrolling interest, changes in a parent’s ownership interest and thevaluation of retained noncontrolling equity investments when a subsidiary isdeconsolidated. The Statement also establishes reporting requirements thatprovide sufficient disclosures that clearly identify and distinguish betweenthe interests of the parent and the interests of the noncontrolling owners.SFAS 160 will be effective for fiscal years beginning after December 15,2008. The Company currently has and presently contemplates obtaining nononcontrolling interests in any subsidiaries, and accordingly, we do not expectany effect of SFAS 160 in the foreseeable future.

 

InMarch 2008, the FASB issued SFAS No. 161, “*Disclosuresabout Derivative Instruments and Hedging Activities — an Amendment of FASBStatement No. 133*”. SFAS No. 161 expands the disclosurerequirements in SFAS No. 133, “*Accounting for DerivativeInstruments and Hedging Activities*,” regarding an entity’sderivative 

 

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instrumentsand hedging activities. SFAS No. 161 will be effective for the Company’sfiscal year and interim periods beginning February 1, 2009. However, we donot expect that SFAS No. 161 will have an impact on the Company’s futurefinancial condition, results of operations or cash flows.

 

InApril 2008, the FASB issued Staff Position No. 142-3 “*Determination of the Useful Life of Intangible Assets*” (“FSPNo. 142-3”) to improve the consistency between the useful life of arecognized intangible asset (under SFAS No. 142) and the period ofexpected cash flows used to measure the fair value of the intangible asset(under SFAS No. 141R). FSP No. 142-3 amends the factors to beconsidered when developing renewal or extension assumptions that are used toestimate an intangible asset’s useful life under SFAS No. 142. Theguidance in the new staff position is to be applied prospectively to intangibleassets acquired after December 31, 2008. In addition, FSP No. 142-3increases the disclosure requirements related to renewal or extensionassumptions. Management is currently assessing the possible impact of theadoption of FSP No. 142-3 on our future consolidated financial statements.

 

## **Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk.**

##  

Not required.

 

## **Item 4T.  Controls and Procedures.**

##  

**Evaluation of DisclosureControls and Procedures**

** **

Our management, with the participation of our ChiefExecutive Officer and Chief Financial Officer, evaluated the effectiveness ofour disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)) asof July 31, 2008. We determined that our disclosure controls andprocedures were effective as of the end of the period covered by this report.

 

**Changes in InternalControl over Financial Reporting**

** **

There has not been any changes in the Company’sinternal controls over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and15d-15(f)) during the three months ended July 31, 2008 that have materiallyaffected, or are reasonably likely to materially affect the Company’s internalcontrols over financial reporting.

 

# **PART II — OTHER INFORMATION**

#  

## **Item 1.  Legal Proceedings**

##  

The legal proceedings described in Item 3 of theCompany’s annual report on Form 10-K for the year ended January 31,2008, in addition to the first quarter Form 10-Q, should be read inconjunction with this disclosure. No material developments related to thesevarious litigation matters have occurred, except as disclosed herein.

 

**Racusin**

** **

On or about June 13, 2008, the Company receivedwritten notification from Racusin of a perceived breach of the SettlementAgreement by the Company. The Company filed a Notice of Filing a CorrectedAmortization Schedule on March 17, 2008 to rectify an inaccurate interestcalculation in the prior Exhibit 1 to the Settlement Agreement. As aresult the Company began making payments according to the corrected Exhibit 1on March 1, 2008, and has continued to do so every month thereafter.Racusin alleges that the Company’s actions breach the Settlement Agreement.Racusin further alleges that under the terms of the Settlement Agreement theentire obligation became due and payable with interest calculated at twelvepercent (12%) from June 30, 2004, and that Racusin may commence anadversarial proceeding. The Company has engaged counsel and intends tovigorously defend against the claims presented.

 

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**Internet SportsInternational, Ltd.**

** **

On July 17, 2008, Internet Sports International,Ltd. filed a complaint against three of our subsidiaries, AWI Manufacturing, Inc.,AWI Gaming, Inc. and Computerized Bookmaking Systems, Inc., and ourGeneral 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 andnegligent interference with prospective economic advantage, and quantum meruit.The claims arise out of agreements with plaintiff to jointly develop an uprightkiosk, including a purchase agreement and a marketing agreement. Plaintiffalleges that we failed to perform under, and effectively and prematurelyterminated, the purchase agreement as to 100 kiosks. Plaintiff further allegesthat it had entered into negotiations with an established customer of ours toplace kiosks and plaintiff’s products on the customer’s casino floor, and thatwe contacted the customer and terminated plaintiff’s opportunity. Plaintiffseeks for (i) the recovery of actual, consequential and punitive damages,and (ii) the recovery of attorneys’ fees, costs and expenses. We haveengaged counsel and intend to vigorously defend against the claims presented.

 

**Other**

** **

From time to time we are also involved in other legalmatters, litigation and claims of various types in the ordinary course of ourbusiness operations, including matters involving bankruptcies of debtors,collection efforts, disputes with former employees, and other matters. Weintend to defend all of these matters stridently. However, we cannot assure youthat we will be successful in defending any of the matters described above orany other legal matters, litigation or claims in which we may become involvedfrom time to time. If we are not successful in defending these matters, we maybe required to pay substantial license fees, royalties or damages, includingstatutory or other damages, post significant bonds and/or discontinue a portionof our operations. Furthermore, our insurance coverage and other capitalresources may be inadequate to cover anticipated costs of these lawsuits or anypossible settlements, damage awards, bonds or license fees. Even ifunsuccessful, these claims still can harm our business severely by damaging ourreputation, requiring us to incur legal costs, lowering our stock price andpublic demand for our stock, and diverting management’s attention away from ourprimary business activities in general.

 

## **Item 1A.  Risk Factors.**

##  

A description of our risk factors can be found in Item1A of our Annual Report on Form 10-K for the fiscal year ended January 31,2008. There were no material changes to those risk factors during the threemonths ended July 31, 2008, except as follows:

 

**RecentEconomic Developments — *The economic slowdown and probable recession have had an adverse impact on our business.***

 

Recently, the residentialreal estate market in Nevada and the U.S. has experienced a significantdownturn due to declining real estate values, substantially reducing mortgageloan originations and securitizations, increasing residential mortgageforeclosures and precipitating more generalized credit market dislocations andsignificant contraction in available liquidity globally.  The general commercial market and gamingindustry in Nevada has also shown significant signs of economic slowdown.  These factors, combined with significantlyhigher oil and gasoline prices, declining business and consumer confidence andincreased unemployment, have precipitated an economic slow down and probablerecession.  Further declines in realestate values in Nevada and the U.S. or elsewhere and continuing credit andliquidity concerns could have an adverse affect on our results of operations.  The broader economic slowdown beingexperienced in Nevada and the region will likely adversely impact discretionaryspending for leisure and other recreational activities, such as gambling andsports wagering services offered by our companies.  Because our Sturgeons hotel-casino is heavilydependent on the drive-through market, especially travelers traveling onInterstate 80, the factors identified above have had and will continue to havean impact on our hotel-casino business.  Webelieve that the operating results discussed above reflect the impact of suchmacroeconomic factors on our business, and, in the short-term, we do notanticipate the macroeconomic conditions to improve. As a result, we anticipatecontinuing pressure on our operating results. 

** **

**U.S. Bank Facility— *Should the current economic conditions andoperational declines continue, we may need to request amendments and/or waiversto the maturity date of our U.S. Bank facility.***

 

At July 31, 2008 we had approximately$1.4 million in cash and equivalents. We expect to fund our operations,debt service and capital needs from operating cash flow and cash on hand. Basedupon our anticipated future operations, we believe that cash on hand andoperating cash flows will be adequate to meet our anticipated working capitalrequirements for existing operations, capital expenditures for existingoperations and scheduled payments of interest on our outstanding indebtednessfor at least the remainder of 2008.  Weanticipate, however, that we may require additional funds to meet operations,capital expenditures for existing operations and scheduled payments on ouroutstanding indebtedness for 2009. No assurances can be given, however, thatour cash flow will be sufficient, that our estimates of our cash needs inrespect of existing operations are accurate, that new business developments orother unforeseeable events will not occur, resulting in the need to raiseadditional funds sooner, or that we will be able to raise additionalfunds.  Should the current economicconditions and operational declines continue, we may need to request amendmentsand/or waivers to the December 31, 2008 maturity date of our U.S. Bankrevolving credit facility (which facility is fully drawn).  Although we expect we will be able to meetour payment obligations or will be able to negotiate such amendments and/orwaivers to our U.S. Bank facility, there can be no assurance that we will besuccessful in doing so.  Failure to meetour payment obligations or failure to obtain amendments and/or waivers to the maturitydate may result in the occurrence of an event of default under the U.S. Bankfacility. Upon the occurrence of an event of default, the lender under our U.S.Bank facility would have the ability to, among other things, accelerate allamounts outstanding under the revolving credit agreement, terminate the creditagreement and cease extending credit to us, use our depository accounts, cashand other property in the possession of lender to pay our obligations under thecredit agreement and notify our accord debtors to make payments directly tolender. Our ability to pay our debt will be dependent on our futureperformance, which will be affected by, among other things, prevailing economicconditions and financial, business and other factors, certain of which arebeyond our control.

 

## **Item 2.  Unregistered Sales of Equity Securities andUse of Proceeds.**

##  

Not applicable.

 

## **Item 3.  Defaults Upon Senior Securities.**

##  

Not applicable.

## ** **

## **Item 4.  Submission of Matters to a Vote of SecurityHolders.**

##  

Not applicable.

 

## **Item 5.  Other Information.**

##  

Not applicable.

 

## **Item 6.  Exhibits.**

 
| **EXHIBIT NUMBER** | ** ** | **DESCRIPTION**                                                                                                                                                                                     |
|--------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |       |                                                                                                                                                                                                |
| 10.1               |       | Change in Terms Agreement dated May 5, 2008,  between AWI Gaming, Inc., and Great Basin Bank of Nevada, incorporated  by reference to registrant’s Form 10-Q, as filed with the |

 

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| **EXHIBIT NUMBER** | ** ** | **DESCRIPTION**                                                                                                                                                                                                                                                  |
|--------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |       | Securities and Exchange Commission on June 13,  2008                                                                                                                                                                                                        |
|               |       |                                                                                                                                                                                                                                                             |
| 10.2               |       | Commercial Guaranty, dated May 5,2008, by  American Wagering, Inc. in favor of Great Basin Bank of Nevada,  incorporated by reference to registrant’s Form 10-Q, as filed with the  Securities and Exchange Commission on June 13, 2008 |
|               |       |                                                                                                                                                                                                                                                             |
| 10.3               |       | Commercial Guaranty, dated May 5, 2008, by  Sturgeon’s, LLC in favor of Great Basin Bank of Nevada, incorporated by  reference to registrant’s Form 10-Q, as filed with the Securities and  Exchange Commission on June 13, 2008        |
|               |       |                                                                                                                                                                                                                                                             |
| 31.1               |       | Certification of Principal Executive Officer  pursuant to Exchange Act Rule 13a-14(a)-Section 302 of the  Sarbanes-Oxley Act of 2002                                                                                                                   |
|               |       |                                                                                                                                                                                                                                                             |
| 31.2               |       | Certification of Principal Financial Officer  pursuant to Exchange Act Rule 13a-14(a)-Section 302 of the  Sarbanes-Oxley Act of 2002                                                                                                                   |
|               |       |                                                                                                                                                                                                                                                             |
| 32.1               |       | Certification of Principal Executive Officer and  Principal Financial Officer pursuant to Exchange Act  Rule 13a-14(b) and Title 18 U.S.C.  Section 1350-Section 906 of the Sarbanes-Oxley Act of 2002                                       |

 

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**SIGNATURES**

** **

In accordance with the requirements of the ExchangeAct, the registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

**AMERICANWAGERING, INC.**

 

 
| Dated:                                               | September 12,  2008 |   |
|------------------------------------------------------|--------------------------|--------|
|                                                 |                     |
| /s/  Victor J. Salerno                               |                     |
| Victor  J. Salerno                                   |                     |
| President, Chief Executive  Officer, Chief Operating |                     |
| Officer,  and Chairman of the Board of Directors     |                     |
|                                                 |                     |
| /s/  Melody J. Sullivan                              |                     |
| Melody  J. Sullivan                                  |                     |
| Chief Financial Officer  and Treasurer               |                     |

 

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